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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, 2003
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)
PO Box 6260, Choctaw Branch, Choctaw, MS 39350
(Address of principal executive offices) (Zip code)
(601) 663-0226
(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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes___ No_X_
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CHOCTAW RESORT DEVELOPMENT ENTERPRISE
INDEX TO QUARTERLY REPORT
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PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Balance Sheets as of December 31, 2003 (unaudited) and September 30, 2003..........................3
Statements of Operations and Comprehensive Income for the Three Months
Ended December 31, 2003 and 2002 (unaudited).......................................................4
Statement of Owner's Equity for the Three Months Ended December 31, 2003 (unaudited)...............5
Statements of Cash Flows for the Three Months Ended December 31, 2003 and
2002 (unaudited)..................................................................................6
Notes to Financial Statements (unaudited) .........................................................7
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................15
Item 3 -- Quantitative and Qualitative Disclosure of Market Risk.............................................25
Item 4 -- Controls and Procedures............................................................................26
PART II -- OTHER INFORMATION................................................................................27
Signatures - ...............................................................................................28
PART I. Financial Information
Item 1 Financial Statements
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
BALANCE SHEETS
December 31, 2003 and September 30, 2003
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December 31, September 30,
2003 2003
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $53,328,255 $49,712,096
Accounts receivable (net of allowance of
$3,416,778 and $3,092,390) 4,697,589 4,811,952
Inventories 2,430,009 2,251,395
Prepaid expenses and other 1,549,699 1,804,452
------------- -------------
Total current assets 62,005,552 58,579,895
Property and equipment, net 417,234,104 423,192,331
Deferred loan costs, net 4,506,964 4,782,154
Other assets 3,441,045 3,414,389
------------- -------------
Total assets $487,187,665 $489,968,769
------------- -------------
Liabilities and Owner's Equity
Current liabilities:
Current maturities of long-term debt $25,000,000 $20,000,000
Accounts payable 4,237,206 6,094,984
Construction accounts payable 7,112,356 7,167,306
Due to Tribe 782 86
Accrued liabilities:
Accrued payroll and related 10,677,169 8,866,960
Accrued expenses and other liabilities 9,625,651 8,647,980
Accrued interest expense 4,929,519 9,723,473
------------- -------------
Total current liabilities 61,582,683 60,500,789
Long term debt, net of current maturities 268,750,000 275,000,000
Commitments and contingencies - -
Owner's equity:
Contributed capital 155,419,610 154,528,735
Retained earnings 1,450,596 -
Accumulated other comprehensive loss (15,224) (60,755)
------------- -------------
Total owner's equity 156,854,982 154,467,980
------------- -------------
Total liabilities and owner's equity $487,187,665 $489,968,769
------------- -------------
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, 2003 and 2002
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Three Months Ended
December 31,
-------------------------
2003 2002
------------ ------------
(Unaudited) (Unaudited)
Revenue:
Casino $66,964,868 $61,910,328
Food & beverage 7,960,565 7,353,637
Rooms 4,017,898 3,756,157
Other 3,315,540 3,612,716
------------ ------------
Gross revenue 82,258,871 76,632,838
Less: promotional allowances (8,836,607) (8,092,096)
------------ ------------
Net revenue 73,422,264 68,540,742
------------ ------------
Costs and expenses:
Casino 19,275,610 21,829,876
Food & beverage 2,887,161 3,390,544
Rooms 707,638 1,013,979
Other 2,073,151 2,563,553
Selling, general, and administrative 17,446,722 15,203,904
Maintenance and utilities 2,275,848 2,233,595
Depreciation 7,950,443 6,982,064
------------ ------------
Total 52,616,573 53,217,515
------------ ------------
Operating income 20,805,691 15,323,227
------------ ------------
Other income (expense):
Interest income 16,292 60,202
Interest expense (6,046,723) (6,222,518)
Other income 47,336 252,691
------------ ------------
Total (5,983,095) (5,909,625)
------------ ------------
Net income 14,822,596 9,413,602
Other comprehensive income 45,531 41,999
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Comprehensive income $14,868,127 $9,455,601
------------ ------------
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, 2003
(Unaudited)
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Accumulated
Other Total
Contributed Retained Comprehensive Owner's
Capital Earnings Loss Equity
------------- -------------- -------------- ---------------
Balances, September 30, 2003 $154,528,735 $ - $(60,755) $154,467,980
Net income - 14,822,596 - 14,822,596
Contributed capital 890,875 - - 890,875
Distributions - (13,372,000) - (13,372,000)
Reclassification adjustment
under SFAS 133 - - 45,531 45,531
------------ ------------ -------- ------------
Balances, December 31, 2003 $155,419,610 $ 1,450,596 $(15,224) $156,854,982
------------ ------------ -------- ------------
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, 2003 and 2002
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Three Months Ended
December 31,
--------------------------------
2003 2002
--------------- ---------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 14,822,596 $ 9,413,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,271,164 7,278,799
Loss on disposal of property and equipment 9,104 2,205
Change in operating assets and liabilities:
Accounts receivable, net 114,363 (733,072)
Inventories (178,614) (171,840)
Prepaid expenses and other 254,753 (2,722)
Other assets (26,656) (1,736,267)
Accounts payable and due to Tribe (1,857,082) (2,793,079)
Accrued liabilities (2,006,074) (4,507,584)
-------------- --------------
Net cash provided by operating activities 19,403,554 6,750,042
-------------- --------------
Cash flows from investing activities:
Acquisitions of property and equipment, net of
amounts in construction accounts payable (2,056,270) (25,652,701)
Restricted cash - (9,646)
-------------- --------------
Net cash used in investing activities (2,056,270) (25,662,347)
-------------- --------------
Cash flows from financing activities:
Borrowing under credit facilities - 25,000,000
Repayment of long-term debt (1,250,000) -
Contributions of cash from Tribe 890,875 550,965
Distributions to Tribe (13,372,000) (23,866,290)
-------------- --------------
Net cash (used in) provided by financing activities (13,731,125) 1,684,675
-------------- --------------
Net (decrease) increase in cash and cash equivalents 3,616,159 (17,227,630)
Cash and cash equivalents at beginning of period 49,712,096 72,783,499
-------------- --------------
Cash and cash equivalents at end of period $ 53,328,255 $ 55,555,869
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,565,486 $ 10,564,382
-------------- --------------
Supplemental disclosure of non-cash investing and
financing activities:
Accounts payable for construction $ 7,112,356 $ 7,730,344
-------------- --------------
The accompanying notes are an integral part of these financial statements.
6
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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
Dancing Rabbit Golf Club ("Dancing Rabbit"), which opened April 1, 1997, 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. The Dancing Rabbit, Geyser Falls and the
Choctaw Hospitality Institute were contributed to the Enterprise at the Tribe's
historical cost.
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
statement have been included. Operating results for the three-month period ended
December 31, 2003 are not necessarily indicative of the results that may be
expected for the year ended September 30, 2004. 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, 2003.
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.
7
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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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 $2,919,019 and $2,643,829 at December 31, 2003 and September 30,
2003, 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 3.
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. Contributed capital is presented net of distributions when
distributions exceed retained earnings.
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
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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Three Months Ended
December 31,
-----------------------------------
2003 2002
--------------- ---------------
Food and beverage $ 4,890,361 $ 5,667,050
Rooms 1,216,220 895,250
Other 708,558 699,021
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Total $ 6,815,139 $ 7,261,321
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Complimentary revenues have been earned in the following casino departments as
follows:
Three Months Ended
December 31,
-----------------------------------
2003 2002
--------------- ---------------
Food and beverage $ 5,690,105 $ 5,034,152
Rooms 2,366,325 2,172,217
Other 780,177 885,727
-------------- --------------
Total $ 8,836,607 $ 8,092,096
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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, 2003 and
2002.
Advertising Expense
Advertising is expensed as incurred and is included in selling, general, and
administrative expense and casino costs and expenses. Advertising expense was
$1,077,746 and $1,360,979 for the three months ended December 31, 2003 and 2002,
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
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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Note 2--Property and Equipment
Property and equipment consists of the following:
Useful
Lives December 31, September 30,
(Years) 2003 2003
----------- -------------- --------------
Land and improvements $16,819,796 $16,819,796
Buildings and improvements 20-40 381,372,552 381,317,031
Golf course improvements 5-15 2,733,973 2,733,973
Furniture and equipment 5-10 125,630,829 123,720,006
Aircraft 10 4,551,215 4,551,215
Vehicles 3 1,139,677 1,139,677
-------------- --------------
532,248,042 530,281,698
Less accumulated depreciation 115,013,938 107,089,367
-------------- --------------
$417,234,104 $423,192,331
-------------- --------------
Note 3--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 (the "Loan") and to finance 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 the Enterprise's 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 the Enterprise's ability to make certain payments, distributions and
investments will be suspended.
After April 1, 2005, the Enterprise may redeem all or 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, 2003, a total of
$93,750,000 is drawn and 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, 2003 and 2002, the Enterprise paid commitment
fees totaling $-0- and $121,041, respectively, on the Facility. Outstanding
advances on the Facility at December 31, 2003 bear interest at LIBOR plus a
margin rate of 3.125%. At December 31, 2003, outstanding advances on the
Facility bore LIBOR interest at rates ranging from 1.17% to 1.21%. During the
quarters ended December 31, 2003 and 2002 the Enterprise recorded interest
expense totaling $1,074,606 and $1,012,828 respectively, on the outstanding
balance of the Facility.
10
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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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 began
reducing quarterly effective December 31, 2002 in the amount of $6.25 million
per quarter, until the amount of the facility is reduced to $40 million.
Accordingly, borrowing capacity available under the Facility has been reduced to
$93,750,000, all of which was outstanding at December 31, 2003. 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 received a waiver for such covenant
violations from the Facility lender. The Enterprise is required to meet these
covenants each quarter. Accordingly the Enterprise entered negotiations relating
to modification of these covenants with the Facility lender in order to ensure
future compliance. On March 25, 2003 the Enterprise successfully completed these
negotiations, which resulted in modification of terms of the credit facility.
Based on the amended terms of the credit facility, the Enterprise is in
compliance with the Fixed Charge Coverage Ratio and the Total Leverage Ratio at
December 31, 2003 and management believes the Enterprise will achieve compliance
with both the Fixed Charge Coverage Ratio and the Total Leverage Ratio going
forward. As of December 31, 2003, management believes that the Enterprise is in
compliance with all other debt covenants under the Notes and the Facility.
Maturities of long-tem debt are as follows:
Fiscal Years Ended September 30,
2004 $ 18,750,000
2005 25,000,000
2006 50,000,000
2007 -
2008 -
Thereafter 200,000,000
---------------
Total $ 293,750,000
---------------
The Enterprise entered into an interest rate swap agreement with a major
financial institution for the purpose of fixing interest rates on a term loan,
thus reducing exposure to interest rate fluctuations. At December 31, 2003, the
Enterprise's interest rate swap had a notional amount of $3,125,000. 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, 2003 through December 31, 2003, the Enterprise
recognized other income of $47,336 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, 2003 through December 31, 2003 are $45,513. 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 were $41,999.
11
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
- --------------------------------------------------------------------------------
Note 4--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
$217,000,000 at December 31, 2003 based on quoted market prices on December 31,
2003.
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, 2003 was $24,303 and is included in accrued expenses and other
liabilities.
The carrying value of the Facility approximates fair value because of its
variable interest rate.
Note 5 - 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 6 - Related Party Transactions
Distributions to the Tribe were $13,372,000 and $23,866,290 for the three months
ended December 31, 2003 and 2002, 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 3.
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.
12
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
- --------------------------------------------------------------------------------
Future Annual Service Payments under the Indenture are as follows:
2004 $ 63,669,375
2005 66,852,844
2006 70,195,486
2007 73,705,260
2008 77,390,523
--------------
Total $ 351,813,488
--------------
Employees of the Enterprise are provided health and life insurance coverage
through the Tribe's health and life insurance plans. The Enterprise paid
$2,308,583 and $2,867,335 to the Tribe under this arrangement for the three
months ended December 31, 2003 and 2002, 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 $417,920 and $390,011 for the three months ended December 31, 2003 and
2002, respectively. For the three months ended December 31, 2003 and 2002, the
Enterprise paid rent for office space and purchased certain goods and services
from the Tribe and its businesses in the amount of $1,826,658 and $1,131,730,
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, 2003 and 2002, the Enterprise made purchases of
$424,236 and $348,165 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, 2003 and 2002,
as required under the Tribal-State Compact. The Choctaw Gaming Commission was
paid $694,764 and $665,502 for the three months ended December 31, 2003 and
2002, 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, 2003 and 2002.
The Enterprise paid $310,980 to the Choctaw Development Enterprise, a wholly
owned enterprise of the Tribe, for construction services related to development
of the beach club and sand beach adjacent to Geyser Falls during the quarter
ended December 31, 2003.
During the three months ended December 31, 2003 and 2002, the Tribe contributed
$890,875 and $550,965, respectively, 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, 2003 and 2002, the Enterprise made payments to the Tribe totaling
$-0- and $750,204, respectively, in connection with this purchase. During the
fiscal year ended September 30, 2003, all remaining amounts due to the Tribe in
connection with this purchase were paid.
13
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
- --------------------------------------------------------------------------------
Note 7--Employee Benefit Plans
Employees of the Enterprise are eligible to participate in the Tribe's 401(k)
plan. The Enterprise expensed contributions of $465,455 and $491,901 for the
three months ended December 31, 2003 and 2002, respectively.
The Enterprise has no formal commitments to provide post-retirement health care
benefits to retirees.
Note 8--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 9--Subsequent Events
On January 19, 2004 the Enterprise distributed $5,050,000 to the Tribe.
Note 10--Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
This interpretation addresses the requirements for business enterprises to
consolidate related entities in which they are determined to be the primary
economic beneficiary as a result of their variable economic interests. The
interpretation is intended to provide guidance in judging multiple economic
interests in an entity and in determining the primary beneficiary. The
interpretation outlines disclosure requirements for VIEs created after January
31, 2003. The Enterprise has reviewed its major relationships and its overall
economic interests with other companies consisting of related parties and other
suppliers to determine the extent of its variable economic interest in theses
parties. The Enterprise adopted FIN 46 effective December 31, 2003. Adoption of
FIN 46 did not have any impact on the financial statements of the Enterprise.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). As the Enterprise's equity securities are not
publicly traded, the Enterprise is a nonpublic entity as defined by SFAS 150.
The effective date of this pronouncement has been deferred for an indefinite
period. The adoption of SFAS 150 will not have a material impact on our
financial position, results of operations or cash flows as the Enterprise does
not have any such financial instruments.
14
Item 2.
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002
- --------------------------------------------------------------------------------
The following business overview, discussion and analysis of the financial
condition and results of operations is a summary and should be read together
with the financial statements and notes thereto and the Enterprise's prior
filings.
Overview.
The Enterprise is a business enterprise of the Tribe that was created on October
12, 1999 to operate the Silver Star and to develop and operate the Golden Moon
and related businesses. Effective July 1, 2001, the Tribe contributed the
Dancing Rabbit to the Enterprise and effective July 8, 2002, the Tribe
contributed the Geyser Falls to the Enterprise. No consideration was or is
intended to be given to the Tribe for such contributions. Choctaw Hospitality
Institute ("CHI") officially opened November 9, 2001. CHI and its staff provide
classroom and hands-on training for gaming, hospitality and professional
employees of the Enterprise.
The Enterprise's primary focus is casino operations. The other properties are
used as amenities to promote and make more attractive the casinos to new and
existing patrons. The Enterprise's primary business focus is the maximization of
casino revenue growth while minimizing operating expenses. The Enterprise seeks
to achieve these goals through aggressive promotion of it properties. The
Enterprise markets the Silver Star, Golden Moon, Dancing Rabbit and Geyser Falls
under the Pearl River Resort trade name and intends to continue to promote these
collective properties as a premier regional entertainment and destination
resort.
The Silver Star Hotel and Casino
The Silver Star is a full service gaming and entertainment complex located on a
32-acre site on the Tribe's reservation. The Silver Star, along with the Golden
Moon, are currently the only land-based casinos in the state. The Silver Star
opened in July 1994 and is an approximately 518,000 square foot facility that,
as of December 31, 2003, featured: a 12-story hotel with 496 rooms;
approximately 82,500 square feet of gaming space with 2,960 slot machines, 64
table games and 11 poker tables; approximately 30,000 square feet of meeting and
convention space, which also serves as a 2,000 seat live entertainment and
sports venue with sky boxes; seven restaurants; three lounges; three retail
outlets; an arcade; an outdoor swimming pool; a full-service spa; fitness
facilities; and guest access to the adjacent Dancing Rabbit Golf Club and Geyser
Falls.
The Golden Moon Hotel & Casino
The Golden Moon is a full service gaming and entertainment complex located on a
15 acre site that opened on August 26, 2002. The Golden Moon, located directly
across from the Silver Star, is connected to the Silver Star via an enclosed
walkway bridge that spans the highway separating the two casinos. The bridge is
enclosed and climate controlled and features moving ramps to ease movement from
one casino to the other. The Golden Moon is an approximately 843,000 square foot
facility that, as of December 31, 2003, featured: a 28-story hotel with 571
rooms; approximately 90,000 square feet of gaming and related circulation area
space with 1,768 slot machines and 65 table games; approximately 11,600 square
feet of meeting space; seven restaurants; five lounges; approximately 8,000
square feet of retail space; a 315-foot tower topped by an 80-foot geodesic
sphere housing a restaurant and lounge; an aqua-scape, including fountains and
other water effects; an indoor/outdoor swimming pool; fitness facilities; and
guest access to the nearby Dancing Rabbit Golf Club and Geyser Falls.
15
Item 2.
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002
- --------------------------------------------------------------------------------
Non GAAP Financial Measures
Management of the Enterprise uses EBITDA as one measure of financial performance
and operational efficiency. EBITDA means earnings before interest, taxes,
depreciation, amortization, certain non-cash expenses and certain non-recurring
items. EBITDA is presented because management believes it is widely used as a
measure of operating performance in the gaming industry. EBITDA is not a measure
under generally accepted accounting principles ("GAAP") and should not be
construed as an alternative to operating income (as determined in accordance
with GAAP) as an indicator of cash flows or a measure of liquidity. All
companies do not calculate EBITDA in the same manner. As a result, EBITDA as
presented here may not be comparable to a similarly titled measure presented by
other companies.
EBITDA for the three months ended December 31, 2003 was $28.8 million compared
to $22.3 million for the three months ended December 31, 2002, an increase of
$6.5 million or 29.1%. As a percentage of net revenue, EBITDA was 39.2% for the
three months ended December 31, 2003 compared to 32.6% for the three months
ended December 31, 2002.
The accompanying table reconciles EBITDA to net income for the three months
ended December 31, 2003 and 2002:
Three Months Ended Three Months Ended
December 31, 2003 December 31, 2002
------------------ ------------------
Net Income $ 14,822,596 $ 9,413,602
Depreciation 7,950,443 6,982,064
Other income (expense) 5,983,095 5,909,625
------------------ ------------------
EBITDA $ 28,756,134 $ 22,305,291
----------------- -----------------
Net Revenues. Net revenues were $73.4 million and $68.5 million for the quarters
ended December 31, 2003 and 2002. The $4.9 million, or 7.2% increase in net
revenue was primarily due to increases in gaming, room and food and beverage
revenue attributable to improved operations of the Golden Moon offset by an
increase in promotional allowances. Complimentary revenues are included in gross
revenues but are deducted as a promotional allowance to arrive at net revenues.
16
Item 2.
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002
- --------------------------------------------------------------------------------
Casino. Casino revenues increased $5.1 million, or 8.2%, to $67.0 million for
the quarter ended December 31, 2003 from $61.9 million for the quarter ended
December 31, 2002.
Table game activity increased as reflected in table game drop. The table game
drop was $52.3 million for the quarter ended December 31, 2003 compared to table
game drop of $49.4 million for the quarter ended December 31, 2002. This
reflects an increase in table activity of $2.9 million or 5.9% over the
corresponding period in 2002. Table game revenue was $9.3 million for the
quarter ended December 31, 2003 compared to $8.1 million for the quarter ended
December 31, 2002, an increase of $1.2 million, or 14.8%. The increase in
revenue is due to a higher drop and hold percentage for the quarter ended
December 31, 2003 as compared to the quarter ended December 31, 2002. Table game
hold percentage was 17.8% for the quarter ended December 31, 2003 compared to
16.4% for the quarter ended December 31, 2002. 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 $57.1 million for the quarter ended December 31, 2003
compared to $53.3 million for the quarter ended December 31, 2002, an increase
of $3.8 million or 7.1%. The increase is due to an increase in coin in for the
quarter ended December 31, 2003 compared to the quarter ended December 31, 2002.
The increase in coin in is primarily attributable to improved operations of the
Golden Moon.
Food and Beverage. For the quarter ended December 31, 2003, food and beverage
revenues were $8.0 million, an increase of approximately $0.6 million, or 8.1%,
from $7.4 million for the quarter ended December 31, 2002. During the quarter
ended December 31, 2003, the Silver Star and Golden Moon turned 512,000
restaurant covers with an average revenue per cover of $10.95. For the quarter
ended December 31, 2002, the Silver Star and Golden Moon turned 453,000
restaurant covers with an average revenue per cover of $11.79.
Rooms. Room revenues were $4.0 million for the quarter ended December 31, 2003
compared to $3.8 million for the quarter ended December 31, 2002. There was a
decrease in the average daily room rate to $49.98 for the quarter ended December
31, 2003 from $56.56 for the quarter ended December 31, 2002. Our occupancy rate
was 82.9% for the quarter ended December 31, 2003 compared to 67.4% for the
quarter ended December 31, 2002. During the quarter ended December 31, 2003,
57.5% of our hotel revenue was attributable to rooms occupied by Silver Star and
Golden Moon customers on a complimentary basis compared to 55.3% for the quarter
ended December 31, 2002.
17
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002 (Continued)
- --------------------------------------------------------------------------------
Other. Other revenues decreased $0.3 million to $3.3 million for the quarter
ended December 31, 2003 from $3.6 million for the quarter ended December 31,
2002. 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 decrease in other revenue is primarily
attributable to a decrease in convention center sales, miscellaneous revenue and
revenues generated by the Choctaw Hospitality Institute. Retail revenues were up
$0.1 million or 9.1%, to $1.2 million for the quarter ended December 31, 2003
compared to $1.1 million for the quarter ended December 31, 2002. Convention
center revenues were $0.6 million for the quarter ended December 31, 2003
compared to $0.8 million for the quarter ended December 31, 2002, a decrease of
$0.2 million or 25.0%. Other revenue, which includes telephone, spa charges and
miscellaneous items, was $0.4 million for the quarter ended December 31, 2003
compared to $0.8 million for the quarter ended December 31, 2002, a decrease of
$0.4 million or 50.0%. Revenue generated by the Choctaw Hospitality Institute
was $0.2 million for the quarter ended December 31, 2003 compared to $0.5
million for the quarter ended December 31, 2002. Golf revenues were $0.8 million
for the quarter ended December 31, 2003 compared to $0.5 million for the quarter
ended December 31, 2002, an increase of $0.3 million or 60.0%. The increase in
golf revenues is primarily attributable to increased golf rounds.
Promotional Allowances. Promotional allowances totaled $8.8 million for the
quarter ended December 31, 2003, representing a $0.7 million or 9.2% increase
over promotional allowances of $8.1 million for the quarter ended December 31,
2002. During each of the quarters ended December 31, 2003 and 2002, promotional
allowances were 13.1% of casino revenues. Promotional allowances are utilized to
reward existing guests and generate visits from new customers in our outer
markets in an effort to increase revenues and market share.
Costs and Expenses. Total costs and expenses were $52.6 million for the quarter
ended December 31, 2003 compared to $53.2 million for the quarter ended December
31, 2002, a decrease of $0.6 million or 1.1%. This decrease is primarily
attributable to increased operating efficiencies and cost control measures
instituted by management.
Casino. Casino costs and expenses were $19.3 million for the quarter ended
December 31, 2003, compared to $21.8 million for the quarter ended December 31,
2002, a decrease of $2.5 million or 11.5%. This decrease is primarily
attributable to increased operating efficiencies, consolidation of certain
casino functions, decreased employee headcount and other cost control measures
instituted by management.
Food and Beverage. Food and beverage costs were $2.9 million for the quarter
ended December 31, 2003 compared to $3.4 million for the quarter ended December
31, 2002, a decrease of $0.5 million or 14.7%. This decrease is primarily
attributable to the increased operating efficiencies, reduced employee headcount
and food cost control efforts instituted by management.
Rooms. Room costs and expenses were $0.7 million for the quarter ended December
31, 2003 compared to $1.0 million for the quarter ended December 31, 2002, a
decrease of $0.3 million or 30.0%. This decrease is primarily attributable to
the increased operating efficiencies, reduced employee headcount and room cost
control efforts instituted by management.
18
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002 (Continued)
- --------------------------------------------------------------------------------
Other. Other costs and expenses were $2.1 million for the three months ended
December 31, 2003, compared to $2.6 million for the three months ended December
31, 2002, a decrease of $0.5 million, or 19.2%. Other expenses are primarily
comprised of the costs related to the operation of retail outlets, the
convention center, the Dancing Rabbit and Geyser Falls. Golf operating expenses
were unchanged at $1.1 million for the three months ended December 31, 2003 and
2002. Geyser Falls operating expenses were $0.3 million for the three months
ended December 31, 2003 compared to $0.4 million, a decrease of $0.1 million or
25%.
Selling, General and Administrative. Selling, general and administrative costs
and expenses were $17.4 million for the quarter ended December 31, 2003 compared
to $15.2 million for the quarter ended December 31, 2002, an increase of $2.2
million or 14.5%. The increase in selling, general and administrative expense is
primarily attributable to increased direct casino patron marketing efforts as
well as other administrative costs associated with operation of the Golden Moon
and Silver Star.
Depreciation. Depreciation expense was $8.0 million for the quarter ended
December 31, 2003 compared to $7.0 million for the quarter ended December 31,
2002. The $1.0 million or 14.3% increase is primarily attributable to additional
depreciation related to property and equipment and construction costs incurred
for Golden Moon and Geyser Falls.
Operating Income. Operating income was $20.8 million for the quarter ended
December 31, 2003 compared to $15.3 million for the quarter ended December 31,
2002, an increase of $5.5 million, or 35.9%. The increase is primarily
attributable to increased casino revenue, the operational efficiencies and cost
control measures instituted by management and to a lesser extent expense
variations previously discussed.
Other Income (Expense). Other expense was $6.0 million for the quarter ended
December 31, 2003 compared to other expense of $5.9 million for the quarter
ended December 31, 2002. Other income (expense) is comprised of interest income
minus interest expense and other expense. The increase in expense of $0.1
million is primarily attributable to a decrease in interest expense of
approximately $0.2 million and a decrease in interest and other income of $0.3
million. The decrease in interest expense for the three months ended December
31, 2003 compared to the three months ended December 31, 2002 is primarily the
result of reduced commitment fees related to the revolving credit facility and
decreased interest expense in connection with the interest rate swap agreement.
The decrease in interest income is due to decreased cash and investment balances
that were used to fund Golden Moon construction and lower investment interest
rates.
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, 2003 and 2002, the Enterprise recognized other income of $47,000
and $253,000 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 Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002 (Continued)
- --------------------------------------------------------------------------------
Critical Accounting Policies
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 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 slot 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.
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, slot jackpots 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, 2003, the Enterprise held cash and cash equivalents of $53.3
million. Our principal sources of liquidity have consisted of cash provided by
operating activities and debt financing. Cash provided by operating activities
was $19.4 million in the three months ended December 31, 2003 compared to $6.8
million in the three months ended December 31, 2002. The increase of $12.6
million was due primarily to the increase in net income to $14.8 million in the
three months ended December 31, 2003 from $9.4 million in the three months ended
December 31, 2002.
Cash used in investing activities in the three months ended December 31, 2003
for capital expenditures totaled $2.1 million and was primarily related to
capital expenditures required to upgrade and maintain the Silver Star and Golden
Moon. Cash used in investing activities in the three months ended December 31,
2002 for capital expenditures totaled $25.7 million and was primarily related to
development and construction of Golden Moon.
20
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002 (Continued)
- --------------------------------------------------------------------------------
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 facility
to maintain the property.
Cash used in financing activities was $13.7 million in the three months ended
December 31, 2003 compared to $1.7 million of cash provided by financing
activities for the three months ended December 31, 2002. The primary use of cash
in each period was distributions to the Tribe of $13.4 million and $23.9 million
in the three months ended December 31, 2003 and 2002, respectively. Additionally
during the three months ended December 31, 2003 the Enterprise made repayments
of long-term debt totaling $1.3 million on the revolving credit facility. 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"). The Facility has a
maturity date of December 28, 2005. Borrowings available under the Facility
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
$93,750,000, all of which was outstanding at December 31, 2003. 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.
21
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002 (Continued)
- --------------------------------------------------------------------------------
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 received a waiver for such covenant
violations from the Facility lender. The Enterprise is required to meet these
covenants each quarter. Accordingly the Enterprise entered negotiations relating
to modification of these covenants with the Facility lender in order to ensure
future compliance. On March 25, 2003 the Enterprise successfully completed these
negotiations, which resulted in modification of terms of the Facility. Based on
the amended terms of the Facility, the Enterprise is in compliance with the
Fixed Charge Coverage Ratio and the Total Leverage Ratio at December 31, 2003
and management believes the Enterprise will achieve compliance with both the
Fixed Charge Coverage Ratio and the Total Leverage Ratio going forward. As of
December 31, 2003, management believes that the Enterprise is in compliance with
all other debt covenants under the Notes and the Facility.
As of December 31, 2003 and September 30, 2003 the Tribe had outstanding
liabilities of $1.7 million and $1.9 million, respectively, under credit
facilities with $1.9 million and $2.4 million, respectively, available in
borrowings, which did not preclude recourse to assets held by the Enterprise.
The Enterprise believes that existing cash balances and operating cash flow 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.
Presently, the Enterprise has fully drawn on the Facility and does not have
other existing lines of credit available for use. The Enterprise does not
anticipate the need for further credit availability in the short-term. However,
in the event that short-term credit is desired, the Enterprise believes that it
could obtain such financing on favorable terms from commercial lending
institutions.
The following table presents the long-term debt maturities and future minimum
lease payments under non-cancellable leases as of December 31, 2003:
Fiscal years endeding September 30,
----------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total
----------- ----------- ----------- ----------- ----------- -------------- --------------
Long-term debt $18,750,000 $25,000,000 $50,000,000 $ - $ - $ 200,000,000 $ 293,750,000
Operating leases 396,085 141,590 - - - - 537,675
----------- ----------- ----------- ----------- ----------- ------------- -------------
$19,146,085 $25,141,590 $50,000,000 $ - $ - $ 200,000,000 $ 294,287,675
=========== =========== =========== =========== =========== ============= =============
Additionally and in accordance with Tribal law, 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 Tribal / State Tourism fund to be used for used
for advertising and tourism promotional activities.
22
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002 (Continued)
- --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
This interpretation addresses the requirements for business enterprises to
consolidate related entities in which they are determined to be the primary
economic beneficiary as a result of their variable economic interests. The
interpretation is intended to provide guidance in judging multiple economic
interests in an entity and in determining the primary beneficiary. The
interpretation outlines disclosure requirements for VIEs created after January
31, 2003. The Enterprise has reviewed its major relationships and its overall
economic interests with other companies consisting of related parties and other
suppliers to determine the extent of its variable economic interest in theses
parties. The Enterprise adopted FIN 46 effective December 31, 2003. Adoption of
FIN 46 did not have any impact on the financial statements of the Enterprise.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). As the Enterprise's equity securities are not
publicly traded, the Enterprise is a nonpublic entity as defined by SFAS 150.
The effective date of this pronouncement has been deferred for an indefinite
period. The adoption of SFAS 150 will not have a material impact on our
financial position, results of operations or cash flows as the Enterprise does
not have any such financial instruments.
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, 2003 or 2002, 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.
23
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Three Months Ended December 31, 2003
Compared to Three Months Ended December 31, 2002 (Continued)
- --------------------------------------------------------------------------------
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).
24
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, 2003, the interest rate swap agreement had a notional
amount of $3.1 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 $24,000 at December
31, 2003. If the floating rate increased 25 basis points, interest expense under
the swap agreement for the three months ended December 31, 2003 would have been
lower by $3,038. Additionally, current borrowings under the revolving credit
facility bear interest at the LIBOR base rate plus a margin rate of 3.125%. If
the LIBOR base rate had increased 25 basis points, interest expense under the
revolving credit facility would been higher by $60,625 during the three months
ended December 31, 2003.
Management has and will continue to limit our exposure to interest rate risk by
maintaining a conservative ratio of fixed rate, long-term debt to total debt
such that variable rate exposure is kept at an acceptable level and fixing
certain long-term variable rate debt through the use of interest rate swaps or
interest rate caps with appropriately matching maturities.
25
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.
As of the end of the period covered by 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-15(e) and 15d - 15(e). 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 within the reasonable assurance threshold described
above 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.
26
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
27
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 12, 2004 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)
28
SIGNATURES
- --------------------------------------------------------------------------------
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer 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 and material weaknesses in the design or
operation of internal controls which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
February 12, 2004 /s/ Jay Dorris
------------------
Jay Dorris
President (Principal Executive Officer)
29
SIGNATURES
- --------------------------------------------------------------------------------
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer 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 and material weaknesses in the design or
operation of internal controls which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
February 12, 2004 /s/ Michael A. Donald
--------------------------------
Michael A. Donald
Vice President of Resort Finance
(Principal Financial and Accounting Officer)