Item 1. Business.
OVERVIEW
River Rock Entertainment Authority (“we,” “us,” “our” or the “Authority”) is a governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians of California (the “Tribe”). The Tribe is a federally recognized Indian tribe with 989 enrolled members, with an approximately 75-acre reservation in Sonoma County, California (“Sonoma County” or the “County”). We were formed in 2003 as an unincorporated governmental instrumentality of the Tribe, to own and operate the River Rock Casino in Sonoma County, California. The River Rock Casino had previously operated as a wholly-owned governmental operating property of the Tribe.
The Indian Gaming Regulatory Act of 1988, (“IGRA”) as amended, permits federally recognized Indian tribes to conduct casino gaming operations on certain Indian lands, subject to, among other things, the negotiation of a compact with the affected state. The Tribe and the State of California entered into a compact (the “Compact”) in September, 1999 which became legally effective when it was approved by the U.S. Department of the Interior and notice of approval was published in the Federal Register in May, 2000. The Compact authorizes certain forms of Class III casino gaming, including slot machines and house-banked card games.
Our address is 3250 Highway 128 East, Geyserville, California 95441 and our telephone number is (707) 857-2777.
Our River Rock Casino
We own and operate the River Rock Casino, a gaming and entertainment facility located on the Tribe’s reservation, approximately 75 miles north of San Francisco, California. Our 62,000 square-foot gaming and entertainment facility, which is located in the Alexander Valley, has views of the surrounding countryside, is open 24-hours a day, seven days a week, and currently features:
· 35,500 square feet of gaming space containing 1,570 slot and video poker gaming machines, 22 table games featuring Blackjack, Three Card Poker, Mini Baccarat and Pai Gow Poker, and 6 tables featuring Texas Hold’em Poker. We offer state-of-the-art gaming devices including video poker, video keno, progressive slots and guest favorites, such as Red Hot 7’s, Hot Shot, Jackpot Party, Quick Hits, Mystery Temple, Quick Strike and other various themes;
· both smoking and non-smoking gaming rooms in order to satisfy customer preferences;
· the Players Club, a player tracking system which offers our guests incentives for additional play;
· the Quail Run Restaurant, offering 24-hour menu dining, with lunch, dinner and Sunday brunch buffets, and 152 indoor seats and 96 outdoor seats, overlooking the Alexander Valley wine region and the Russian River;
· two snack bars, a lounge, the Oak Bar, which offers “bar top” video poker games in an elegant setting, a gift shop and a historic and contemporary Pomo basketry and art display;
· alcohol service, as a result of the May 2008 issuance of our liquor license;
· three parking structures and an adjacent parking lot allows us to accommodate approximately 1,584 customer vehicles;
· an Arts and Crafts California Bungalow-style design and furnishings, incorporating Native American elements, that feature a cultural arts collection of traditional and contemporary Pomo art, including historical basketry for which the Tribe is known. The interior of our gaming facility utilizes an extensive amount of wooden casework and natural rock to emphasize the architectural style found throughout California wine country. In keeping with this motif, our gaming facility’s counters are constructed of natural stone and wood, and oak wainscoting grace the food and beverage facilities; and
· a location in the heart of the beautiful Alexander Valley with spectacular views of the surrounding countryside. Guests entering our gaming facility are treated to a large, open-beamed Porte cochere that faces out towards sweeping vistas of Alexander Valley vineyards. Our gaming and entertainment facility was designed to capitalize on the scenic vistas with the food and beverage facilities strategically placed to feature the expansive views.
In addition, to enhance the comfort of our guests, we have installed a state-of-the-art ventilation system that greatly reduces cigarette smoke and impurities, circulates air from the ground level and provides 100% fresh-air return. Our gaming facility also incorporates other environmentally sensitive engineering features, including irrigation using surplus wastewater and non-intrusive lighting in the parking lot. Furthermore, our state-of-the-art back-up and redundant generators are designed to provide electricity in the event of a power failure.
We maintain a digital surveillance system that tracks the entire casino floor to secure our facility and operations. We employ a 65 officer security force.
Competitive Strengths
We believe the following strengths have and will continue to contribute to our success:
Attractive Location with Convenient Access. Our gaming facility is conveniently located off of Highway 101, a four-lane highway that serves as a major thoroughfare between Los Angeles and Oregon. Highway 101 travels directly through the nearby cities of San Francisco, San Rafael, Petaluma and Santa Rosa. Currently CALTRANS estimates of Average Annual Daily Traffic (AADT) on Highway 101 to be around 43,400 north and south bound vehicles. In addition, the nearby airport in Santa Rosa provides easy access for patrons traveling to wine country.
Strong Market Demographics. Our gaming facility is easily accessible by all the approximately 6.9 million residents of the San Francisco Bay area market which include the major metropolitan cities of San Francisco, Oakland and the smaller cities of San Rafael, Berkeley, Santa Rosa, and Petaluma. We also benefit from the 7 million annual visitors to Sonoma County and
5 million annual visitors to Napa County which is known for their world-renowned wineries and related tourist attractions.
Limited Competitive Environment and High Barriers to Entry. Class III casino gaming may not be conducted in California other than on certain lands held for the benefit of federally recognized Indian tribes and pursuant to negotiated compacts with California and approved by the U.S. Secretary of the Interior. We believe these restrictions significantly limit potential future competition. We are not subject to any betting limits on Indian gaming activities.
High Quality Products and Amenities. Our gaming facility offers state-of-the-art gaming devices and table games in an upscale, relaxed gaming environment. Our gaming devices feature comprehensive, integrated cashless technology permitting faster wagering and payouts. In addition, our restaurant offers premium food and beverages and was designed to capitalize on the spectacular views of the Alexander Valley. Our gaming and food and beverage facilities emphasize a high level of customer service, created and maintained through comprehensive employee training.
Emphasis on Gaming Devices. Our gaming facility emphasizes slot and video poker gaming devices, which we believe, based on industry studies, represents the most consistently profitable and lowest risk segment of the gaming business. We offer a wide variety of games not only to attract guests but also to encourage them to play for longer periods of time.
Tax Free Cash Flow from Operations. We currently generate significant cash flow from operations. In addition, because these are governmental operations, they are not subject to any local, state or federal income taxes.
Experienced Senior Management Team and Staff. Our management team is led by seasoned executives who have significant industry experience, leadership and expertise in operations, marketing, finance and development. Members of this team have previously worked at premier local and destination casinos for commercial and tribally owned casinos. We believe our management team and our experienced staff provides superior employee and customer care product quality, and an in-depth understanding of the target market and how to maintain return business which enhances our competitive position.
Business and Marketing Strategies
Our business strategy is to grow our business to not only capture a greater share of our growing market, but also expand our target patron base to a broader demographic with the following competitive business strategies:
Marketing & Promotions: Our advertising methods include radio, a strong emphasis on email blasts, billboards, TV, newspaper, magazines, bus billboards, signature shuttles, rack cards and direct mail. The direct mail program that will be enhanced next year will be tiered by player based on player status. This direct mail method will include coupons and information regarding up and coming promotions which will be tailored to target our high end players. Over the years, we have analyzed promotions and player demand and have continued with the successful promotions which have led to increased revenues. Promotions that have proven successful and increased revenues are car giveaways, cash spins, and “Gas and Cash”. Along with continued promotions, we will also be adding tournaments. Marketing will be putting more emphasis on direct mail to the ethnic marketing, i.e. Latino and Asian signature markets in the Bay area. With giveaways and promotions throughout the year, we will be able to continue to provide cutting edge entertainment.
Capitalize on Our Prime Location and Appeal of Sonoma County. We market our Casino to our local customer base and to our broader regional market and international patrons traveling to the area as part of the Sonoma Valley resort destination. The picturesque Alexander Valley region in the
heart of Sonoma County is a world-renowned tourist destination. We intend to capitalize on its appeal, including its reputation as one of California’s premier wine producing regions, to further expand our customer base. Sonoma County receives over 7 million tourists annually and over 5 million tourists visit Napa County annually. Our marketing message emphasizes the convenient access to our facility.
Partners Program. Partnerships with local businesses have created economic growth and strong community relations with local wineries, hotels, Chamber of Commerce and local businesses. In return, promoting one another will help increase tourism and bring in new potential customers to Sonoma County and our Casino. Our visitor’s office located in downtown Healdsburg provides tourists detailed and local area information on the casino and highlights those in the partners program with maps, lodging and transportation options.
Increase Time on Device and Win Per Unit. We utilize state-of-the-art technology and sophisticated player tracking software system which provides a customized and tailored gaming environment that generates increased time spent on a device and enhances the likelihood of return business. This data base helps us to determine our premier players and target their favorite games, and also helps us create a relationship with those patrons.
Continue to Develop our Appeal to the Asian Market. The Asian market constitutes 20% of the Bay Area population and 31% of the San Francisco population. We continue cultivating our Asian market customer base through our bus program from San Francisco’s Chinatown with our targeted gaming promotions. In an effort to further increase our market exposure, we have increased our Asian targeted media and we have begun participating in Asian community events.
Expand Marketing and Promotion Programs. We will monitor the effectiveness of our advertising and brand awareness efforts through an extensive research analysis program and evaluate it against measurable objectives such as first name recall for our gaming facility and satisfied resident response rates. From our database, we are able to track our repeat business. Our database also provides us with information on new player sign-ups, which in 2008, has grown by 45,000. We have also promoted more frequent and longer visits and increased wagering at off-peak demand periods through promotions such as our “Hot Nights, Cool Cash” and “Pick Your Dream Car” programs. These promotions offer customers cash rewards on weekday nights and has resulted in increased net revenue whenever offered.
Supplement Demand with Our Bus Program. We intend to supplement our overall demand with our line and charter bus program to provide customer transportation to our gaming facility. We believe that this program enabled us to maximize our number of guests during the off-peak times. Our guests have appreciated the convenience offered by this program and we have experienced an increase in the use of our bus program. We operated an average of approximately 32 buses a day in 2008. Our bus program brings guests from San Francisco, San Mateo, Contra Costa, Alameda and Marin Counties. On our River Rock line runs, guests pay between $10 to $15 roundtrip to and from our casino. Upon arrival, they receive an incentive package in the range of $15 to $25 towards use on gaming in our casino. Our special charter bus guests also receive $20 towards use on gaming in our casino.
COMPETITION
Other Casinos In and Around Our Market
Federal and California law currently permits Class III casino gaming only on federally recognized tribal lands pursuant to compacts negotiated with the State of California and approved by the U.S. Secretary of the Interior. Class II gaming for tribes is permitted only on federally recognized tribal lands. There are currently 55 tribes operating 56 compacted gaming facilities in the State of California. The closest existing competitors are the Hopland Sho-ka-wah Casino, located approximately 35 miles and 40 minutes driving time north of the Tribe’s reservation; the Konocti Vista
Casino, located approximately 45 miles and one hour and ten minutes driving time northeast of the Tribe’s reservation; the Thunder Valley Casino, located approximately 124 miles and two hours and forty-five minutes driving time east of the Tribe’s reservation; and Cache Creek Indian Casino and Bingo, located approximately 95 miles and two hours and fifteen minutes driving time east of the Tribe’s reservation. In addition, several potential competitors are attempting to develop and open casinos near our Casino.
The greatest competition may come from the proposed Graton Rancheria casino. In April 2003, the Federated Indians of the Graton Rancheria, also known as the Coast Miwoks, announced plans to purchase land in Sonoma County near Highway 37 and Lakeville Highway, approximately 20 miles south of our gaming facility and closer to San Francisco than our reservation. The proposed location would lie directly between our Casino and the majority of the 7 million population base of the San Francisco Bay area. The announced plans include construction of a casino-hotel complex that will be managed by Station Casinos, Inc. based in Las Vegas, Nevada. The proposed facility would house approximately 2,000 slot machines, 120 card tables and bingo, as well as a 300-room hotel, five restaurants and a theater with up to 2,000 seats. As a result of environmental opposition to the development of such location, the Federated Indians of the Graton Rancheria announced plans to move the proposed casino-hotel complex to a site near Rohnert Park, California. The Rohnert Park City Council has approved an agreement with the Federated Indians of the Graton Rancheria to share revenues with Rohnert Park and various community groups, approximately $200.0 million over 20 years, to offset the impact of the proposed project.
In May 2008, the U.S. Department of Interior published in the Federal Register a notice to take the proposed Rohnert Park site into federal trust on behalf of the Graton Rancheria. This represents a significant step towards the development of a casino at Rohnert Park, as do the separate agreements negotiated between the Graton Rancheria and Sonoma County and Marin County, whereby the counties pledged to not challenge the land-into-trust decision and the Graton Rancheria agreed not to build any additional casinos in Sonoma or Marin counties. The U.S. Department of Interior’s land-into-trust decision has, however, been challenged by citizens groups opposed to a casino in Rohnert Park. Under established policy, the Department will not actually take the land into trust - a prerequisite for gaming to occur there - until the litigation is resolved. Another obstacle facing the proposed Graton Rancheria casino is the ability to obtain financing for the project. In addition, the Graton Rancheria will also need to enter into a tribal-state compact with the State of California before it can operate Class III gaming at the Rohnert Park site.
The Hopland Sho-ka-wah Casino is located several miles east of Highway 101 on Route 175. The facility features a 40,000 square foot casino offering 550 slot machines, 6 table games and a small 3 table poker room. The facility contains a small cafe-type food and beverage area, a bar and a fine-dining steak house. Entertainment is provided occasionally, which includes musical acts and boxing. Hopland operates a small bus program but does not operate a hotel.
East of the Sho-ka-wah Casino is the Konocti Casino in Lakeport, California. Lakeport is located approximately 37 miles from Cloverdale with access off Highway 20. The casino houses 660 slot machines and 8 table games. The facility also offers an 80-room hotel and marina with small pool as well as a 74-space recreational vehicle park. The food and beverage program includes a small restaurant, buffet and a new full-service restaurant serving liquor.
The Thunder Valley Casino opened in June 2003 and is located at the intersection of Highway 65 and Interstate 80 just outside of Sacramento, California. The Nevada-style property offers over 2,400 slot machines and 98 table games that include blackjack, baccarat, and a variety of poker games including Let It Ride and Pai Gow. The facility features a salon, private dining rooms, bars and butler service. In addition, it houses a 500-seat buffet and various fast food options, including Fat Burger, Panda Express and Starbucks, and fine dining options such as Austin’s Steakhouse. The facility also features a nightclub, and live entertainment is offered every two weeks. In 2008, the Thunder Valley Casino announced plans to build a new 650-room, 23-story hotel featuring a spa, family center and
other amenities. Thunder Valley also planned to construct a 3,000-seat performing arts center, and to expand the casino to include three new restaurants, more gaming space and new poker room, and a parking structure capable of holding 5,000 cars. Thunder Valley obtained financing for the expansion, which began in July 2008 but was halted in November 2008. The casino recently announced plans to continue with the expansion, but the project has been scaled down to include a 15-story hotel with 400 rooms; a 700-seat, 10,000-square-feet multipurpose entertainment center in place of the performing arts center; and a 7-story parking structure with approximately 3,500 spaces.
The Cache Creek Casino is located approximately 50 miles west of Sacramento. The Cache Creek Casino recently expanded its facility to 2,900 slot machines. The casino recently added a 28-table poker room and houses over 140 table games including blackjack, Texas Hold’em, Pai Gow and Caribbean Stud. The facility also includes a 200-room luxury hotel, an 8 restaurant outlets, an entertainment pavilion with seating for 600, a spa and outdoor pool, an 18-hole golf course, and a 1,883 spot parking structure. The facility is in the process of expanding its restaurant offerings, and has recently announced plans to add more shops, parking, and expand its gaming floor, and to add more than 500 slot machines, a 10-story hotel tower with 467 rooms, and a 62,500 square-foot convention center capable of seating 2,300.
The Lytton Band of Pomo Indians currently operates a 70,000 square-foot casino with 1,050 Class II electronic bingo machines on the 9-acre site of a card room in San Pablo, near Oakland, California, on land that was placed in trust for the tribe through congressional legislation. The Lytton Band signed a compact with Governor Arnold Schwarzenegger for operating Class III casino gaming on the San Pablo site, but the state legislature withheld its approval. In May 2007, legislation was introduced in the U.S. Senate, which has the support of the Lytton Band, that would require the Lytton Band to forego any Class III machines at the San Pablo site and instead limit itself to operating its existing Class II machines. This legislation was passed by the Senate in November 2007 and referred to the Committee on Natural Resources of the U.S. House of Representatives, but no further action was taken. In January 2009, the legislation was again introduced in the U.S. Senate. It was read twice and referred to the Senate Committee on Indian Affairs, but no further action has been taken.
The Twin Pine Casino, owned and operated by the Middletown Rancheria of Pomo Indians, is located approximately 4 miles off of Highway 29 in Napa County, approximately 34 miles and one hour driving time from our gaming and entertainment facility. The Twin Pine Casino currently offers 12,000 square feet of gaming space, with more than 400 slot machines and 8 table games including blackjack and poker, and houses a café. The Middletown Rancheria has announced plans to add a 60-room hotel, which is tentatively scheduled to open in March 2009, and to expand the facility to include 50,000 square feet of gaming space with approximately 700 slot machines and 20 table games, three food areas, and a wine tasting room.
There are a number of other Indian tribes, including the Scotts Valley Band of Pomo Indians and the Guidiville Band of Pomo Indians, that have announced preliminary plans to develop gaming projects in the San Francisco Bay area.
The Guidiville Band hopes to have transferred to it land at the former Point Molate Naval Base in Richmond, California on which it hopes to operate a casino along with a 1,100-room hotel, theater, convention center, and retail shops, but the project is still in its early stages, as the land transfer has not been approved and environmental reviews must be completed. In January 2009, two environmental groups filed a lawsuit against the City of Richmond, the Guidiville Band and its financial backer and developer in an effort to stop the transfer of the land.
The Scotts Valley Band hopes to build a 225,000 square-foot casino complex and five-story parking garage on a 29.87-acre site in Contra Costa County, near Richmond, California. In March 2008, the Bureau of Indian Affairs announced the filing of the Final Environmental Impact Statement for the proposed project. In August 2008, the Contra Costa County Superior Court struck down a municipal services agreement between the City of Richmond and the Scotts Valley Band on
the ground that the City failed to conduct the proper environmental reviews before signing the agreement.
The Cloverdale Rancheria has announced preliminary plans to build a 596,000 square-foot hotel/spa and casino resort some ten miles north of our Casino on U.S. Highway 101, and they and their financial backers have purchased approximately 79 acres for the proposed facility. The environmental review process for the proposed Cloverdale Rancheria project began in July 2008.
Each of these proposed projects faces numerous obstacles in addition to environmental approvals, including the negotiation and approval of a compact with the State of California, approval from the U.S. Department of Interior to take the land on which the project would be located into federal trust on behalf of the tribe, and determinations from appropriate federal agencies that the tribes may conduct gaming on these lands pursuant to the Indian Gaming Regulatory Act.
We also compete with other forms of gaming such as statewide lotteries, live and simulcast pari-mutuel wagering and card rooms.
In May 2007, Governor Schwarzenegger proposed that the California State Lottery be leased to a private concessionaire to increase its revenue and efficiency. Part of the Governor’s proposal includes authorizing the use of instant lottery video terminals that resemble and operate like slot machines at locations including horse racing tracks and card rooms. Approval of this proposal would require a two-thirds affirmative vote of the state legislature and could require a constitutional amendment to the Constitution of the State of California. While it is uncertain whether or when this proposal will be approved, its implementation could adversely affect our and other Indian casinos’ competitive positions.
Other initiatives expanding competitive forms of gaming have been approved and may, from time to time, be approved by state or local authorities. Examples include the passage in California of recent legislation expanding off-site betting on horse races through expanded advance deposit wagering and increased satellite wagering sites, and a legislative proposal in the California Assembly in February 2007 to amend the California Penal Code to expand permitted bingo games by charitable organizations to include electronic bingo cards.
EMPLOYEE AND LABOR RELATIONS
As of December 31, 2008, we had 625 full and part-time employees. Our employees are not covered by any collective bargaining agreements. We believe that our relations with our employees are good. However, provisions in a labor ordinance the Tribe was required to adopt as part of the 1999 compact agreement, permits opportunities for unions to attempt to organize our labor force. In addition, a recent decision by the United States Court of Appeals for the District of Columbia upheld a finding by the National Labor Relations Board, that the National Labor Relations Act is applicable to tribal casinos.
REGULATION
General
We are subject to special federal and tribal laws applicable to commercial relationships with tribes and the management and financing of casinos owned by an Indian tribe. In addition, we are regulated by certain federal laws applicable to the gaming industry generally, with respect to the use of certain gaming equipment, and specifically applicable to the Indian gaming market. We are also regulated by the provisions of the Compact, which have been ratified under state law and are based in part on the California constitution and other state laws and policies. The following description of the regulatory environment, in which Indian gaming takes place and in which we operate our gaming
facility, is only a summary and not a complete recitation of all applicable law. Moreover, our regulatory environment is more susceptible to changes in public policy considerations than others. Changes in these laws could have a material adverse impact on our operations.
Applicability of Federal Law
Federally recognized Indian tribes are independent governments, subordinate to the United States, with sovereign powers, except as those powers may have been limited by Congress, by treaty, or, in certain instances, by the public policy of the state in which the tribe’s lands are located. The power of Indian tribes to enact their own laws to regulate gaming derives from their sovereign right to govern and regulate their own affairs, particularly where it is consistent with federal law and the state’s public policy. Indian tribes maintain their own governmental systems and often their own judicial systems. Indian tribes have the right to tax persons and businesses conducting business on Indian lands and also have the right to require licenses and to impose other forms of regulations and regulatory fees on persons and businesses operating on their lands.
The Indian Gaming Regulatory Act of 1988
Regulatory Authority. Since 1988, the sovereign right of tribes to operate and regulate gaming on their lands has been subjected to the provisions of the Indian Gaming Regulatory Act of 1988 (“IGRA”). IGRA is administered by the National Indian Gaming Commission (“NIGC”), an independent agency within the U.S. Department of Interior that exercises certain regulatory responsibilities in connection with Indian gaming on behalf of the United States. The NIGC has authority to issue regulations governing tribal gaming activities, approve tribal ordinances for regulating Class II and Class III gaming (as described below), approve management agreements for gaming facilities, conduct investigations and generally monitor tribal gaming. The Bureau of Indian Affairs, which is a bureau of the U.S. Department of the Interior, retains certain responsibilities under IGRA, such as the approval of per capita distribution plans of gaming revenues to individual tribal members and the approval of transfers of lands into trust status for gaming. The Bureau of Indian Affairs also has responsibility to review and approve land leases and other agreements relating to Indian lands. Criminal enforcement is a shared responsibility of the U.S. Department of Justice, and, depending on the terms of a tribal-state compact that is in effect, the state in which the tribe is located, and the tribe.
The NIGC is empowered to inspect and audit all Indian gaming facilities, conduct background checks on certain persons associated with Indian gaming, hold hearings, issue subpoenas, take depositions, adopt regulations, assess fees and impose civil penalties for violations of IGRA. IGRA also provides for federal criminal penalties for illegal gaming on Indian land and for theft from Indian gaming facilities. The NIGC has adopted rules implementing certain provisions of IGRA. These rules govern, among other things, the submission and approval of tribal gaming ordinances or resolutions and the maintenance of minimum internal control standards for the operation of gambling games and equipment. IGRA and the NIGC regulations require an Indian tribe to have the sole proprietary interest in, and to maintain a high level of responsibility for, the conduct of any gaming on its lands. Tribes are required to issue gaming licenses under articulated standards, conduct or commission financial audits of their gaming enterprises, perform or commission background investigations for primary management officials and key employees, and maintain facilities in a manner that adequately protects the environment and the public health and safety. These rules also set out review and reporting procedures for tribal licensing and background activities.
Classes of Gaming. IGRA classifies gaming that may be conducted on Indian lands into three categories: Class I gaming includes social games solely for prizes of minimal value or traditional forms of Indian gaming engaged in by individuals as part of, or in connection with, tribal ceremonies or celebrations. Class II gaming includes bingo and pull tabs, lotto, punch boards, tip jars, instant bingo and other games similar to bingo if those games are played at the same location as bingo is played, and non-banked card games (such as poker) if permitted within the state. Class III gaming includes all
other forms of gaming, such as slot machines, table games, lotteries, sports betting and pari-mutuel wagering.
Class I gaming on Indian lands is within the exclusive jurisdiction of Indian tribes and is not subject to federal regulation under IGRA. Class II gaming is permitted on Indian lands if:
· the state in which the Indian lands lie permits that gaming for any purpose by any person, organization or entity;
· the gaming is not otherwise specifically prohibited on Indian lands by federal law;
· the gaming is conducted in accordance with a tribal ordinance or resolution that has been approved by the NIGC;
· an Indian tribe has sole proprietary interest and responsibility for the conduct of gaming; and
· the primary management officials and key employees are tribally licensed and several other requirements are met.
Class III gaming is permitted on Indian lands if the conditions applicable to Class II gaming are met and, in addition, the gaming is conducted in conformity with the terms of a tribal-state compact (a written agreement between a tribe and the government of the state within whose boundaries the tribe’s lands lie).
Tribal-State Compacts. IGRA requires Indian tribes to enter into tribal-state compacts in order to conduct Class III gaming. These tribal-state compacts may include provisions for the allocation of criminal and civil jurisdiction between the state and the Indian tribe necessary for the enforcement of these laws and regulations, taxation by the Indian tribe of the Class III gaming activity, remedies for breach, standards for the operation of the Class III gaming activity and maintenance of the gaming facility, including licensing, and certain other subjects that are directly related to the operation of gaming activities.
Tribal-state compacts usually specify the types of permitted games, establish technical standards for gaming devices, entitle the state to inspect casinos, require background investigations and licensing of casino employees, and require the tribe to pay a portion of the state’s expenses for establishing and maintaining agencies that participate in the regulatory process provided in the compact. Some tribal-state compacts are for set terms, while others are for indefinite durations.
The Tribe entered into a Compact with the State of California in September 1999, which became effective in May 2000, that permits the Tribe to engage in some levels of Class III gaming. The Compact will expire on December 31, 2020. For additional information see “Part I. Item 1. Business-Description of Material Agreements-The Compact.”
Tribal Ordinances. Under IGRA, except to the extent otherwise provided in a tribal-state compact as described below, and subject to certain oversight and enforcement authority by the NIGC, Indian tribal governments have primary regulatory authority over gaming on land within a tribe’s jurisdiction. Therefore, our gaming operations and persons engaged in gaming activities are subject to the provisions of the Tribe’s ordinances and regulations regarding gaming. The Tribe maintains a fully staffed tribal gaming agency (“TGA”), known as the Dry Creek Gaming Commission, to carry out the Tribe’s regulatory responsibilities under IGRA, its ordinances and the compact.
IGRA requires that the NIGC review tribal gaming ordinances and authorizes the NIGC to approve these ordinances only if they meet requirements relating to:
· the ownership, security, personnel background, recordkeeping and auditing of a tribe’s gaming enterprises;
· the use of the revenues from that gaming; and
· the protection of the environment and the public health and safety.
Licensing and Registration Requirements of the Compact and State Regulation
Compact. The Compact requires that any person who directly or indirectly extends financing to the Tribe’s gaming facility or gaming operation must be licensed as a “financial source” by the TGA. However, as permitted by the Compact, the TGA has exempted federally- and state-regulated banks and savings and loan associations, as well as persons who hold less than 10% of our $200.0 million of 9-3/4% Senior Notes, due 2011 (the “Notes”). For an applicant who is a non-exempt business entity, these licensing provisions also apply to the entity’s officers, directors, principal management employees, owners (if an unincorporated entity), partners and greater than 10% shareholders. Under the Compact, a permanent license cannot be issued unless the TGA has conducted an investigation as to the suitability of the applicant. Any application for a gaming license may be denied, and any license issued may be revoked, if the TGA determines the applicant to be unsuitable or otherwise unqualified for a gaming license. Each license is subject to review for compliance at least every two years.
Prior to receiving a license, an applicant must apply to the California Gambling Control Commission (“CGCC”) for a determination of suitability. If the TGA receives notice that the CGCC has determined that a person is unsuitable, the Compact requires that the TGA revoke any license it has issued to such person.
The Compact states that any agreement between the Tribe and a “financial source” terminates upon revocation or non-renewal of the financial source’s license because of a determination of unsuitability by the CGCC. Upon such a termination, the Tribe’s only liability is for repayment of all outstanding sums owed as of the termination date, exclusive of unpaid accrued interest. Further, the Tribe is not permitted to enter into, or continue to make payments under, any financing agreement with anyone whose application to the CGCC for a determination of suitability has been denied or has expired without renewal.
State and Tribal Regulation. The CGCC and the TGA, pursuant to the authority created in a tribal-state joint powers board known as the “Association,” have both adopted regulations that simplify the licensing and registration process for certain large institutional investors, both in the initial distribution of certain debt securities and the secondary market.
Under these regulations, certain regulated financial institutions with at least $100.0 million invested in non-affiliated securities may take advantage of an abbreviated licensing and certification process. The regulations do not require any licensing or registration for persons purchasing debt securities in the secondary market. However, unless a holder of debt securities is licensed or exempt from licensing, neither the holder nor the Trustee on the holder’s behalf will have any right to enforce any payment obligation relating to the debt securities. In addition, neither the Trustee nor the Tribe may make any payment of principal or interest on the debt securities as a result of any enforcement action or default acceleration of debt security payments, except to a person who is licensed or exempt from licensing.
Gaming Device Licenses
The Compact permits the Tribe to operate up to 350 gaming devices without licenses. From March 2000 through December 2001, the Tribe obtained 1,250 gaming device licenses through a process conducted by a public accounting firm retained by a number of tribes under the Compact, thus permitting the Tribe to operate up to a total of 1,600 gaming devices. Following the allocation, the California Attorney General opined that only the CGCC has the authority to issue gaming device licenses under the compacts, and the Governor of California ordered the CGCC to control and monitor
the gaming device licensing process. In June 2002, the CGCC ratified all gaming device license issued to the Tribe and the other tribes in the earlier process.
In accordance with the Compact and California law, the Tribe is obligated to remit certain fees to the CGCC on a quarterly basis for inclusion in a Revenue Sharing Trust Fund (“RSTF”) maintained by the State of California. The RSTF is for the benefit of tribes that have no or limited gaming. The RSTF fees are fixed amounts per device, calculated on an annual basis and paid quarterly. We pay these fees on behalf of the Tribe. RSTF fees for the years ended December 31, 2008 and 2007 were $1.3 million for each year.
In the summer of 2006, Governor Schwarzenegger renegotiated five compacts with five Southern California tribes which took effect in January 2008. The new compact amendments allow the tribes who agreed to the amendment to have additional slot machines, while imposing additional significant annual payments to the State of California and requiring extensive mitigation and compensation to impacted local communities and provisions affecting customers and employees. In the summer of 2008, the State entered into a compact with a tribe in Central California that contains similar terms and provisions. The Tribe has not sought or entered into an amendment of its Compact.
Issuance of Liquor License
In March 2008, the Tribe and the Sonoma County Board of Supervisors entered into a Memorandum of Agreement (the “MOA”) that, among other things, settled several long-standing legal disputes between Sonoma County and the Tribe, and will provide a binding framework for resolving future disputes. Under the MOA, the County agreed to drop its opposition to the Tribe’s application for a liquor license. In a related action, the Alexander Valley Association (“AVA”), a local business and residents association which has long objected to the issuance of a liquor license, agreed to withdraw its objections to the license and has persuaded its members and a number of other protestors to do likewise.
In May 2008, the California Department of Alcoholic Beverage Control issued a liquor license to our gaming and entertainment facility. However, the Tribe has agreed to restrict the sale of alcohol to wine and beer between the hours of 11 a.m. and 5 p.m. on weekdays, and to stop serving alcohol altogether at midnight except for Friday and Saturday nights and the nights before holidays. The Tribe has also agreed not to serve liquor on the Casino floor, although patrons may bring drinks purchased at the restaurant or bar on to the Casino floor. The restrictions may be renegotiated following the first to occur of the three year anniversary of the MOA or the opening of a hotel, which is anticipated to occur within the next two to three years.
DRY CREEK RANCHERIA BAND OF POMO INDIANS
Tribal Administration
The Dry Creek Rancheria Band of Pomo Indians is a federally recognized, self-governing Indian tribe with 989 enrolled members. The reservation was established in 1915 under the authority of an Executive Order dated January 12, 1891. Pursuant to the Tribe’s Articles of Association, the Tribe is governed by a Tribal Council composed of all voting members. Certain authority is delegated to elected tribal officers who comprise the Board of Directors, consisting of a Chairperson, a Vice Chairperson, a Secretary/Treasurer and two members-at-large.. The members of the Board of Directors of the Tribe are the same members as our Board of Directors, but they do not serve in the same capacity.
The Tribal Gaming Commission
The Tribe enacted a tribal gaming ordinance in April 1997, which was approved by the NIGC in September 1997. Among other matters, the gaming ordinance created and established the TGA as a governmental subdivision of the Tribe. The TGA consists of three commissioners and supporting staff and is vested with the authority to regulate all gaming activity conducted on the Tribe’s lands.
Each TGA Gaming Commissioner is appointed by the Tribal Council to serve a four-year term. The tribal gaming ordinance and the Compact require that each Commissioner undergo a comprehensive background check prior to his or her assuming office. Pursuant to the tribal gaming ordinance, the TGA is responsible for, among other matters, inspection of all gaming operations within the Tribe’s reservation boundaries, enforcement of all provisions of the tribal gaming ordinance, investigation of all allegations of violations of the tribal gaming ordinance, conducting or arranging for background investigations of all applicants for tribal gaming licenses and issuing gaming licenses in accordance with the tribal gaming ordinance and the Compact. Under law, our Casino cannot operate without TGA regulation. Therefore, the costs of such regulation, including the cost of operating the TGA have, since commencement of operations of the River Rock Casino, been paid by us and will continue to be paid by us.
DESCRIPTION OF MATERIAL AGREEMENTS
The following is a summary of the material terms of our material agreements and material agreements of the Tribe relating to our Casino. This summary does not restate these agreements in their entirety. We urge you to read these agreements because they, and not these summaries, define our rights and obligations, and the rights and obligations of the Tribe, contained in the agreements. Copies of these agreements are included as exhibits to this Form 10-K.
The Compact
In September 1999, the State of California and the Tribe entered into a Compact. Under its terms, the Compact was not effective until ratified by statute and a supporting state constitutional amendment was passed by the California voters. On March 7, 2000, the California voters amended the state constitution and enacted the Indian Self-Reliance Amendment. The Amendment permits federally recognized Indian tribes to conduct Class III gaming in California, in accordance with compacts between such tribes and the State of California, subject to approval by the Secretary of the Interior. In May 2000, the Secretary of the Interior approved the Compact, and that approval became effective when it was published in the Federal Register on May 16, 2000.
Under the Compact, the gaming activities that may be offered by the Tribe include up to 2,000 Class III gaming devices, banked and percentage card games, and any devices or games that are authorized by the California State Lottery, provided that the Tribe does not offer such games through use of the Internet unless others in California are permitted to do so.
The Compact establishes limitations on Class III gaming that may restrict our gaming activities. Among those, which are of importance to our gaming facility, are those that require the Tribe to adopt and comply with California laws prohibiting cashing any check drawn against any public fund, free or reduced price alcoholic beverages, food or lodging as an incentive, the extension of credit for gaming activities, and persons under 18 (or under 21 if alcohol may be consumed) to be present in any room where Class III gaming is offered, other than simply to pass through the room.
The Compact requires the State of California and the Tribe to establish a method for licensing all key employees of a gaming entity and issuing work permits for other service employees. While the Tribe, as a sovereign governmental entity, is not required to be licensed, the California Gambling Control Act applies to all others associated with Class III gaming at our gaming facility. To facilitate
that licensing and comply with all other provisions of IGRA, in 1997 the Tribe adopted a tribal gaming ordinance establishing the TGA. The Chairman of the NIGC approved the Tribe’s gaming ordinance in 1997.
Under the Compact, all persons connected with our gaming facility are required to be licensed or to submit to a background investigation under IGRA. All “Gaming Employees” and “Gaming Resource Suppliers” (as defined in the Compact) and certain other persons must be licensed by the TGA. Licenses granted by the TGA are subject to review and renewal every two years. Holders of licenses granted by the TGA must, except in limited circumstances, also be determined suitable by the CGCC to be employed by us.
The Compact requires the Tribe to adopt and enforce regulations to ensure the physical safety of casino patrons, to prevent illegal activity, to maintain the regularity and integrity of gaming operations, and to require an annual audit conducted by an independent certified public accountant.
The Compact requires the Tribe to carry public liability insurance with initial limits of at least $5.0 million for personal injury and property damage claims. The Tribe is required to waive its sovereign immunity to the extent of the $5.0 million liability insurance limits.
The Compact also requires the Tribe to adopt and comply with standards no less stringent than federal workplace and occupational health and safety standards, and to adopt and comply with standards no less stringent than federal and state laws prohibiting employment discrimination. However, our tribal gaming ordinance permits us to give preference to Indians in employment matters.
The Compact also mandates that the Tribe must follow certain procedures to assess the off-reservation environmental impact of any reservation construction expansion projects. The procedures require the Tribe to give notice of a covered project, to determine whether a project will have any significant adverse environmental impact, to accept and respond to comments, to consult with the county board of supervisors, and to hold a public meeting.
The Notes and the Indenture
On November 7, 2003, we issued and sold our Notes in a private placement to certain “qualified institutional buyers” pursuant to Regulation 144A of the Securities Act of 1933, as amended (the “Notes Offering”). On June 21, 2004, pursuant to a registration rights agreement entered into in connection with the issuance of the Notes, we consummated an offer to exchange all of the Notes for $200.0 million in aggregate principal amount of 9-3/4% senior notes due 2011 (the “Outstanding Notes”) registered with the Securities and Exchange Commission. The terms of the Outstanding Notes are substantially identical to the terms of the Notes, except that the transfer restrictions and registration rights applicable to the Notes do not apply to the Outstanding Notes. We did not receive any additional proceeds from the exchange offer. The Outstanding Notes and the Notes were issued under an Indenture, dated as of November 7, 2003 (the “Indenture”), among us, the Tribe and U.S. Bank National Association, as trustee. The terms of the Outstanding Notes include those stated in the Indenture, as well as those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended.
The net proceeds from the Notes Offering were used to repay a majority of our outstanding indebtedness, to fund the completion of three parking structures and related infrastructure improvements, to fund the settlement of litigation involving the Tribe, to fund the acquisition of real property adjacent to the Tribe’s reservation, to build an additional access road to the Tribe’s reservation through such property, and to repay outstanding indebtedness of the Tribe.
The Outstanding Notes bear interest at a fixed rate of 9-3/4% per year, and mature on November 1, 2011. The Outstanding Notes are secured by a first priority pledge of our revenues and
substantially all of our existing and future tangible and intangible personal property. The Outstanding Notes are senior debt. As further described in the Indenture, the Outstanding Notes are subject to optional and mandatory redemption, and in some cases, holders of the Outstanding Notes may be required to surrender them for redemption by us (or to otherwise dispose of the Outstanding Notes) if certain gaming regulations are not satisfied.
The Indenture includes affirmative and negative covenants that limit our ability to borrow money, create liens, sell assets, engage in transactions with affiliates, engage in other businesses, open other gaming facilities, engage in certain mergers and consolidations, make certain investments, make certain accelerated payments on our indebtedness that is subordinated to the Outstanding Notes, and make payments to the Tribe.
Cash Collateral and Disbursement Agreement
Pursuant to the Cash Collateral and Disbursement Agreement among U.S. Bank National Association and Wells Fargo Bank, N.A. as disbursement agents, U.S. Bank National Association, as the trustee for the holders of the Outstanding Notes, Merritt & Harris, our independent construction consultant, the Tribe and us, a portion of the net proceeds of the Notes Offering was placed into a construction disbursement account, a construction escrow account, the Dugan Property improvements account, and an operating account, all to be disbursed by the disbursement agents pursuant to the Cash Collateral and Disbursement Agreement.
Construction Disbursement Account. Approximately $61.1 million of the net proceeds of the Notes Offering was deposited into a construction disbursement account and was used to fund the design and construction of our expansion project. All funds in the construction disbursement account are pledged to the trustee for the benefit of itself, and the holders of the Outstanding Notes, until disbursed by U.S. Bank National Association in accordance with the Cash Collateral and Disbursement Agreement. Approximately $3.5 million from the proceeds from the Notes Offering were used to reimburse the Tribe for payments made to Swinerton Builders prior to the sale of the Notes. The construction disbursement account had $2.6 million remaining as of December 31, 2008.
Construction Escrow Account. $10.0 million of the net proceeds of the Notes Offering was deposited into a construction escrow account to fund qualifying construction cost overruns. All funds in the construction escrow account are pledged to the trustee for the benefit of itself and the holders of the Outstanding Notes until disbursed by U.S. Bank National Association in accordance with the Cash Collateral and Disbursement Agreement. We used $10.0 million in the account to pay off the Subordinated Note on March 13, 2005. The construction escrow account has $0.1 million remaining as of December 31, 2008.
Dugan Property Improvements Account. $5.0 million of the net proceeds of the Notes Offering was deposited into the Dugan Property improvements account and will be used to build an additional access road to the Tribe’s reservation. All such funds will be held in the Dugan Property improvements account and pledged to the trustee for the benefit of itself and the holders of the Outstanding Notes until disbursed by U.S. Bank National Association in accordance with the Cash Collateral and Disbursement Agreement. Subject to certain exceptions, U.S. Bank National Association, as the disbursement agent, will disburse funds from the Dugan Property improvements account only upon certification by us that we have adequate funds to complete the road project, and upon the satisfaction of the other disbursement conditions set forth in the Cash Collateral and Disbursement Agreement. The Dugan Property improvements account had $4.3 million remaining as of December 31, 2008.
Operating Account. We deposit all of our cash and cash equivalents in excess of $2.0 million into our operating account with Bank of America, N.A. on a daily basis. All such funds are held in the operating account and pledged to the trustee for the benefit of itself and the holders of
the Outstanding Notes until disbursed in accordance with the terms of the Cash Collateral and Disbursement Agreement. Funds may generally be disbursed by Bank of America, N.A. from the operating account for all purposes permitted by the Indenture.
Investments; Pledge of Accounts. Our disbursement agent is required to invest any money held by it in the collateral accounts established pursuant to the Cash Collateral and Disbursement Agreement, in cash equivalents and such government securities, as may be directed in writing by us from time to time. Any income or gain realized as a result of such investment is required to be held as part of the applicable account and reinvested as provided in the Cash Collateral and Disbursement Agreement. All funds, securities and other assets in the collateral accounts established pursuant to the Cash Collateral and Disbursement Agreement are pledged to the trustee for the benefit of the holders of the Outstanding Notes.
Memorandum of Agreement between the Tribe and Sonoma County, California
On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into a memorandum of agreement (“MOA”) that will, among other things, settle several long-standing legal disputes between Sonoma County and the Tribe and provide a binding framework for resolving future disputes. The MOA enables the Tribe to move forward with its proposed resort development project, including a new and expanded “Tuscan-themed” casino and hotel with luxury resort amenities. Under the MOA, the County agreed to drop its opposition to the Tribe’s application for a liquor license and we obtained our liquor license for the casino on May 29, 2008.
Under the MOA, the Tribe agreed to restrict the sale of alcohol to wine and beer between the hours of 11 a.m. and 5 p.m. on weekdays, and to stop serving alcohol at midnight except for Friday and Saturday nights and the nights before holidays. The restrictions may be renegotiated following the first to occur of three years or the opening of a hotel, which is projected to occur within the next two to three years.
In addition, the MOA commits the County Sheriff’s Department and Fire Marshall to provide public safety and fire investigation services to the casino and the Tribe’s future gaming projects on the reservation and provides detailed agreements on off-reservation impact mitigation measures. Pursuant to the MOA, the County withdrew its opposition to the Tribe’s application to take into trust an approximately 18-acre parcel of land adjacent to the Tribe’s reservation (the “Dugan Property”). Previously, the trust application had been approved by the Department of the Interior, which approval had been opposed by the County.
Pursuant to the MOA, the Tribe has agreed to pay the County $75 million in mitigation fees over the next 12 years, subject to adjustment under certain circumstances described in the MOA, to offset the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and to support the services being provided by the County. The Tribe paid $3.0 million on April 17, 2008 and $4.5 million on September 20, 2008. Future payments are scheduled to take place as follows: $2.8 million no later than June 30, 2009; $5.0 million upon the earlier of March 18, 2011 or the opening of phase one of the resort project; $5.0 million on July 1st of the subsequent year but no later than July 1, 2011; and $5.0 million plus 4% compounded annually on July 1 of each subsequent year until the entire $75.0 million has been paid.
In addition, the Tribe has agreed to pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental charges collected on occupied hotel rooms. Such fees are required to be paid quarterly until five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State.
We believe the MOA will have significant positive impacts on the future conduct of our business and our and the Tribe’s ability to develop our expansions plans and construct our proposed hotel and casino resort.
Lease for Casino
In May 2002, the Tribe entered into a lease with Sprung Instant Structures, Inc. for two dome-shaped structures that house our gaming facility. The lease agreement was assigned to us and was renewed through August 17, 2007. Monthly payments are $36,230. At the end of the lease term, at our option, 100% of the first four lease payments or, if all such payments have been timely made, 40% of the last twenty four lease payments will be credited towards the $1.5 million purchase price, which would result in a purchase price of $1.1 million. Since the expiration of the lease on August 17, 2007, we have maintained the lease payments on a month to month basis.
Development and Loan Agreement
The Tribe entered into a Development and Loan Agreement with Dry Creek Casino, LLC (“DCC”) on August 26, 2001, which has been amended from time to time (as amended, the “Development Agreement”). In consideration of DCC providing credit enhancement and other services under the Development Agreement, the Tribe was obligated to pay DCC a Credit Enhancement Fee (the “Credit Enhancement Fee”). The Credit Enhancement Fee was defined as 20% of our net income before distributions to the Tribe plus depreciation and amortization plus annual interest on $25.0 million principal amount of the Senior Notes less revenues from sales of alcoholic beverages. The Credit Enhancement Fee was required to be paid monthly for a period of five years commencing on June 1, 2003.
We had the right to terminate the Development Agreement by exercising a buy-out option (the “Buy-Out Option”) and did so on January 31, 2007. Subsequently on March 2, 2007, we and DCC signed a mutual agreement to fix the amounts due to DCC in respect of such exercise to the sum of $11.4 million, less the amount paid after we exercised the Buy-Out Option of $0.7 million. The net payment of $10.6 million was made in March 2007 and expensed in full in the three months ended March 31, 2007. Credit Enhancement Fee expense was $0 and $11.3 million for the years ended December 31, 2008 and 2007, respectively.
Item 1A.
Item 1A. Risk Factors
The following is a description of what we consider our key challenges and risks:
Risks Related to Our Business
We have a substantial amount of indebtedness that could adversely affect our financial condition and prevent us from fulfilling our obligations under the Outstanding Notes.
As of December 31, 2008, we had approximately $199.0 million, net of unamortized issue discount of $1.0 million, of indebtedness outstanding, represented by our Outstanding Notes. Our substantial indebtedness could have important consequences and significant effects on our business and future operations. For example, it could:
· increase our vulnerability to general adverse economic and industry conditions or a downturn in our business;
· limit our ability to fund future working capital, capital expenditures and other general operating requirements;
· require us to dedicate a substantial portion of our cash flow from operations to repay our outstanding indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, development and other general operating requirements;
· place us at a competitive disadvantage compared to our competitors that have less debt or greater resources; and
· limit our ability to borrow additional funds.
The occurrence of any one of these events or conditions could have a material adverse effect on our business, financial condition, results of operations, prospects, ability to service or otherwise satisfy our obligations under the Outstanding Notes. In addition, the Indenture permits us to incur debt in addition to the Outstanding Notes in certain circumstances. If we were to incur additional debt, the related risks could intensify.
We will require a significant amount of cash to service our indebtedness and fund our gaming operations. Our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and refinance our debt, including the Outstanding Notes, and to fund our gaming operations, will depend on our ability to generate cash flow from our gaming operations. Our ability to generate sufficient cash flow to satisfy our debt obligations will depend on our future operating performance that is subject to many economic, competitive, regulatory and business factors that are beyond our control. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments or seek to raise additional capital. These measures may not be available to us or, if available, they may not be sufficient to enable us to satisfy our obligations under the Outstanding Notes and may restrict our ability to pay operating expenses. If our cash flow is insufficient and we are unable to implement one or more of these alternatives, we may not be able to service our debt obligations or fund our gaming operations.
Since we depend on operations in a single location, certain events that we cannot control may adversely affect the business performance of our gaming facility.
We rely primarily on guests living within 100 miles of our Casino. We rely exclusively on cash flow from our Casino to service our obligations, including our obligations under the Outstanding Notes. Therefore, we are subject to greater risks than more geographically diversified gaming operations, including:
· a decline in the economies of the local areas where our guests are located or a decline in the number of gaming guests from these areas for any reason;
· a downturn in regional or local economic conditions;
· an increase in competition in the local areas where our guests reside;
· inaccessibility due to road construction or closures of primary access routes; and
· natural and other disasters and climate conditions in the surrounding area.
The occurrence of any of the events or conditions described above could cause a material disruption in our business and cause us to be unable to generate sufficient cash flow to make payments on the Outstanding Notes.
We have experienced landslides and may not be insured against damage resulting from landslides.
Although we maintain insurance customary in our industry, including earthquake insurance, our insurance coverage may not be adequate to cover all the risks to which our business and assets may be subject to. Although we have experienced two landslides since our operations began, our landslide-related insurance is limited to events incident to earthquakes. Although neither landslide disrupted our operations or our expansion project, including the excavation, retaining wall and parking structures, the insurance is intended for future landslides. A landslide could occur in the future that could materially disrupt our operations and materially affect our financial condition.
We face competition from other California Indian casinos, casinos located in Nevada and elsewhere and other forms of gaming.
The gaming industry is very competitive. We face or will face competition from existing and proposed Indian gaming facilities in the surrounding area, and elsewhere in California, and with casino gaming in Nevada, including gaming facilities that could be located closer to the San Francisco Bay area. We also compete with card rooms located in the surrounding area, and other forms of gaming that are legal in California, including on and off-track wagering and the California State Lottery, as well as with non-gaming leisure activities, and the availability of such alternative gaming and non-gaming activities which may increase in the future. Many of our competitors have substantially greater resources and name recognition than our Casino. In addition, we may also face competition in our market from new facilities that may be built by other Indian tribes in the future.
Restrictive covenants in the Indenture may limit our ability to expand our operations and to pursue our business strategies.
The Indenture includes covenants that limit our ability to borrow money, make investments, create liens, sell assets, engage in transactions with affiliates, engage in other businesses, open other gaming facilities and engage in mergers or consolidations. These restrictive covenants may limit our ability to expand our operations and to pursue our business strategies. If we are unable to capitalize on business opportunities, we may be unable to make payments on the Outstanding Notes. Additionally, a violation of any of these restrictive covenants would constitute a default under the Indenture.
Risks related to environmental matters could have an adverse effect on us.
We are subject to various federal laws and tribal ordinances and regulations, and the Compact which governs activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal of hazardous material or solid or hazardous waste. Environmental laws enacted in the future may create material obligations or liabilities which may have a material adverse effect on us. In addition, certain provisions of the Compact regarding environmental matters may be the subject of renegotiation with the State of California and could limit any future physical expansion of our gaming facility. If so, such limitations may have a material adverse effect on our operations.
Pursuant to and in accordance with the Compact, the Tribe adopted an ordinance providing for the preparation and circulation by the Tribe of an environmental study concerning potential off-reservation environmental impacts of any renovation, modification, and construction or development project relating to or associated with the gaming facility. Among other things, the Compact requires that in fashioning the ordinance, the Tribe must make a good faith effort to incorporate the policies and purposes of the National Environmental Policy Act and the California Environmental Quality Act
consistent with the Tribe’s governmental interests. The Compact’s environmental provisions are identical to such provisions in compacts for all other California tribes that entered into compacts in or around 1999. The Tribe believes it has complied, and intends to continue to comply, with all applicable requirements in its environmental ordinance, but the County of Sonoma has taken issue with the Tribe’s position and claims that the Compact’s environmental requirements are not being fulfilled. The State could claim the Tribe is in breach of the Compact and seek to have the Compact terminated.
Our business and assets could become liable for claims asserted against the Tribe if the Tribe waives its sovereign immunity with respect to our business or assets or if tribal law intended to limit such liability is ineffective.
We are an unincorporated instrumentality of the Tribe, formed pursuant to a law of the Tribe. This tribal law also provides that our obligations and other liabilities are not those of the Tribe and that the obligations and liabilities of the Tribe are not ours. This law is untested and generally has no direct counterpart in other areas of the law. If this law should prove to be ineffective at limiting our liability, our business and assets could become subject to claims asserted against the Tribe or its assets. Similarly, we would be liable for such claims if the Tribe waived its sovereign immunity (with respect to which we have no control) to an extent that allowed enforcement of such claims against our business or assets.
Changes in U.S. or regional economic conditions could adversely affect the profitability of our business.
A decrease in economic activity in the United States, particularly in the State of California, could adversely affect demand for our business, thus reducing our revenue and earnings. A decline in economic conditions could reduce attendance and spending at our Casino. In addition, an increase in price levels generally, or in price levels in a particular sector, could result in a shift in consumer demand away from the entertainment we offer, which could also adversely affect our revenues and, at the same time, increase our costs.
Our business is subject to contingencies beyond our control, including the aftermath of terrorist acts and wars, which may significantly and adversely affect our business, financial condition, results of operations and ability to make payments on the Notes.
The United States’ ongoing military campaign against terrorism and continued violence, conflicts and instability in other areas of the world have created many economic and political uncertainties, some of which may affect our ability to attract customers outside our current primary market as well as our operations and profitability. The potential short-term and long-term effects that these and other similar situations and events may have for our customers, our primary and secondary markets and the U.S. economy in general are uncertain. These and other similar future events could have a significant impact on the number of customers visiting our Casino and, as a result, may have a material adverse effect on our business, financial condition, results of operations and ability to make payments on the Notes.
Acts of terrorism may negatively impact our future profits.
Terrorist attacks and other acts of war or hostility have created many economic and political uncertainties. We cannot predict the extent to which terrorism, security alerts, war, or hostilities throughout the world, will continue to directly or indirectly impact our business and results. As a consequence of the threat of terrorist attacks and other acts of war or hostility in the future, premiums for a variety of insurance products have increased, and some types of insurance are no longer available. Given current conditions in the global insurance markets, we are predominantly uninsured for losses
and interruptions caused by terrorist acts and acts of war. If any such event were to affect our properties, we likely would be adversely impacted.
A variety of uncontrollable events and natural disasters may reduce demand for our Casino.
Demand for our Casino is partly dependent on the general environment for travel and tourism. The environment for travel and tourism can be significantly adversely affected in the United States or in specific regions as a result of a variety of factors beyond our control, including adverse weather conditions or natural disasters (such as excessive heat or rain, hurricanes and earthquakes); health concerns; and international, political or military developments. These events, and others such as fluctuations in travel and energy costs, may also damage our ability to provide our services or to obtain insurance coverage with respect to these events.
Highway and bridge construction projects have impacted the length of travel to our Casino by certain customers.
On January 7, 2008, Caltrans began construction on a 3.3-mile stretch of Highway 101 from Santa Rosa (Steele Lane) to Windsor (River Road), California, approximately 20 miles south of our Casino. The project is intended to widen Highway 101 resulting in an additional third lane in each direction. The project requires the closure of one lane of Highway 101 in both directions from 11 p.m. to 5 a.m., Monday through Thursday, and from 12:00 a.m. to 5 a.m. on Fridays. All lanes will be open during daylight hours and weekends. The project will also involve the closure of certain freeway entrance and exit ramps and some local streets. The lane widening project is expected to be completed in the summer of 2010. There currently has been no major impact from this project on our operations. However, potentially there may be future risks that could have an impact on our operations as a result of this project.
The loss of management and other key personnel could significantly harm our business.
Our ability to maintain our competitive position is dependent to a large degree on the efforts and skills of the senior management team. In addition to the senior management team, the operation of our Casino will require other qualified and skilled employees with gaming and hospitality industry experience and qualifications. Currently, there is a shortage of skilled labor in the gaming industry in general. In addition, we are subject to the policy of Tribal hiring preference that requires us to give preference to members of the Tribe. Despite these limitations, our future success depends upon, among other things, our ability to attract and retain senior management and highly qualified employees. Currently, approximately 90 percent of the employees at the Casino are not members of the Tribe. We compete with other potential employers for employees, and we may not succeed in hiring or retaining the executives and other employees that we may need, particularly due to the very small number of workers skilled in the gaming industry that reside in the immediate vicinity of our businesses.
Currently, we have a vacancy in the office of the Chief Executive Officer and are conducting a search to fill the vacancy. We do not have employment agreements with any key executives or employees other than with our Chief Operations Officer, and Chief Financial Officer. We do not maintain key-man life insurance policies for any of our executives. A sudden loss or inability to replace key employees could have a material adverse effect on our financial condition and results of operation.
A recent federal court decision could lead to unionization in the tribal gaming industry.
A recent decision by the United States Court of Appeals for the District of Columbia upheld a finding by the National Labor Relations Board that the National Labor Relations Act is applicable to tribal casinos. This decision could lead to unionization activities, which could adversely affect our operations.
Energy price increases may adversely affect our costs of operations and our revenues.
Our Casino uses significant amounts of electricity, natural gas and other forms of energy. While we have not experienced any shortages of energy to date, the recent substantial increases in the
cost of energy in the United States could negatively impact our operating results. In addition, energy price increases could result in a decline in disposable income of potential customers and a corresponding decrease in visitation to our gaming and hotel facilities, which could negatively impact our revenues.
Our business is particularly sensitive to reductions in discretionary consumer spending as a result of downturns in the economy.
Consumer demand for gaming properties, such as ours, are particularly sensitive to downturns in the economy and the corresponding impact on discretionary spending on leisure activities. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, the current housing crisis and the credit crisis, the impact of high energy and food costs, the increased cost of travel, the potential for continued bank failures, perceived or actual disposable consumer income and wealth, effects of the current recession and changes in consumer confidence in the economy, or fears of war and future acts of terrorism could further reduce customer demand for the amenities that we offer, thus imposing practical limits on pricing and harming our operations.
The current housing crisis and economic slowdown in the United States has resulted in a significant decline in the amount of tourism and spending on gaming operations. If this decline continues, our financial condition, results of operations and cash flows may be adversely affected.
Risks Relating to the Indian Gaming Industry
Our gaming operations are extensively regulated by federal laws and the Compact, and non-compliance with these laws or the Compact by us or the Tribe, as well as changes in the laws or future interpretations of the laws or the Compact, could have a material adverse effect on our gaming operations.
Gaming on the Tribe’s reservation is regulated extensively by federal, state and tribal regulatory bodies, including the NIGC, the CGCC, the California Department of Justice and the TGA. The Compact imposes ongoing compliance obligations on us. Our failure to observe any of these obligations could result in a breach of the Compact and the loss of our right to conduct gaming.
Changes in applicable laws or regulations, or future interpretation of these laws or regulations could limit or materially affect the types of gaming that we may offer and, consequently, our revenue. Congress has regulatory authority over Indian affairs and can establish and change the terms upon which Indian tribes may conduct gaming. Currently, the operation of all gaming on Indian lands is subject to IGRA. For the past several years, legislation has been introduced in Congress designed to amend IGRA, including proposed legislation limiting the scope of gaming that can be offered and the conditions under which gaming may be offered. While none of the substantive proposed amendments to IGRA have proceeded very far in the legislative process, we cannot predict the ramifications of future congressional legislative acts. It is possible that future legislation may result in a material adverse effect on our operations.
Tribal-state compacts are renegotiable and the outcome of any renegotiation may negatively impact our competitive position or otherwise adversely affect our financial condition, results of operations or cash flows.
In March 2003, the State of California requested renegotiations with the Tribe and other tribes with respect to matters related to the number of slot machines permitted at tribal casinos under tribal-state gaming compacts, the way in which slot machine licenses are allocated within the state under those compacts, and the fees charged for slot machine licenses. We did not renegotiate the terms of our compact, although some other tribes in California have done so. Those renegotiations, plus the addition
of new compacts the State may be entering into with tribes in our market area that were not previously engaged in gaming, may have negative effects on our competitive position, and our results of operations could be materially and adversely affected. Even if our negotiations with the State of California were to result in an increase in the number of slot machines we could operate, the State has indicated that any increase could result in higher license fees being imposed, which, in light of possible other competition, could result in lower revenues. In addition, the State’s willingness to renegotiate over slot machine limits has been tied to its imposition of further regulations on Indian gaming, particularly on the subject of greater County involvement, provisions favoring negotiating opportunities for organized labor, and other non-economic issues. The effect of the State’s injection of those issues into the renegotiation process, and the resistance of some tribes to renegotiate because of those issues, could have a negative impact on the public’s view of Indian gaming, the effect of which we cannot predict. Finally, any amendment to our compact or any other compact in the State requires the approval of the tribe, the Governor, the California legislature and the U.S. Secretary of the Interior. Some renegotiated (and new) compacts have been approved through that process, but the public debate that has surrounded those renegotiations and the approval process could have a negative impact on Indian gaming generally within the State and on a national level, the likelihood or extent of which cannot be predicted.
A change in our current non-taxable status could have a material adverse effect on our cash flow and ability to fulfill our obligations under the Outstanding Notes.
Based on current interpretations of U.S. tax laws, we are not now, and it is anticipated that we will not be, a taxable entity for U.S. federal income tax purposes. If these interpretations are reversed or modified, or if the federal tax law changes in this regard, our cash flow, results of operations, financial conditions and our ability to fulfill our obligations under the Outstanding Notes would be adversely affected.
Efforts have been made in Congress over the past several years to tax the income of tribal business enterprises. These have included a House of Representatives bill that would have taxed gaming income earned by Indian tribes as business income subject to corporate tax rates. Although such legislation was not enacted, similar legislation could be passed in the future. Future legislation in this area could materially adversely affect our ability to fulfill our obligations under the Outstanding Notes.
Item 2.
Item 2. Properties.
Our Casino is located on the Tribe’s 75-acre reservation near Geyserville, located in the heart of the Alexander Valley in Sonoma County, California. We do not own the land on which our gaming business is located. The use of tribal land is provided to us free of rent by the Tribe. The United States government holds all the real property underlying our facility in trust for the benefit of the Tribe.
We made a distribution to the Tribe from the net proceeds of the Notes Offering to enable the Tribe to acquire and develop an approximately 18-acre parcel of land adjacent to the reservation (the “Dugan Property”). Title to the parcel will initially be held by the Tribe, although the Tribe is seeking to have the parcel taken into trust for the Tribe’s benefit. The Tribe has granted us access to any benefits the property may have for our Casino, including road access and water rights. As of December 31, 2008, we had $4.3 million remaining in an improvements account which was funded from proceeds from the Notes Offering to be used primarily to build an additional access road to the Tribe’s reservation through the Dugan Property. The Dugan Property may be subject to certain zoning, use, environmental and other restrictions, permits and processes under county and state law, including but not limited to certain agreements that have been made relative to the Dugan Property regarding agricultural use limitations and related property tax benefits. We have completed the initial planning on the road from the Dugan Property to the Tribe’s reservation.
Item 3.
Item 3. Legal Proceedings.
Runyan Litigation
On March 7, 2008, Norman Runyan, our former Chief Operations Officer, filed suit against us, the Casino and Mr. Harvey Hopkins, the Chairman of the Tribe and a member of our Board, in the Sonoma County Superior Court. Mr. Runyan’s complaint asserted causes of actions for breach of contract, wrongful termination in violation of public policy, intentional interference with contract and intentional infliction of emotional distress. He sought unspecified compensatory and punitive damages. Mr. Runyan alleged that he was wrongfully terminated from his employment because he opposed certain alleged actions on the part of the defendants, including contracts for construction work allegedly performed on the reservation by affiliates of the Tribe and Mr. Hopkins. Mr. Runyan claimed that the work violated the Indenture and that Mr. Runyan was forced to resign from his employment in violation of public policy after protesting that the alleged work violated the Indenture, the Compact, and the Securities Exchange Act of 1934. He also claimed that the defendants unlawfully discriminated against him in connection with his status as a debtor under the Bankruptcy Code. We believed that Mr. Runyan’s lawsuit is based on erroneous information and is without merit, and we and the Tribe vigorously defended against it.
On October 17, 2008, the judge of the Sonoma County Superior Court signed an Order dismissing the lawsuit filed by Norman Runyan against us, the Casino and Mr. Harvey Hopkins, the Chairman of the Tribe and a member of our Board. On December 3, 2008, the Order was entered and the case was dismissed.
On January 14, 2009, Mr. Runyan filed a Petition for Order Compelling Arbitration with the Sonoma County Superior Court, and on January 30, 2009, he filed a Motion for Order Compelling Arbitration. In both the Petition and the Motion, Mr. Runyan seeks to have the Court issue an order compelling arbitration of the claims asserted in the complaint that was dismissed by the court in December 2008. We believe, based on the fact that Mr. Runyan entered into a Severance Agreement and General Release with us, the Casino, and other released parties, that there is no basis for Mr. Runyan to seek arbitration of his claims. Accordingly, we, the Casino, and Mr. Hopkins plan to file a hybrid motion to quash summons and dismiss the Petition and Motion, together with an opposition to Mr. Runyan’s Motion.
Other Legal Matters
We are involved in other litigation and disputes from time to time in the ordinary course of business with vendors and patrons. The Authority believes that the aggregate liability, if any, arising from such litigation or disputes will not have a material adverse effect on its results of operations, financial condition or cash flows.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
We have not issued or sold any equity securities.
Item 6.
Item 6. Selected Financial Data.
River Rock Casino has historically operated as a separate wholly owned operating property of the Tribe. We were formed as an unincorporated instrumentality of the Tribe to own and operate the River Rock Casino. Upon the issuance of our Notes, the Tribe reorganized so that its gaming business became owned and operated by us. This reorganization was accounted for as a reorganization of entities under common control. In accordance with Statement of Financial Accounting Standards 141, “Business Combinations,” the assets and liabilities of the casino operating property are presented by us on a historical cost basis.
The following table presents summary historical statements of revenues and expenses, balance sheet and other data for the periods presented and should be read in conjunction with Item 7
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying financial statements and related notes beginning on page 28 of this Annual Report on Form 10-K, Item 6 - “Selected Financial Data” and Part I. Item 1. “Business.”
Overview
General
We have historically operated as a separate wholly-owned operating property of the Tribe. We were formed as an unincorporated governmental instrumentality of the Tribe to own and operate the River Rock Casino. Upon the issuance of our Notes, the Tribe reorganized so that its gaming business became owned and operated by us. This reorganization was accounted for as a reorganization of entities under common control. In accordance with Statement of Financial Accounting Standards 141, “Business Combinations,” the assets and liabilities of the Casino are presented by us on a historical cost basis.
We offer Class III slot and video poker gaming machines, house banked table games (including Blackjack, Three card poker, Mini-baccarat and Pai Gow poker), Poker, featuring Texas Hold’em, comprehensive food and beverage offerings, and goods for sale in our gift shop.
On November 7, 2003, we issued the Notes. A portion of the net proceeds from the sale of the Notes was used to fund three new parking structures, and related infrastructure improvements, to repay various debts and accrued expenses of the Tribe, as well as to increase our cash on hand. The balance of the net proceeds was used to fund a land purchase by the Tribe and settle litigation of the Tribe. The Notes are secured by a first priority pledge of our revenues and substantially all of our existing and future tangible and intangible personal property.
At the beginning of 2003, we started our infrastructure projects, including the excavation of a hillside and the construction of retaining walls. In April 2003, we began the design process for the three new parking structures. The parking structure portion of the expansion project was completed in two phases and our existing gaming facility remained open during construction. On October 29, 2004, we obtained a temporary certificate of occupancy to open the entire first parking structure for self and valet parking. On December 1, 2004, we received a certificate of substantial completion on the first parking structure. The second phase, which included our second and third parking structures with approximately 445 and approximately 470 spaces, respectively, opened on December 29, 2004. Since
December 31, 2006, we have had enough parking spaces available to accommodate a total of approximately 1,584 customer parked vehicles.
Critical Accounting Policies and Estimates
We have identified certain critical accounting policies and estimates that affect our more significant judgments and estimates used in the preparation of our financial statements. The preparation of our financial statements, in conformity with accounting principles generally accepted in the United States of America, requires that we make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate those estimates, including those related to asset impairment, accruals for our promotional slot club, compensation and related benefits, revenue recognition, allowance for doubtful accounts, contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. We believe that the following critical accounting policies affect significant judgments and estimates used in the preparation of our financial statements:
· Casino Revenues - In accordance with industry practice, casino revenue is recognized as the net win from gaming activities, which is the difference between gaming wins and losses. Casino revenues are net of accruals for anticipated payouts of progressive slot jackpots.
· Property and Equipment - Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements
years
Furniture, fixtures and equipment
years
· We evaluate our property and equipment for impairment in accordance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” When events or circumstances indicate that an asset should be reviewed for impairment, we compare the undiscounted cash flow derived from the asset or asset group to the net carrying value. If an impairment is indicated, the impairment loss is measured by the amount in which the carrying value of the asset or asset group exceeds its fair value. Fair value is measured by comparable sales, solicited offers or discounted cash flow models.
· Accrued Progressive Slot Jackpots - Accrued progressive slot jackpots consist of estimates for prizes relating to various games that have accumulated jackpots. We have recorded the cost of these anticipated payouts as a reduction of casino revenues and the cost is included as a component of accrued liabilities.
· Contingencies - We assess our exposure to loss contingencies, including legal matters, and provide for an exposure if it is judged to be probable and estimable. If the actual loss from a contingency differs from management’s estimate, operating results could be materially impacted. As of December 31, 2008, we have determined that no accruals for claims and legal actions are required. If circumstances surrounding claims and
legal actions change, the addition of accruals for such items in future periods may be required, which accruals may be material.
Accounting Standards - There are differences between financial statements prepared in accordance with Governmental Accounting Standards Board (“GASB”) pronouncements and those prepared in accordance with Financial Accounting Standards Board (“FASB”) pronouncements. The statement of revenues, expenses and fund deficit is a combined statement under GASB pronouncements. FASB pronouncements allow a statement of income or operations and a statement of owners’ or shareholders’ (deficit) equity, which is where distributions to owners would be presented under FASB pronouncements. The amount shown on our statement of revenues, expenses and fund deficit as income before distributions to the Tribe, would not be different if we followed all FASB pronouncements to determine net income, and would be the most comparable amount to net income computed under FASB pronouncements. We are an unincorporated instrumentality created by tribal law and accounted for as a separate fund of the Tribe. As such, there is no owners’ or shareholders’ (deficit) equity as traditionally represented under FASB pronouncements. The most comparable measure of owners’ (deficit) equity presented on our balance sheet would be Fund Deficit.
Results of Operations
Quarterly Results of Operations
The following table sets forth unaudited quarterly operations data for each full quarter for the past three years. In our opinion, this data reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the data. The results of operations for any quarter are not necessarily indicative of the results of operations for a full year or any future period. Certain amounts from prior quarters have been reclassified to be consistent with our current presentation, i.e. surveillance costs are now included in Gaming commission expense. We expect our quarterly operating results to vary significantly in future periods.
(a) Our financial statements are prepared in accordance with Governmental Accounting Standards Board (“GASB”) pronouncements. There are differences between financial statements prepared in accordance with GASB pronouncements and those prepared in accordance with Financial Accounting Standards Board (“FASB”) pronouncements. The Statements of Revenues, Expenses and Changes in Fund (deficit) Equity are a combined statement under GASB pronouncements. FASB pronouncements allow a statement of income or operations and a separate statement of owners’ or shareholders’ (deficit) equity, which is where distributions to owners would be presented under FASB pronouncements. The amount shown above as income (loss) before distributions to the Tribe would not be different if we followed all FASB pronouncements to determine net income and would be the most comparable amount to net income computed under FASB pronouncements. River Rock Entertainment Authority is a separate fund of the Tribe, a governmental entity, and, as such, there is no owners’ or shareholders’ (deficit) equity as traditionally represented under FASB pronouncements. The most comparable measure of owners’ (deficit) equity is presented on the River Rock Entertainment Authority balance sheet as fund (deficit) equity.
Results of Operations - Fiscal Years ended December 31, 2008 and 2007
Net Revenues. Net revenues for the fiscal year ended December 31, 2008 (“FY 2008”) decreased by $8.8 million to $130.6 from $139.4 million for the fiscal year ended December 31, 2007 (“FY 2007”). The decrease is attributed to a national and regional economic slowdown. Approximately 95.3% of our net revenues, net of respective promotional allowances, were from gaming activities for FY 2008. We generated $110.2 million, or 84.4% of net revenues, net of respective promotional allowances of $12.0 million, from gaming devices, and $14.3 million, or 10.9% of net revenues, net of respective promotional allowances of $0.2 million, from table games for FY 2008, as compared to $118.9 million, or 85.3% of our net revenues, net of respective promotional allowances of $11.4 million, from gaming devices and $15.2 million, or 10.9% of our net revenues, net of respective promotional allowances of $0.2 million, from table games for FY 2007.
For FY 2008, we generated $7.9 million in food, beverage and retail sales, compared to $7.5 million for FY 2007. The increase is primarily due to the May 2008 issuance of our alcohol license resulting in alcohol sales that were non-existent in 2007. The retail value of our food and beverage provided to customers without charge is included in gross revenues and then deducted as promotional allowances. Such allowances for FY 2008 and FY 2007 were $2.4 million and $2.9 million, respectively. We do not provide complimentary alcoholic beverages to our patrons.
Promotional Allowances. Promotional allowances for the FY 2008 were $14.6 million, or 11.2% of net revenues, compared to $14.5 million, or 10.4% of net revenues, for FY 2007. The increase in promotional allowances is attributable to the expanded use of e-coupons. E-coupons cannot be cashed out and requires the patron to use their Players Club card.
Operating expenses. Operating expenses for FY 2008 were $86.4 million, or 66.2% of net revenues, compared to $99.5 million, or 71.4% of net revenues, for FY 2007. The decrease in operating expenses is primarily attributable to the elimination of the Credit Enhancement Fee in FY 2008 which totaled $11.3 million in FY 2007.
Casino expense includes costs associated with our gaming operations and an allocation of food and beverage expense related to the costs of complimentary activities. Casino expense for FY 2008 decreased to $20.8 million, or 16.7% of Casino revenues net of promotional allowances, from $23.4 million, or 17.4% of Casino revenues net of promotional allowances, for FY 2007. The decrease in Casino expense is attributable to decreases in participation fees, players club points and wide-area progressive commission.
Food, beverage and retail expense for FY 2008 was $7.1 million, or 147.9% of food, beverage and retail revenue net of promotional allowances, increasing from $4.6 million, or 99.5% of food, beverage and retail revenue net of promotional allowances for FY 2007. We have increased our use of promotional food and beverage as part of our marketing initiatives. Our food and beverage expense ratio is still significantly higher than industry average because we have utilized these amenities as an opportunity to build customer loyalty rather than as a source of income.
Selling, general and administrative expense for FY 2008 decreased by $0.5 million to $43.5 million, or 33.3% of net revenues, from $44.0 million, or 31.6% of net revenues, from FY 2007. The decrease in selling, general and administrative expense is attributable to the decrease in advertising expenses and legal fees related to obtaining our liquor license.
Depreciation expense for FY 2008 was $10.0 million compared to $11.8 million FY 2007. Depreciation expense was computed using the straight-line method over the useful lives of property, plant and equipment. The decrease in depreciation expense is due to fully depreciated assets.
Credit Enhancement Fee expense was no longer applicable in FY 2008 compared to $11.3 million in FY 2007. We began paying the credit enhancement fee to DCC in June 2003. We had the right to terminate the Development Agreement by exercising a buy-out option and did so on January 31, 2007.
Gaming Commission and surveillance expenses for FY 2008 were $3.7 million compared to $3.0 million FY 2007. The increase is due to increases in audit fees, wages and benefits, legal fees and training.
Compact revenue sharing trust fund expense remained the same at $1.3 million for both FY 2008 and 2007. Compact revenue sharing trust fund expense includes payments associated with operating 1,600 gaming devices. These fees became payable by the Tribe when we commenced operations in September 2002, and are based on the number of our gaming device licenses. Compact revenue sharing trust fund expense includes payments to the Revenue Sharing Trust Fund (“RSTF”) as required by our Compact with the State of California. The Tribe is obligated to remit certain fees to the California Gambling Control Commission on a quarterly basis for inclusion in the RSTF. The RSTF is for the benefit of tribes that have no or limited gaming. We pay these fees on behalf of the Tribe.
Income from operations. Income from operations for FY 2008 was $44.2 million, or 33.8% of net revenues, compared to $39.9 million, or 28.6% of net revenues, for FY 2007.
Other expense, net. Other expense, net for FY 2008 increased to $19.9 million, or 15.2% of net revenues, from $19.2 million, or 13.8% of net revenues, for FY 2007. Other expense, net, included $1.0 million of interest income for FY 2008 compared to $1.7 million of interest income for FY 2007. The decrease in interest income was due to a significant drop in interest rates and the decline of invested funds.
Income before distributions to the Tribe. Income before distributions to the Tribe for FY 2008 increased by $3.6 million to $24.3 million, or 18.6% of net revenues, from $20.7 million, or 14.9% of net revenues, for FY 2007.
Results of Operations - Fiscal Years ended December 31, 2007 and 2006
Net Revenues. Net revenues for the fiscal year ended December 31, 2007 (“FY 2007”), increased by $8.8 million to $139.4 million, from $130.6 million for the fiscal year ended December 31, 2006 (“FY 2006”). The increase is attributed to improved access to our Casino in FY 2007 following the lack of accessibility to our Casino due to the damage and resulting closure of the Geyserville Bridge in Geyserville, California from January 1, 2006 through August 18, 2006 (the “Geyserville Bridge Closure”). Approximately 96.2% of our net revenues, net of respective promotional allowances, were from gaming activities for FY 2007. We generated $118.9 million, or 85.3% of our net revenues, net of respective promotional allowances of $11.4 million, from gaming devices and $15.2 million, or 10.9% of our net revenues, net of respective promotional allowances of $0.2 million, from table games for FY 2007, compared to $111.4 million from gaming devices, or 85.3% of our net revenues, net of respective promotional allowances of $10.2 million, and $14.5 million, or 11.1% of our net revenues, net of respective promotional allowances of $0.2 million, from table games for FY 2006. Our win per slot machine per day increased to $207 in FY 2007 from $194 in FY 2006.
For FY 2007, we generated $7.5 million in food, beverage and retail sales, compared to $6.2 million, for FY 2006. The increase is primarily due to improved access to our Casino in FY 2007 following the Geyserville Bridge Closure during the first eight months of 2006. The retail value of our food and beverage provided to customers without charge is included in gross revenues and then deducted as promotional allowances. Such allowances were $2.9 million and $2.3 million for FY 2007 and FY 2006, respectively.
Promotional Allowances. Promotional allowances for the FY 2007 were $14.5 million, or 10.4% of net revenues, compared to $12.5 million, or 9.7% of net revenues, for FY 2006. The increase in promotional allowances is attributable to the expanded use of e-coupons. E-coupons cannot be cashed out and requires the patron to use their Players Club card.
Operating expenses. Operating expenses for FY 2007 were $99.5 million, or 71.4% of net revenues, compared to $90.4 million, or 69.2% of net revenues, for FY 2006. The increase in operating expenses is attributable to the increased costs associated with the early buy-out of the Credit Enhancement Fee and increased costs in selling, general and administrative expenses from changing advertising agencies and enhanced marketing and guest service initiatives.
Casino expense includes costs associated with our gaming operations and an allocation of food and beverage expense related to the costs of complimentary activities. Casino expense for FY 2007 increased to $23.4 million, or 17.4% of Casino revenues, from $20.5 million, or 16.2% of Casino revenues, for FY 2006, net of respective promotional allowances. The increase in Casino expense is attributable to an increase in labor costs in gaming operations and an increase in participation fees and commissions on wide area progressive slot machines.
Food, beverage and retail expense for FY 2007 was $4.6 million, or 99.5% of food, beverage and retail revenue, decreasing from $6.0 million, or 150.6% of food, beverage and retail revenue for FY 2006, net of respective promotional allowances. We have increased our retail prices to offset the use of promotional food and beverage as part of our marketing initiatives. Our food and beverage expense ratio is still significantly higher than industry average because we have utilized these amenities as an opportunity to build customer loyalty rather than as a source of income.
Selling, general and administrative expense for FY 2007 increased by $4.1 million to $44.0 million, or 31.6% of net revenues, from $39.9 million, or 30.5% of net revenues, for FY 2006, net of respective promotional allowances. The increase in selling, general and administrative expense is attributable to increases in payroll, increased advertising costs from restructuring the marketing department’s approach to focus more on direct marketing and the change in our advertising agency. These efforts led to increased costs in television, radio and newsprint media as compared to 2006.
Depreciation expense for FY 2007 was $11.8 million compared to $11.5 million for FY 2006. Depreciation expense was computed using the straight-line method over the useful lives of property, plant and equipment. The increase in depreciation expense is due to the addition of depreciable assets.
Credit Enhancement Fee expense for FY 2007 was $11.3 million compared to $8.1 million for FY 2006. We began paying the credit enhancement fee to DCC in June 2003. We had the right to terminate the Development Agreement by exercising a buy-out option and did so on January 31, 2007. Subsequently on March 2, 2007, we signed with DCC a mutual agreement to fix the amounts due to DCC in respect of such exercise to the sum of $11,350,000 less the amount paid after we exercised the buy-out option of $737,491. The net payment of $10,612,509 was made in March 2007 and was expensed in full in the three months ended March 31, 2007.
Gaming Commission and surveillance expenses for FY 2007 and FY 2006 were $3.0 million and $3.2 million, respectively. The decrease is due to decreased costs and increased efficiencies from normalized operations in regulatory and surveillance.
Compact revenue sharing trust fund expense remained the same at $1.3 million for FY 2007 and 2006. Compact revenue sharing trust fund expense includes payments associated with operating 1,600 gaming devices. These fees became payable by the Tribe when we commenced operations in September 2002, and are based on the number of our gaming device licenses. Compact revenue sharing trust fund expense includes payments to the Revenue Sharing Trust Fund (“RSTF”) as required by our Compact with the State of California. The Tribe is obligated to remit certain fees to the California Gambling Control Commission on a quarterly basis for inclusion in the RSTF. The RSTF is for the benefit of tribes that have no or limited gaming. We pay these fees on behalf of the Tribe.
Income from operations. Income from operations for FY 2007 was $39.9 million, or 28.6% of net revenues, compared to $40.2 million, or 30.8% of net revenues, for FY 2006.
Other expense, net. Other expense, net for FY 2007 decreased to $19.2 million, or 13.8% of net revenues, from $20.0 million, or 15.3% of net revenues, for FY 2006. Other expense, net included $1.7 million of interest income for FY 2007, compared to $1.0 million of interest income, for FY 2006. No interest costs were capitalized in 2007.
Income before distributions to the Tribe. Income before distributions to the Tribe for FY 2007 increased by $0.5 million, to $20.7 million, or 14.9% of net revenues, from $20.2 million, or 15.5% of net revenues, for FY 2006.
Liquidity and Capital Resources
Since our inception, we have funded our capital expenditures and working capital requirements primarily through operating cash flow, debt financing, gaming equipment supplier financing, and other financing.
Construction of our Casino and infrastructure improvements commenced on April 1, 2002. The first portion of our gaming facility was completed in September 2002. As of December 31, 2008, we had spent approximately $164.5 million on the planning, development and construction of our gaming facility, infrastructure and furniture, fixtures and equipment, excluding the proposed future expansion project. We financed the development with borrowings and development advances.
As of December 31, 2008, we spent $0.3 million on the development of land adjacent to the Tribe’s reservation (the “Dugan Property”) which is expected to include an additional access road to our Casino. We have $4.3 million remaining in a restricted account funded from the proceeds of our Notes Offering for the development of the Dugan Property.
Our capital expenditures for FY 2008 and 2007 were $41.2 million and $8.2 million, respectively. The increase in 2008 is attributable to the work completed and reimbursed to the Tribe for master plan development costs for our proposed expansion project and infrastructure improvements, which includes the construction of the lower Acorn Road.
As of December 31, 2008, we had cash and cash equivalents of $27.3 million, as compared to $46.5 million as of December 31, 2007. As of December 31, 2008, we had restricted cash of $7.1 million, as compared to $7.3 million as of December 31, 2007.
Restricted cash consists of net proceeds from the Notes Offering and investment earnings thereon set aside in construction financing accounts, for construction costs for the three parking structures, infrastructure improvements and construction contingencies. It also includes funds that are reserved for additional construction contingencies and the funds for the development of the Dugan Property. Our restricted cash is held in escrow accounts that can only be used for authorized construction disbursements until the related projects are completed.
Our principal source of liquidity for uses other than our expansion project during FY 2008 consisted of cash flow from operating activities. Net cash provided by operating activities for FY 2008 was $54.6 million, a decrease of $10.6 million, from $65.2 million for FY 2007. The decrease in our net cash provided by operations is a result of the economic downturn during FY 2008. Net cash provided by operating activities for FY 2007 increased by $4.6 million, from $60.6 million for FY 2006.
Net cash used in capital and related financing activities for FY 2008 was $60.9 million, as compared to $40.5 million for FY 2007. Cash flow used in capital and related financing activities was primarily for the purchase of property and equipment and interest paid on the Notes. The increase is primary attributable to the addition of property and equipment as a result of work completed and reimbursed to the Tribe for master plan development costs for our proposed expansion project and infrastructure improvements, which includes the construction of the lower Acorn Road, increasing cash used in capital and related financing activities by $33.8 million. This increase was then offset primarily by the elimination of the credit enhancement fee in FY 2008 compared to $11.3 million in FY 2007.
Net cash used in non-capital financing activities for FY 2008 was $13.9 million, an increase of $1.5 million from $12.4 million for FY 2007. Net cash used in non-capital financing activities consist of distributions to the Tribe.
We believe that existing cash balances, cash from operations, as well as permitted disbursements from our restricted cash escrow accounts will provide adequate funds for our working capital needs, planned capital expenditures and debt service requirements for the foreseeable future. However, our ability to fund our operations, make planned capital expenditures, make scheduled debt payments and refinance our indebtedness depends on our future operating performance and cash flow, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. Additionally, the Indenture limits our ability to incur additional indebtedness. See Item 1 - “Business - Material Agreements - The Notes and the Related Indenture.”
On June 28, 2007, we and the Tribe announced plans to build a destination resort as more fully described in the press release furnished as an exhibit to our Form 8-K dated June 28, 2007. The proposed project includes the construction of a casino, hotel and spa, several food and beverage venues, parking and storage, administrative facilities, a garden and terrace plaza, balconies and terraces, a retail area, conference facilities, and back of house facilities. The proposed project includes three above-ground levels and a hotel tower (up to eight levels) and four below-ground levels. We do not currently have adequate liquidity or cash flow to finance the project as proposed. We will consider various sources of liquidity to finance the first phase of the proposed project.
The Tribe has incurred expenses on our behalf that relate to the master planning of the proposed resort and Tribal infrastructure that benefit us. Total expenses incurred and subsequently reimbursed to the Tribe for the year ended December 31, 2008 were $36.0 million.
The Tribe has incurred an additional $21.0 million in costs relating to the master planning of the proposed resort. While the Tribe has not made any request to us for reimbursement of such amount, it may request reimbursement from us in the future. While we have no obligation to pay such amounts when requested and any such reimbursement would need to be approved by management and our Board of Directors, there is a possibility that such request for reimbursement may be made by the Tribe. Prior to making any reimbursement payment, we will consider various factors, including, but not limited to, whether the costs incurred were actually related to the master planning, whether such costs are beneficial to our gaming business and expansion plans, the reasonableness of such costs, the availability of cash and whether the reimbursement payment is in compliance with the covenants in the Indenture for the Outstanding Notes.
On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into a memorandum of agreement (“MOA”) that will, among other things, settle several long-standing legal disputes between Sonoma County and the Tribe and provide a binding framework for resolving future disputes. We believe the MOA will have significant positive impacts on the future conduct of our business and the Tribe’s ability to develop our expansions plans and construct our proposed hotel and casino resort. Pursuant to the MOA, the Tribe has agreed to pay the County up to $75 million in mitigation fees over the next 12 years to offset impacts of the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and are intended to support the services being provided by the County. In addition to the mitigation fees, the Tribe will pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental collected on occupied hotel rooms, to be paid quarterly and continuing for five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State (which is now terminable in 2020 at the earliest), which fees may be applied to programs and services that serve to promote tourism in the County. Such in lieu fees could total as much as $25 million during the term of the MOA. It is currently unclear to us what, if any, amounts we will be requested to pay to the Tribe to fund its obligations pursuant to the MOA.
Contractual Obligations as of December 31, 2008
The following table summarizes our contractual obligations and commitments as of December 31, 2008:
(a) Excluded from long-term debt obligations above are interest payments of $19.5 million in 1 year, $35.8 million in 2-3 years, and $0 million in 4-5 years.
(b) The Compact requires us to pay a quarterly fee of $0.3 million to the RSTF based on the number of our licensed gaming devices. Total obligations do not include the RSTF payments.
Regulation and Taxes
We are subject to extensive regulation by the tribal gaming agency, the California Gambling Control Commission and the National Indian Gaming Commission. Changes in applicable laws or regulations could have a significant impact on our operations.
On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into the MOA that, among other things, settled several long-standing legal disputes between Sonoma County and the Tribe, and will provide a binding framework for resolving future disputes. Under the MOA, the County agreed to drop its opposition to the Tribe’s application for a liquor license. In a related action, the Alexander Valley Association (“AVA”), a local business and residents association which has long objected to the issuance of a liquor license, agreed to withdraw its objections to the license and has persuaded its members and a number of other protestors to do likewise.
On May 29, 2008, the California Department of Alcoholic Beverage Control issued a liquor license to our gaming and entertainment facility. However, the Tribe has agreed to restrict the sale of alcohol to wine and beer between the hours of 11 a.m. and 5 p.m. on weekdays, and to stop serving alcohol altogether at midnight except for Friday and Saturday nights and the nights before holidays. The Tribe has also agreed not to serve liquor on the Casino floor, although patrons may bring drinks purchased at the restaurant or bar on to the Casino floor. The restrictions may be renegotiated following the first to occur of the three year anniversary of the MOA or the opening of a hotel, which is anticipated to occur within the next two to three years.
In addition, the MOA commits the County Sheriff’s Department and Fire Marshall to providing public safety and fire services to the Casino and the Tribe’s future gaming projects on the Rancheria, provides detailed agreements on off reservation impact mitigation measures, and permits the Tribe’s application to take the Dugan Property into trust, which has already been approved by the Department of the Interior (“DOI”) but was appealed by the DOI, to move forward without further County opposition.
The Tribe has agreed to pay the County up to $75 million in mitigation fees over the next 12 years to offset impacts of the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and are intended to support the services being provided by the County. In addition to the mitigation fees, the Tribe will pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental collected on occupied hotel rooms, to be paid quarterly and continuing for five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State (which is now terminable in 2020 at the earliest), which fees may be applied to programs and services that serve to promote tourism in the County. Such in lieu fees could total as much as $25 million during the term of the MOA.
We believe the MOA will have significant positive impacts on the future conduct of our business and our and the Tribe’s ability to develop our expansions plans and construct our proposed hotel and casino resort.
Since we are an unincorporated governmental instrumentality of the Tribe located on reservation land held in trust by the United States of America, we are not subject to federal or state income taxes. Various efforts have been made in Congress over the past several years to enact legislation that would subject the income of tribal governmental business entities, such as us, to federal income tax. Although no such legislation has been enacted, similar legislation could be passed in the future. It is not possible to determine with certainty the likelihood of possible changes in tax law or in the administration of such law. Such changes, if adopted, could have a material adverse effect on our operating results and cash flow from operations.
Impact of Inflation
Absent changes in competitive and economic conditions or in specific prices affecting the casino industry, we do not expect that inflation will have a significant impact on our gaming facility 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 casino industry in general.
Seasonality
We anticipate that activity at our gaming facility may be modestly seasonal with stronger results expected during the summer due in part to the relatively higher levels of tourism during such times of the year. In addition, our operations may be impacted by adverse weather conditions and fluctuations in the tourism business. Accordingly, our results may fluctuate from quarter to quarter and the results of one quarter may not be indicative of results expected from future quarters.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices.
Through December 31, 2008, we had not invested in derivative or foreign currency-based financial instruments. Additionally, we primarily have fixed rate debt. As such, we do not believe we have material exposure to market risk.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Our financial statements and notes thereto, referred to in Item 15(A) (1) of this Form 10-K, are filed as part of this report and appear in this Form 10-K beginning on page 51.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, management performed, with the participation of our General Manager and Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the report we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our General Manager and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our General Manager and Chief Financial Officer concluded that, as of December 31, 2008, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management has conducted, with the participation of our General Manager and our Chief Financial Officer, an assessment, including testing of the effectiveness of our internal control over financial reporting as of December 31, 2008. Management’s assessment of internal control over financial reporting was conducted using the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2008.
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
In Item 9A of our Annual Report on Form 10K for the fiscal year ended December 31, 2007, management reported four (4) material weaknesses in its internal control over financial reporting.
Specifically,
1. The Authority placed reliance on the external auditors to review and adjust the quarterly and annual financial statements, to monitor new accounting principles, and to ensure compliance with SEC disclosure requirements.
2. The Tribe contracted and paid for material capital expenditures and other Tribal department expenses on behalf of the Authority. The Tribe submitted invoices to the Authority for reimbursement of these costs. The signing officials (CEO and CFO) had no visibility to the specific nature of the capital expenditures or Tribal department expenses being presented for reimbursement on invoices from the Tribe. Supporting documentation for the invoices was not being furnished with the invoice to the signing officials, and as such, the signers could not ensure that a material error or omission to Construction in Progress (“CIP”) or expense accounts would be discovered on a timely basis.
3. Subsequent to the completion of the annual financial statement review process, Financial Management discovered a computational error in the National Progressive Slot accruals and related fees which required a reclassification entry. The initial internal control procedures did not detect an error in the percentage breakdown between the progressive slot accruals included with net revenue and related progressive slot fees that should have been classified as an operating expense to the Casino Expenses balance. A reclassification entry for approximately $1.7 million has been reflected in the financial statements.
4. The Authority did not maintain effective policies and procedures related to fixed assets. In addition, the Authority does not have a formal procedure for assessing potential asset impairments.
Management’s remediation plan to address the material weaknesses described above was substantially completed in 2008 and included the following steps taken to strengthen the Authority’s internal control over financial reporting.
1. Management has reduced its reliance on the external auditors by hiring more qualified personnel and reorganizing the responsibilities that manage the financial statement preparation, review and filing of SEC reports, and has implemented additional oversight and review processes. Management also now subscribes to a service that provides regular updates and research capabilities related to SEC and accounting pronouncements. In addition, the Authority’s public filings are reviewed by outside SEC counsel.
2. Management has gained the needed visibility to inter-governmental Tribal capital projects and expenses. Management has regular meetings with the CFO of the Tribe to ensure good communication is maintained between the Authority and the Tribe. The purpose of these meetings is to gather all data necessary to gain the understanding necessary to account properly for Construction in Progress and inter-governmental expenses prior to the commencement of a contract with a selected vendor for CIP projects and prior to the Authority’s quarterly or annual closing process. All underlying support for CIP is now required before management signoff and approval.
3. The National Progressive Slot accruals and related fees account reconciliations are now performed at a level that will appropriately identify errors on a timely basis.
4. Management has reduced its exposure to a material weakness in fixed asset accounting by hiring more qualified financial reporting personnel. The Authority has now assigned the monitoring of fixed asset accounting to the Director of Finance hired in 2008.
Changes in Internal Control Over Financial Reporting
Other than the control improvements discussed above, there have been no changes in our internal control over financial reporting during the fourth quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
We were formed in 2003 as an unincorporated instrumentality of the Tribe. We are governed by a five-member Board of Directors consisting of the same five members as those of the Tribe’s Board of Directors. The Tribe’s Board of Directors is elected biennially by the Tribal Council (the approximately 564 voting members of the Tribe), and consists of five members, including a Chairperson, a Vice Chairperson, a Secretary-Treasurer. The Secretary-Treasurer position has been vacant since December 12, 2006. Our last election took place on October 7, 2006. The elections for our Board of Directors, originally scheduled for the late fall of 2008, have been postponed pending the resolution of the status of certain voting members of the Tribe. The Tribe intends to resolve these issues expeditiously and reschedule the elections for the spring of 2009. The members of our Board of Directors will serve for so long as they serve on the Tribe’s Board of Directors.
Our Board of Directors
The table below sets forth information about the current members of our Board of Directors:
Betty Arterberry has served as Chairperson of our Board of Directors since July 18, 2006. Prior to that, Ms. Arterberry served as Vice Chairperson since our inception. On July 18, 2006, Ms. Arterberry assumed the title of Chairperson of the Authority while also serving as the Vice Chairperson of the Tribe’s Board of Directors. Prior thereto, Ms. Arterberry previously served as the Tribe’s Secretary-Treasurer for three consecutive two-year terms. Ms. Arterberry is currently employed at Sonoma County Indian Health Project as Chief Administrative Officer where she has worked since 1977. Ms. Arterberry is a member of the National Congress of American Indians and the California Nations Indian Gaming Association and serves on various other national, state and tribal associations.
Margie Rojes has served as Vice Chairperson of our Board of Directors since December 12, 2006. Prior to that, Ms. Rojes served as our Secretary-Treasurer of our Board of Directors since our inception. Ms. Rojes has also served as the Secretary-Treasurer of the Tribe’s Board of Directors since September 9, 2001. Ms. Rojes served as member of the Board of Directors for the Tribe for the last four terms since 1994. Ms. Rojes retired from the Windsor Elementary School District after 20 years of service. Ms. Rojes is a member of the National Congress of American Indians and the California Nations Indian Gaming Association and is the tribal delegate for Indian Child and Family Preservation Program. She also serves as a member of the Finance and Legislative Committees for the Tribe.
Harvey Hopkins has served as Chairperson of the Tribe’s Board of Directors since November 20, 2004. Mr. Hopkins served as our Chairperson from November 20, 2004 to July 14, 2006. Mr. Hopkins began a professional career in construction in 1970 and has been a licensed excavating contractor for 29 years. He grew up in Santa Rosa, California, and has been a lifelong member of the Dry Creek Rancheria. He and his wife have also been in the trucking business for the last 16 years and currently own American Indian Management Inc. Trucking Company. Additionally, Mr. Hopkins worked for American Civil Constructors West Coast for the past 15 years.
Augusto “Gus” Pina has served as a member of our Board of Directors since November 20, 2004. Mr. Pina retired as vice president of the Santa Rosa office of Bank of the West. Prior to joining Bank of the West in 1992, Mr. Pina served in various managerial positions at Crocker Bank and Bank of America. Mr. Pina was honorably discharged from the US Navy in 1964. Except during his service to the US Navy, Mr. Pina has lived in Sonoma County his entire
life. He has been a member of Rotary International, Cotati Planning Commissioner, Cotati Chamber President, former board member of KRCB channel 22 and a former member of the Petaluma Boys & Girls Club.
Gabe Nevarez has served as a member of our Board of Directors since October 7, 2006. Mr. Nevarez had served on the Tribe’s Board of Directors as a member-at-large from 1998 through 2004. He had previously served on the Authority’s Board of Directors as a member-at-large from its inception through November 2004. Mr. Nevarez has been employed in retail sales in Santa Rosa, CA since 1986. Mr. Nevarez has previously served as a member of the Enrollment, Personnel, Housing and Legislative Committees of the Tribe.
Executive Officers
The table below sets forth information about certain key executive officers as of December 31, 2008.
On January 22, 2009, Mr. Shawn S. Smyth left the positions of Chief Executive Officer and General Manager to pursue other interests. Mr. John Cirrincione was immediately appointed as the Acting General Manager of the Casino. We are currently conducting a search for a new Chief Executive Officer. Set forth below is a brief description of the business experience of our key executive officers. The following descriptions for our officers include employment by River Rock Casino as our predecessor.
Shawn S. Smyth has been our Chief Executive Officer and General Manager since April 13, 2006. Mr. Smyth has more than 26 years experience in the gaming industry. He has been responsible for developing, enhancing and expanding operations at several Native American properties. Most recently, he was the General Manager of Paradise Casinos in Yuma, Arizona, where he oversaw a Tribal property containing two adjacent casinos. Prior to that, he was Chief Executive Officer of the Seven Feathers Hotel and Casino Resort in Canyonville, Oregon, where he was responsible for daily operations, strategic planning and master plan development. His previous experience also includes 15 years as the Chief Executive Officer of Carson Valley Inn Properties in Minden, Nevada.
John Cirrincione has been our Chief Operations Officer since October 7, 2008. Mr. Cirrincione has 23 years experience in the gaming industry, most recently as General Manager of Downstream Casino Resort, a high-end casino facility with 2,100 slots, 45 games, 5 restaurants, 226 hotel rooms and a 36 hole golf course in Quapaw, Oklahoma. Mr. Cirrincione was part of the project team credited with bringing the resort from groundbreaking to operation within 10 months and 26 days. Prior positions include serving as General Manager of Gila River Gaming Enterprises, Inc. in Chandler, Arizona, Director of Operations for the Sands Hotel Casino in Reno, Nevada from 1999 through 2003 and as a Casino Manager and start up team with Thunder Valley Casino Resort in Lincoln, California. Additionally, Mr. Cirrincione was employed by Mystic Lake Hotel Casino in Prior Lake, Minnesota, as Director of Table Games Operations, and as Assistant Director of Table Games for the Atlantis Casino Resort in Reno, Nevada. He graduated with a BS in Communications from the State University of New York College at Fredonia in 1984, and became certified in gaming management at the University of Nevada in 1994.
Joseph R. Callahan has been our Chief Financial Officer since August 8, 2007. Mr. Callahan has a diverse Casino Executive background in Finance and Accounting, Hotel, Food and Beverage and Gaming Operations. Most recently, Mr. Callahan worked for Fantasy Springs Casino in Indio, California where he had been the Director of Accounting and Finance since 2005. Prior to that he spent 5 years with Mohegan Sun where he was Finance Director specializing in Strategic Planning and Analysis and Labor and Productivity. Mr. Callahan has also spent several years working for Station Casinos in Las Vegas, Nevada as an Analyst, Finance Director and also Director of Hotel Operations. In 1994, Colonel Callahan retired from the U.S. Air Force after 20 years of service.
Code of Ethics
We have adopted a code of ethics that applies to all of our executive officers, including our Chief Executive Officer and Chief Financial Officer. Our code of ethics is available on our website at www.riverrockcasino.com under “Contact Us/Investor Relations/Corporate Governance.” We will provide a copy of our code of ethics to any person upon request in writing to us at our address.
Audit Committee of the Board of Directors; Financial Expert
We do not have a separate audit committee of our board of directors. Our full board of directors has assumed the audit functions of our casino except that our TGA is responsible under our Compact to hire, monitor the performance of and, if necessary, replace the independent auditors and to approve any significant non-audit relationship with the independent auditors and assess the independent auditor’s qualifications and independence.
Our board of directors has determined that it does not have an audit committee financial expert.
Item 11.
Item 11. Executive Compensation.
Compensation Discussion and Analysis
Philosophy
Our compensation policies are designed to attract and retain key employees, motivating them to achieve and rewarding them for superior performance. We choose to pay competitive levels of base compensation and discretionary bonuses in order to attract and retain the necessary executive talent, reward annual performance and provide incentive for their balanced focus on long-term strategic goals as well as short-term performance. Since we believe the performance of every employee is important to our success, we are mindful of the effect of executive compensation on all of our employees.
We believe that the compensation of our officers should reflect their success as an individual and as a management team, in attaining key operating objectives, such as growth of revenues and operating earnings. We believe that the performance of the officers in managing our company, considered in light of general economic and specific company, industry and competitive conditions, should be the basis for determining their overall compensation. In setting our officers’ compensation, we intend to be competitive with other gaming companies. Our discretionary cash bonuses are an important element of our ability to recruit and retain talented employees and reward achievement since we do not pay any equity-based compensation.
Overview of Compensation and Process
In lieu of a compensation committee, our Board of Directors acts as a whole to make determinations regarding compensation of our executive officers. Elements of compensation for our executives include: salary, incentive bonus, and benefits such as health, disability, life insurance and perquisites. Base salaries for our non-contracted executives and discretionary bonuses for all executives are set for our officers annually by the Board of Directors.
As part of its annual review of officer compensation, our Board of Directors takes into account each officer’s total compensation from prior years, as well as information contained in compensation surveys. After reviewing the above factors, our Board of Directors makes the ultimate compensation determinations. Compensation determinations relating to incentive bonuses to our Chief Executive Officer, Chief Operations Officer and Chief Financial Officer, as well as base compensation, are determined solely by our Board of Directors.
The following are certain factors that our Board of Directors will also take into account in determining the various components of our executive officers’ total compensation package:
· Performance against corporate and individual objectives for the previous year;
· Difficulty of achieving desired results in the coming year;
· Value of their unique skills and capabilities to support our long-term performance;
· Performance of their management responsibilities;
· Responsibility and authority of each position relative to other positions within the Authority; and
· Contributions as a member of the senior management team.
These elements fit into our overall compensation objectives by helping to secure the future potential of our operations, providing proper compliance and regulatory guidance, and helping to create a cohesive team.
In addition to wages, the Authority provides all employees including executives with 401(k) match at 100% up to 5% of gross annual pay, paid medical, dental, vision and life insurance. The Authority also provides insurance for dependents while paying for 50% of employee dependent premiums.
Overview of Director Compensation and Procedures
We review the level of compensation of our directors on an annual basis. To determine how appropriate the current level of compensation for our directors is, we have historically obtained data from a number of different sources such as salary surveys and industry standards.
Retention Agreements
We do not have individual retention agreements with any employee except for severance arrangements with our Chief Executive Officer, Chief Operations Officer and Chief Financial Officer contained in their respective employment contracts that are discussed in Item 11 under “Employment Agreements.”
Compensation Committee Interlocks and Insider Participation
No member of the Board of Directors has served as one of our officers or employees at any time. None of our executive officers serve as a member of the Board of Directors of any other company that has an executive officer serving as a member of our Board.
Board of Directors Report
Our Board of Directors has reviewed the Compensation Discussion and Analysis and discussed that analysis with management. Based on its review and discussions with management, the Board of Directors has approved the Compensation Discussion and Analysis and it is to be included in our Annual Report on Form 10-K for 2008. This report is provided by our full Board of Directors:
Betty Arterberry, Chairperson
Margie Rojes, Vice Chairperson
Harvey Hopkins, Member
Gus Pina, Member
Gabe Nevarez, Member
Executive Officers
The following table provides summary information concerning compensation of our Chief Executive Officer, current and former Chief Operations Officer, current and Chief Financial Officer and our two most highly compensated executive officers for each of our fiscal years ended December 31, 2008, 2007 and 2006:
(a) Dollar amounts for bonuses are not guaranteed and represent the maximum amount that the principal officer may receive.
(b) “Other Compensation” includes medical, dental, vision and other health benefits provided.
(c) Shawn S. Smyth began serving as our Chief Executive Officer in April 2006 and left the office in January 2009.
(d) Norman Runyan, our former Chief Operations Officer, served until his resignation on November 14, 2007.
(e) John Cirricione began serving as our Chief Operations Officer as of October 7, 2008.
(f) David B. Wolfe, our former Chief Financial Officer, served until his resignation on April 11, 2007.
(g) Joseph R. Callahan began serving as our Chief Financial Officer as of August 8, 2007.
Employment Agreements
We amended an employment agreement with Mr. Shawn Smyth on July 30, 2007 to continue to serve as our Chief Executive Officer. This three year amendment to the original employment agreement commenced as of July 30, 2007, and provides Mr. Smyth a base annual salary of $300,000 and a discretionary bonus, as determined by our Board, of not more than 25% of his annual salary based on various criteria. Mr. Smyth left as our Chief Executive Officer and General Manager on January 22, 2009. Mr. Smyth’s severance package was $89,386. In addition to his severance package, Mr. Smyth received $50,000 as settlement and release of any and all claims that Mr. Smyth may have had.
We entered into an employment agreement with Mr. Joseph R. Callahan on October 17, 2007 effective as of August 8, 2007 to serve as our Chief Financial Officer. This three year employment agreement commenced on August 8, 2007, and provides Mr. Callahan an annual salary of $225,000 and a discretionary bonus, as determined by our Board, of not more than 25% of his annual salary based on various criteria. If Mr. Callahan’s employment is terminated for other
reasons set forth in the employment agreement including death or disability, Mr. Callahan will be entitled to his salary for three months. Either party may terminate the agreement with a 30 day written notice.
We entered into an employment agreement with Mr. John Cirrincione on October 8, 2008 effective as of October 7, 2008 to serve as our Chief Operations Officer. This three year employment agreement commenced on October 7, 2008, and provides Mr. Cirrincione an annual salary of $275,000 and a discretionary bonus, as determined by our Board, of not more than 25% of his annual salary based on various criteria. If Mr. Cirrincione’s employment is terminated for other reasons set forth in the employment agreement including death or disability, Mr. Cirrincione will be entitled to his salary for three months. Either party may terminate the agreement with a 30 day written notice.
We have no other employment agreements with our principal executive officers. Compensation for our principal executive officers other than those subject to employment agreements is set based on the following criteria:
· Performance against corporate and individual objectives for the previous year;
· Difficulty of achieving desired results in the coming year;
· Value of their unique skills and capabilities to support our long-term performance;
· Performance of their management responsibilities;
· Responsibility and authority of each position relative to other positions within the Authority; and
· Contributions as a member of the senior management team.
Potential Payments to Named Executive Officers Upon Termination
Pursuant to their employment agreements, Messrs. Smyth, Callahan and Cirrincione are entitled to potential severance payments upon certain terminations of employment. The terms and conditions for when severance payments are triggered, how payment amounts are determined, and what conditions are attached to the executive’s receipt of severance payments are substantially similar for all named executive officers.
Triggering Events: each of Messrs. Smyth, Callahan and Cirrincione is entitled to receive severance payments in the event of any termination of his employment as a result of the following events:
· The executive dies or becomes unable to perform the duties and responsibilities set forth in his employment agreement by reason of long-term physical or mental disability, defined as a period of disability that exceeds three (3) months;
· The Authority shall for any reason cease to operate the Casino; or
· The Authority shall give the executive ninety (90) days’ written notice of executive’s termination.
Payments. If severance is owed to any of Messrs. Smyth, Callahan and Cirrincione, we will be obligated to continue to pay the executive his base compensation in effect as of the date of termination for a severance period following termination equal to three months. Additionally, we will be obligated, to the extent elected by the executive, to continue all employee benefits for that three month period.
The following table sets forth a summary of the estimated payments required to be made by us as if severance had been triggered under our employment agreements on December 31, 2008:
Compensation of Our Board
We are governed by a five-member Board of Directors consisting of the same five members as those of the Tribe’s Board of Directors. The Tribe compensates members of each Board of Directors for the services they render. In 2008, we reimbursed the Tribe for 50% of the total compensation of the Board members reflecting an estimate of the total time allocable to Authority Board matters. The members of the Board of Directors received the following amounts for their service as members of the Tribe’s Board of Directors and as members of the Authority’s Board of Directors for the fiscal year 2008:
(a) Mr. Hopkins is Chairman of the Board of Directors of the Tribe.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
We have no outstanding equity securities.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Distributions to the Tribe were $13.9 million, $12.4 million and $15.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. Under the Indenture, we currently are restricted from making payments to the Tribe other than payments specifically permitted by our Indenture.
The Tribe has incurred expenses on behalf of the Authority that relate to the master planning of the proposed resort and Tribal infrastructure that benefit the Authority. Total expenses incurred and subsequently reimbursed to the Tribe for the twelve months ended December 31, 2008 and 2007 were $36.0 million and $4.6 million. No amounts were incurred or reimbursed in 2006 or 2005.
The Tribe has incurred an additional $21.0 million in costs relating to the master planning of the proposed resort. While the Tribe has not made any request to us for reimbursement of such amount, it may request reimbursement from us in the future. While we have no obligation to pay such amounts when requested and any such reimbursement would need to be approved by management and our Board of Directors, there is a possibility that such request for reimbursement may be made by the Tribe. Prior to making any reimbursement payment, we will consider various factors, including, but not limited to, whether the costs incurred were actually related to the master planning, whether such costs are beneficial to our gaming business and expansion plans, the reasonableness of such costs, the availability of cash and whether the reimbursement payment is in compliance with the covenants in the Indenture for the Outstanding Notes.
The Tribe has incurred expenses on behalf of the Authority that relate to the development of land adjacent to the Tribe’s reservation, the Dugan Property, which is expected to include an additional access road to our Casino for the benefit of the Authority. Total expenses incurred and subsequently reimbursed to the Tribe for the twelve months ended December 31, 2008 and 2007 were $0.3 million and $0, respectively.
The Tribe enacted a tribal gaming ordinance in April 1997, which, among other matters, created and established the TGA as a governmental subdivision of the Tribe. The TGA is responsible for the regulation of all gaming activities conducted by the Tribe or us on tribal lands. We pay for various expenses of the TGA (gaming commission expense), surveillance, plant operations, human resources, and warehouse. All of these departments are operated by the Tribe. These expenses include but are not limited to payroll and related expenses, legal and other operational expenses. These expenses were $4.2 million, $7.2 million and $6.2 million for the years ended December 31, 2008, 2007 and 2006. In
2007 and 2006, the purchasing department was operated by the Tribe. However, in 2008, we began operating this department.
The Tribe is obligated to remit certain fees to the CGCC on a quarterly basis for inclusion in the RSTF. The RSTF is for the benefit of tribes in California that have no or limited gaming. We pay these fees on behalf of the Tribe. Compact revenue sharing trust fund expense remained the same at $1.3 million for the years ended December 31, 2008 2007 and 2006. Compact revenue sharing trust fund expense includes payments associated with operating 1,600 gaming devices. These fees became payable by the Tribe when we commenced operations in September 2002, and are based on the number of our gaming device licenses. Compact revenue sharing trust fund expense includes payments to the RSTF as required by our Compact with the State of California.
On April 16, 2008, we pledged a cash gift, on behalf of the Tribe, to Healthcare Foundation, our local hospital, in the amount of $1.8 million. Commencing May 2008, this cash donation shall be provided at the monthly rate of $30,000 over the course of five years. This cash donation is a gift and not part of any revenue sharing agreement with any state or local government.
We reserved 50 recreational vehicle spaces and 10 campsite spaces at Alexander RV Park and Campground for casino guests. Alexander RV Park and Campground is a wholly owned subsidiary of the Tribe. The cost of reserving the parking spaces and campsite spaces was $0.3 million in 2008.
Pursuant to the MOA, the Tribe has agreed to pay the County up to $75 million in mitigation fees over the next 12 years to offset impacts of the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and are intended to support the services being provided by the County. In addition to the mitigation fees, the Tribe will pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental collected on occupied hotel rooms, to be paid quarterly and continuing for five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State (which is now terminable in 2020 at the earliest), which fees may be applied to programs and services that serve to promote tourism in the County. Such in lieu fees could total as much as $25 million during the term of the MOA. It is currently unclear to us what amounts, if any, we will be requested to pay to the Tribe to fund its obligations pursuant to the MOA.
Review, Approval or Ratification of Transactions with Related Persons
Our Board of Directors reviews and approves or disapproves all related party transactions, and our written Code of Business Conduct and Ethics further requires that any transaction involving a potential conflict of interest involving an executive or an employee must be disclosed and approved by our full Board of Directors.
Director Independence
We are a governmental instrumentality of the Tribe and are managed by a board of directors of five members, all of whom are enrolled members of the Tribe. Our board of directors is constituted by the same persons who constitute the board of directors of the Tribe. The board of directors of the Tribe is elected biannually by the enrolled members of the Tribe, who alone have the power to appoint and remove our directors. Mr. Harvey Hopkins, a member of our board of directors, has been serving as the Chairman of the board of directors of the Tribe since 2004.
We are 100% owned by the Tribe and have issued only debt securities which are not listed on a national securities exchange or in an inter-dealer quotation system. As a result, we are not a listed issuer and a majority of the directors on our board of directors are not required to be independent.
Item 14.
Item 14. Principal Accounting Fees and Services.
The following table sets forth the aggregate fees billed for professional services rendered by Deloitte & Touche LLP, for the audit of our annual financial statements as well as the aggregate fees billed for audit-related services and all other services rendered for the years ended December 31, 2008 and 2007.
The category of “Audit Fees” includes fees for our annual audit, quarterly reviews and services rendered in connection with statutory and regulatory filings, or engagements for those fiscal years.
The category of “Audit-Related Fees” includes aggregate fees billed in each of the last two fiscal years, for assurance and related services by the principal accountant, that are reasonably related to the performance of the audit or review of the Authority’s financial statements.
The category of “All Other Fees” includes aggregate fees billed in each of the last two fiscal years which are not covered by the above categories.
All above audit services were pre-approved by the TGA, which, under the Compact, has responsibility for ensuring that the audit is performed. The TGA concluded that the provision of such services by Deloitte & Touche LLP was compatible with the maintenance of that firm’s independence in the conduct of auditing functions. The TGA’s outside auditor independence policy provides for pre-approval of all services performed by the outside auditors.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
A. Financial Statements
(a) Documents filed as part of this report.
1. The following financial statements of the Authority and the Report of Deloitte & Touche LLP, independent registered public accounting firm, appear on pages 55 through 73 of this Form 10-K and are incorporated by reference in Part II, Item 8:
Report of Independent Registered Public Accounting Firm
Balance Sheets of the River Rock Entertainment Authority as of December 31, 2008 and 2007
Statements of Revenues, Expenses and Changes in Fund Deficit for the Years Ended December 31, 2008, 2007 and 2006
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
Notes to Financial Statements for the Years Ended December 31, 2008, 2007 and
2. List of financial statement schedules. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. List of exhibits required by Item 601 of Regulation S-K. See part (c) below.
B. Exhibits.
The exhibits to this Form 10-K are listed on the exhibit index, which appears elsewhere herein and is incorporated herein by reference.
EXHIBIT INDEX
Exhibit No.
Exhibit
3.1
Dry Creek Rancheria Band of Pomo Indians Ordinance No. 03-10-25-003 setting forth the River Rock Entertainment Authority Act of 2003 (filed as Exhibit 3.1 to the Authority’s Registration Statement on Form S-4 (the “Form S-4”), filed with the SEC on May 5, 2004 (SEC File No. 333-115186), and incorporated by reference herein)
3.2
Dry Creek Rancheria Band of Pomo Indians Tribal Council Resolution No. 03-10-25-002 (the River Rock Entertainment Authority and Bond Resolution Act) approving, among other things, creation of the River Rock Entertainment Authority (filed as Exhibit 3.2 to the Authority’s Registration Statement on Form S-4, filed with the SEC on May 5, 2004) (SEC File No. 333-115186), and incorporated by reference herein)
3.3
Dry Creek Rancheria Band of Pomo Indians Ordinance No. 97-08-04, as amended October 25, 2003, authorizing and regulating gaming on the Dry Creek Band of Pomo Indians Rancheria (filed as Exhibit 3.3 to the Form S-4, and incorporated by reference herein)
4.1
Indenture, dated as of November 7, 2003, by and among the Authority, the Tribe and U.S. Bank National Association, as trustee (the “Trustee”), together with the Exhibits attached thereto (filed as Exhibit 4.1 to the Form S-4, and incorporated by reference herein)
4.2
Form of Global 9 ¾% Senior Note due 2011 (contained in the Indenture filed as Exhibit 4.1 herewith) (filed as Exhibit 4.2 to the Form S-4, and incorporated by reference herein)
10.1
Tribal-State Compact between the Dry Creek Rancheria Band of Pomo Indians and the State of California, effective May 2000 (filed as Exhibit 10.1 to the Form S-4, and incorporated by reference herein)
10.2
Cash Collateral and Disbursement Agreement, dated as of November 7, 2003 (the “Cash Collateral Agreement”), by and among the Trustee, U.S. Bank National Association, as USB disbursement agent, Wells Fargo Bank, N.A., as disbursement agent, Merritt & Harris, Inc., as independent construction consultant, the Authority and the Tribe (filed as Exhibit 10.2 to the Form S-4, and incorporated by reference herein)
10.3
Amendment No. 1 to Cash Collateral Agreement, dated as of November 17, 2003, by and among the Trustee, U.S. Bank National Association, as USB disbursement agent, Wells Fargo Bank, N.A., as disbursement agent, Merritt & Harris, Inc., as independent construction consultant, the Authority and the Tribe (filed as Exhibit 10.3 to the Form S-4, and incorporated by reference herein)
10.4
U.S. Bank National Association Control Agreement, dated as of November 7, 2003, by and among the Trustee, U.S. Bank National Association, as disbursement agent, securities intermediary and depository bank, the Authority and the Tribe (filed as Exhibit 10.4 to the Form S-4, and incorporated by reference herein)
10.5
Wells Fargo Bank, N.A. Control Agreement, dated as of November 7, 2003, by and among the Trustee, Wells Fargo Bank, N.A., as depository bank, the Authority and the Tribe (filed as Exhibit 10.5 to the Form S-4, and incorporated by reference herein)
10.6
Wells Fargo Bank, N.A. side letter dated December 1, 2003, from Wells Fargo Bank, N.A. to the Trustee (filed as Exhibit 10.6 to the Form S-4, and incorporated by reference herein)
10.7
Pledge and Security Agreement, dated as of November 7, 2003, by and among the Authority, the Tribe and the Trustee (filed as Exhibit 10.7 the Form S-4, and incorporated by reference herein)
10.8
Employment Agreement, dated as of April 17, 2006, by and between the Tribe and Shawn S. Smyth (filed as Exhibit 10.1 to the Form 8-K filed with the SEC on April 19, 2006, and incorporated by reference herein)
10.9
Employment Agreement, dated as of August 8, 2007, by and between the Authority and Joseph R. Callahan (filed as Exhibit 10.1 to the Form 8-K filed with the SEC on October 23, 2007, and incorporated by reference herein)
10.10
Agreement, dated as of April 1, 2004, by and between the Authority and Swinerton Builders (filed as Exhibit 10.19 to the Form S-4, and incorporated by reference herein)
10.11
Lease Agreement, dated as of May 30, 2002, by and between the Tribe and Sprung Instant Structures, Inc. (filed as Exhibit 10.20 to the Form S-4, and incorporated by reference herein)
10.12
Amendment No. 1 to Lease Agreement, dated as of February 26, 2004, by and between the Tribe and Sprung Instant Structures, Inc. (filed as Exhibit 10.21 to the Form S-4, and incorporated by reference herein)
10.13
Amendment No. 2 to Lease Agreement, dated as of August 29, 2005, by and between the Tribe and Sprung Instant Structures, Inc. (filed as Exhibit 10.20 to the Form 10-K filed with the SEC on April 17, 2007, and incorporated by reference herein)
10.14
Memorandum of Agreement between the Dry Creek Rancheria Band of Pomo Indians and the County of Sonoma, California, together with exhibits thereto (filed as Exhibit 10.22 to the Form 10-K filed with the SEC on April 14, 2008, and incorporated by reference herein)
10.15
Employment Agreement, dated as of October 7, 2008, by and between the Authority and John Cirrincione (filed as Exhibit 10.1 to the Form 8-K/A filed with the SEC on October 14, 2008, and incorporated by reference herein)
12.1
Statement of Calculation of Ratio of Earnings to Fixed Charges (filed herewith as Exhibit 12.1)
14.1
Code of Ethics (filed as Exhibit 14.1 to the Form 10-K filed with the SEC on March 30, 2006, and incorporated herein by reference)
31.1
Certification by John Cirrincione, Acting General Manager, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) (filed herewith)
31.2
Certification by Joseph R. Callahan, Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) (filed herewith)
32.1*
Certification by John Cirrincione, Acting General Manager, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2*
Certification by Joseph R. Callahan, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
* These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of River Rock Entertainment Authority whether made before or after the date hereof, regardless of any general incorporation language in such filing.
C. Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
The registrant has not sent an annual report or proxy statement to security holders. The registrant will not be sending an annual report or proxy statement to its security holders subsequent to the filing of this Form 10-K.
Exhibit 12.1
STATEMENT OF CALCULATION OF
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
For the purpose of calculating the ratio of earnings to fixed charges, “earnings” represent income before income taxes plus fixed charges. “Fixed charges” consist of (a) interest expensed and capitalized; (b) amortized premiums, discounts and capitalized expenses related to indebtedness; and (c) an estimate of the interest within rental expenses.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of River Rock Entertainment Authority
We have audited the accompanying balance sheets of the River Rock Entertainment Authority (the “Authority”), a governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians (the “Tribe”), as of December 31, 2008 and 2007 and the related statements of revenues, expenses and changes in fund deficit and of cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Authority’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Authority is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Authority’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the River Rock Entertainment Authority as of December 31, 2008 and 2007, and the revenues and expenditures and changes in fund deficit and the cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
River Rock Entertainment Authority is an unincorporated instrumentality of the Tribe and is not a separate legal entity. These financial statements reflect the financial position of the River Rock Entertainment Authority, its revenues and expenditures and changes in net assets and its cash flows and do not purport to represent the financial position and activity of the Tribe as a whole.
/s/ Deloitte & Touche LLP
San Francisco, CA
March 30, 2009
RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)
BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
The accompanying notes are an integral part of these financial statements.
RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)
STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND DEFICIT
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
The accompanying notes are an integral part of these financial statements.
RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
The accompanying notes are an integral part of these financial statements.
RIVER ROCK ENTERTAINMENT AUTHORITY
(A Governmental Instrumentality of the Dry Creek Rancheria Band of Pomo Indians)
1. DESCRIPTION OF BUSINESS
River Rock Entertainment Authority (the “Authority”) is a governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians (the “Tribe”), a federally recognized Indian tribe. River Rock Casino (the “Casino”) is a governmental development project of the Authority. The Casino offers Class III gaming (as defined by the Indian Gaming Regulatory Act of 1988, as amended) on tribal land located in Geyserville, California. The legal authority for slot machines and table games is provided by the Tribe’s gaming compact with the State of California (the “Compact”), which was entered into in September 1999 and became effective upon approval by the Secretary of Interior on May 5, 2000. The Compact expires on December 31, 2020.
The Authority was formed as an unincorporated instrumentality of the Tribe on November 5, 2003 pursuant to a reorganization whereby the Tribe’s gaming business became owned and operated by the Authority. This reorganization was accounted for as a reorganization of entities under common control. Accordingly, after the reorganization, the assets and liabilities of the Casino’s operating property were presented by the Authority on a historical-cost basis.
The Authority operates as a separate, wholly owned operating unit of the Tribe and is not a separate legal entity. These financial statements reflect the financial position and activity of only the Authority and do not purport to represent the financial position and activity of the Tribe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Standards-The Authority prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial statements presented are prepared on the accrual basis of accounting from the accounts and financial transactions of the Authority. GAAP requires the Authority to apply all applicable pronouncements of the Governmental Accounting Standards Board (“GASB”). The Authority is also required to follow Financial Accounting Standards Board (“FASB”) Statements and Interpretations, Accounting Principles Board Opinions and Accounting Research Bulletins issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. The Authority is given the option whether to apply all FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. Accordingly, the Authority has elected to implement non-conflicting FASB Statements and Interpretations issued after November 30, 1989.
There are differences between financial statements prepared in accordance with GASB pronouncements and those prepared in accordance with FASB pronouncements. The statements of revenues, expenses and changes in fund deficit are a combined statement under GASB pronouncements. FASB pronouncements allow a statement of income or operations and a separate statement of owners’ or shareholders’ (deficit) equity, which is where distributions to owners would be presented under FASB pronouncements. The amount shown as income before distributions to Tribe would not be different if the Authority followed all FASB pronouncements to determine net income and would be the most comparable amount to net income computed under FASB pronouncements. The Authority is a separate fund of the Tribe, a governmental entity, and as such there is no owners’ or shareholders’ (deficit) equity as traditionally represented under FASB pronouncements. The most comparable measure of owners’ (deficit) equity is presented on the Authority’s balance sheet as fund (deficit) equity.
Recent Accounting Pronouncements-The Authority adopted the required provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS No. 157”) on January 1, 2008. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 establishes a fair value hierarchy for disclosure of the inputs used to measure fair values. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for similar assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs which reflect assumptions developed by management to measure assets and liabilities at fair value. A financial asset or
liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. There was no material impact to the condensed financial statements upon the adoption of SFAS No. 157.
The Authority adopted the provisions of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115” (“SFAS No. 159”) on January 1, 2008. SFAS No. 159 provides a company with the option to measure selected financial instruments and certain other items at fair value at specified election dates. Upon adoption, the Authority has not elected to apply SFAS No. 159 to measure selected financial instruments and certain other items; therefore, there was no impact to the financial statements upon adoption of SFAS No. 159. Subsequent to the initial adoption of SFAS No. 159 on January 1, 2008, the Authority has not made any elections during the year ended December 31, 2008.
Use of Estimates-The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents-The Authority considers all highly liquid investments with a maturity of three months or less at date of purchase as cash equivalents. The carrying amount of cash and cash equivalents approximates its fair value. Cash and cash equivalents include cash on hand, cash on deposit with banks and highly liquid investments. The Federal Deposit Insurance Corporation (“FDIC”) has insured $250,000 of the cash on deposit with the banks. The Authority believes that there is little risk of loss regarding the uninsured amounts of cash and cash equivalents on deposit with the banks.
Inventories-Inventories, consisting principally of gaming supplies and food and beverage items, are stated at the lower of cost (first-in, first-out) or market value.
Restricted Cash-Restricted cash consists of estimated construction expenses for three parking structures, related infrastructure improvements and construction contingencies. It also includes funds that are reserved for additional construction contingencies and the funds necessary to develop an approximately 18 acre parcel of land adjacent to the Tribe’s reservation. These funds are held in escrow accounts which are restricted for authorized construction disbursements. These escrow accounts are invested in CDs, which generate interest on a monthly basis. The FDIC has insured $250,000 of this balance. The Authority believes that there is little risk of loss regarding the uninsured amounts of restricted cash held in the escrow account. Restricted cash was $7,090,273 and $7,335,473 at December 31, 2008 and December 31, 2007, respectively. As of December 31, 2008, restricted cash includes amounts available for construction of $2,769,081 and land development funds of $4,321,192.
Property and Equipment-Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows:
The Authority evaluates its property and equipment for impairment in accordance with the FASB’s SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” When events or circumstances indicate that an asset should be reviewed for impairment, the Authority compares the undiscounted cash flows derived from the asset or asset group to the net carrying value. If impairment is indicated, the impairment loss is measured by the amount in which the carrying value of the asset or asset group exceeds its fair value. Fair value is measured by comparable sales, solicited offers or discounted cash flow models. We did not have any recorded impairments in the statement of revenues, expenses and changes in fund deficit for the periods presented.
Capitalized Interest-The interest cost associated with major development and construction projects is capitalized and included in the cost of the asset. Capitalization of interest ceases when the project is substantially complete or development activity is suspended. There was no capitalized interest for the years ended December 31, 2008 and 2007.
Deposits and Other Assets-As of December 31, 2008 and December 31, 2007, deposits and other assets include $2,897,142 and $3,918,837 in bond legal fees and other issuance costs related to the issuance of the Authority’s 9 ¾% Senior Notes due 2011 (the “Senior Notes”) under the Indenture, dated November 7, 2003 (the “Indenture”); $0 and
$350,485 of deferred financing fees; $0 and $41,883 of equipment deposits; $126,487 and $11,372 of performance deposits and $15,900 and $16,425 of rental deposits. Deferred loan costs are amortized using the effective interest method to interest expense over the term of the related financial arrangement.
Accrued Liabilities-Accrued liabilities consist of accrued interest, accrued payroll and other accrued liabilities.
Accrued Progressive Slot Jackpots-Accrued progressive slot jackpots consist of estimates for prizes relating to various games that have accumulated jackpots. The Authority has recorded the cost of these anticipated payouts as a reduction of Casino revenues, and the cost is included as a component of accrued liabilities.
Accrued Slot Players Club-In accordance with Emerging Issues Task Force Issue No. 00-22, “Accounting for ‘Points’ and Certain Other Time-based or Volume-Based Sales Incentive Offers and Offers for Free Products or Services to Be Delivered in the Future,” the Authority has recorded a liability related to prizes and cash incentives earned by the members of our Players Club and have adjusted the liability for the estimated future breakage. The Authority has recorded the cost of the estimated redemption of the liability related to prizes as an operating expense and the estimated redemption of the liability related to cash as promotional allowance in the accompanying statements of revenues, expenses and changes in fund deficit.
Casino Revenues-In accordance with industry practice, the Authority recognizes as casino revenue the net win from gaming activities, which is the difference between gaming wins and losses. Casino revenues are net of accruals for anticipated payouts of progressive slot jackpots.
Food, Beverage and Retail-The Authority recognizes as food, beverage and retail revenues the proceeds from its food, beverage and gift shop sales. The Authority continues to distribute non-alcoholic beverages free of charge in the gaming area for playing guests. The retail value of these free beverages is also included in food, beverage and retail revenue.
Other Revenues-Other revenues are comprised of commissions on ATM and vending machine transactions.
Promotional Allowances-The retail value of food and beverages provided to customers without charge or at a discount is included in food, beverage and retail revenues and then deducted as promotional allowances. Such amounts that are included in food, beverage, and retail revenues for the years ended December 31, 2008, 2007 and 2006 were $2,386,172, $2,897,660 and $2,160,035, respectively. The distribution of electronic coupons (e-coupons) to customers is included in Casino revenues and is also deducted as promotional allowances. The total e-coupons for the years ended December 31, 2008, 2007 and 2006 were $10,398,776, $9,562,441 and $8,788,573, respectively. The redemption of cash incentives earned by the Players Club members is also recorded as promotional allowances. The total cash incentives for the years ended December 31, 2008, 2007 and 2006 were $1,847,259, $2,007,429 and $1,593,091, respectively.
Food and Beverage Expenses-Food and beverage expenses include cost of goods sold related to providing food and beverage to our customers. The estimated costs of providing complimentary services are reclassified from food, beverage and retail costs to Casino expenses. The estimated costs of such complementary services were $4,440,552, $5,801,400 and $3,845,342 for the years ended December 31, 2008, 2007 and 2006, respectively.
Advertising Costs-Advertising costs are expensed the first time advertising takes place. Advertising costs included in selling, general and administrative expenses were $6,310,057, $7,910,198 and $5,210,739 for the years ended December 31, 2008, 2007 and 2006, respectively.
Gaming Commission and Surveillance Expenses-The Authority pays for various expenses for the Tribal Gaming Commission and surveillance. Tribal Gaming Commission expenses are reported as Gaming Commission and surveillance expense on the Statement of Revenues, Expenses and Changes in Fund Deficit. Gaming Commission and surveillance expenses for the years ended December 31, 2008, 2007 and 2006 were $3,694,674, $3,023,303 and $3,154,384, respectively.
Income Taxes-As a governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians, a federally recognized Indian tribe, the Authority is a nontaxable entity for purposes of federal and state income taxes.
Distributions to Tribe-Distributions to Tribe are made up of permitted payments under the covenants of the Indenture. They are included in the statements of revenues, expenses and changes in fund deficit as distributions to Tribe allowed pursuant to the Indenture. Total distributions to the Tribe for the years ended December 31, 2008, 2007 and 2006 were $13,919,060, $12,427,200 and $15,121,137, respectively.
3. CERTAIN RISKS AND UNCERTAINTIES
The Authority’s operations are dependent on the continued licensing and qualification of the Authority by the Tribal Gaming Commission. Such licensing and qualification are reviewed periodically by the Tribal Gaming Commission and regulatory agencies of the State of California. The Authority believes that no events or circumstances have arisen that would have an adverse effect on the Casino’s ability to continue its licensing and qualification by the Tribal Gaming Commission or regulatory agencies of the State of California to operate the Authority.
4. RELATED PARTIES
The Authority has been constructed on federal land beneficially owned by the Tribe. The Authority does not pay the Tribe for the use of the land.
The Authority pays for various expenses for the following departments operated by the Tribe: Tribal Gaming Commission, surveillance, plant operations, human resources and warehouse. These departmental expenses include but are not limited to payroll and related expenses, legal, and other operational expenses.
Total amounts billed by the Tribe to the Casino for these departments, excluding Tribal Gaming Commission and surveillance, were $4,158,064, $4,178,576 and $3,188,736 for the years ended December 31, 2008, 2007 and 2006, respectively. They are recorded as a component of selling, general and administrative expenses.
The Authority pays for various expenses for the Tribal Gaming Commission and surveillance. The Tribal Gaming Commission and surveillance expenses are recorded in Gaming Commission and surveillance expenses on the Statement of Revenues, Expenses and Changes in Fund Deficit. Gaming Commission and surveillance expenses were $3,694,674, $3,023,303 and $3,154,384for the years ended December 31, 2008, 2007 and 2006, respectively.
The Tribe has incurred expenses on behalf of the Authority that relate to the development of land adjacent to the Tribe’s reservation, the Dugan Property, which is expected to include an additional access road to our Casino for the benefit of the Authority. Total expenses incurred and subsequently reimbursed to the Tribe for the twelve months ended December 31, 2008 and 2007 were $0.3 million and $0, respectively.
The Tribe has incurred expenses on behalf of the Authority that relate to the master planning for the proposed resort and Tribal infrastructure that benefit the Authority. The Authority reimbursed $36.0 million to the Tribe for these expenses for the year ended December 31, 2008. These expenses were capitalized and reflected in construction-in-progress. The reimbursed costs consisted of engineering and design costs related to the proposed master plan development, including electrical, HVAC, landscaping, interior design services and consulting fees for legal, branding, feasibility, public relations services, as well as the construction of the lower Acorn Road. While the Tribe has not made any additional request to the Authority for reimbursement, it may request additional reimbursements from the Authority in the future. While the Authority has no obligation to pay such amounts when requested, and any such reimbursement would need to be approved by management and the Board of Directors of the Authority, there is a possibility that such request for reimbursement may be made by the Tribe. Prior to making any reimbursement payment, the Authority will consider various factors, including, but not limited to, whether the costs incurred were actually related to the master planning, whether such costs are beneficial to the gaming business and expansion plans of the Authority, the reasonableness of such costs, the availability of cash and whether the reimbursement payment is in compliance with the covenants in the Indenture.
5. DEVELOPMENT AND LOAN AGREEMENT
The Tribe entered into a Development and Loan Agreement with Dry Creek Casino, LLC (“DCC”) on August 26, 2001, which has been amended from time to time (as amended, the “Development Agreement”). In consideration of DCC providing credit enhancement and other services under the Development Agreement, the Tribe was obligated to pay DCC a Credit Enhancement Fee (the “Credit Enhancement Fee”). The Credit Enhancement Fee was defined as 20%
of the Authority’s net income before distributions to the Tribe plus depreciation and amortization plus annual interest on $25.0 million principal amount of the Senior Notes less revenues from sales of alcoholic beverages. The Credit Enhancement Fee was required to be paid monthly for a period of five years commencing on June 1, 2003.
The Authority had the right to terminate the Development Agreement by exercising a buy-out option (the “Buy-Out Option”) and did so on January 31, 2007. Subsequently on March 2, 2007, the Authority and DCC signed a mutual agreement to fix the amounts due to DCC in respect of such exercise to the sum of $11,350,000 less the amount paid after the Authority exercised the buy-out option of $737,491. The net payment of $10,612,509 was made in March 2007 and expensed in full in the three months ended March 31, 2007. Credit Enhancement Fee expense was $0, and $11,348,897 for each of the years ended December 31, 2008 and 2007, respectively.
6. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Cash and cash equivalents and restricted cash consisted of the following as of December 31, 2008 and December 31, 2007:
The Authority’s cash in banks and cash equivalents (the “Investments”) are categorized by level of credit risk assumed by the Authority. Category 1 includes cash that is insured or registered or for which the investments are held by the Authority or its agent in the Authority’s name. Category 2 includes uninsured and unregistered investments for which the investments are held by the counterparty’s trust department or agent in the Authority’s name. Category 3 includes uninsured and unregistered investments for which the investments are held by the counterparty’s agent but not in the Authority’s name. At December 31, 2008, the Authority had $9,221,163 cash in banks ($250,000 of which is FDIC insured - Category 1), $12,157,902 in Money Market accounts and $0 in short term investments which are Category 2 investments, and $7,090,273 restricted cash in bank ($250,000 of which is FDIC insured - Category 1) which is a Category 3 investment. Amounts in Category 2 and Category 3 investments are invested in short term, highly liquid cash equivalents and investments. As of December 31, 2008 and 2007, these amounts are composed of money market accounts in the amount of $12,157,902 and $3,000,298, respectively and A1/P1 securities in the amount of $0 and $31,013,947, respectively.
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2008 and December 31, 2007 consisted of the following:
Construction in progress consists of payments to the Tribe and various vendors related to the Authority’s master plan development and land improvements. Substantially all of the Authority’s personal property is pledged as collateral to secure its debt. At December 31, 2008 and 2007, the Authority had $220,628 and $415,639 in capital lease assets with related accumulated depreciation of $155,728 and $203,781.
8. ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31, 2008 and December 31, 2007:
9. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 2008 and December 31, 2007:
Maturity schedule - Annual requirements to retire long-term debt at December 31, 2008:
On November 7, 2003, the Authority issued the Senior Notes. The proceeds were utilized to fund an expansion project, which included three parking structures, related infrastructure improvements, repayment of various debt and advances and fund payment of various accruals and payables, as well as to increase cash on hand. The proceeds were also utilized to fund a land purchase and settle litigation. The Senior Notes are collateralized by a first priority pledge of the Authority’s revenue and substantially all of the existing and future tangible and intangible personal property. The Authority may redeem the Senior Notes prior to maturity, in whole or in part, through October 31, 2009 at a redemption price that is at a premium to the principal amount of the Senior Notes (expressed as percentages of principal amount) and from November 1, 2009 and thereafter at par, plus accrued and unpaid interest.
Fair Value-The Authority’s long-term debt is recorded at an amortized historical cost basis. The fair value of long-term debt was $150,000,000 as of December 31, 2008.
10. LEASES
The Authority leases a sprung structure, which is accounted for as an operating lease. Such lease expense was $434,760 and $434,760 for the years ended December 31, 2008 and 2007. The Authority renewed the lease agreement on August 17, 2005 for $36,230 per month for twenty four (24) months ending August 17, 2007. Since the expiration of the lease on August 17, 2007, the Authority has maintained the lease payments on a month to month basis.
On February 21, 2007, the Authority entered into a one year operating lease for office and promotional space commencing February 21, 2007 and expiring February 20, 2008. The monthly lease fee was $600 per month. On February 21, 2008, the Authority extended the lease for three years, commencing on February 21, 2008 and expiring on February 20, 2011. The extended lease fee is $625 per month for the first year, with adjustments for the Consumer Price Index and property taxes in the second and third years.
On August 30, 2007, the Authority entered into a five year operating lease agreement for office and showroom space commencing October 1, 2007 and expiring on September 30, 2012. The monthly lease fee for the initial year was $16,630. As of October 1, 2008, the monthly lease fee increased to $17,129. Lease expenses for 2008 totalled $201,057.
On September 1, 2004, the Authority entered into a five year capital lease to purchase two licenses to operate three-card poker tables in the amount of $120,000. The capital lease is at 7.20% interest with monthly lease fees of $2,390 and with a $1 buyout at the end of the lease term, expiring August 31, 2009.
On April 25, 2006, the Authority entered into a thirty-six month capital lease to purchase 5 Deck Mate poker shufflers in the amount of $61,827. The capital lease is at 7.92% interest with monthly lease fees of $1,937 and with a $1 buyout at the end of the lease term, expiring April 30, 2009.
On August 1, 2006, the Authority entered into a thirty-six month capital lease to purchase 2 licenses to operate pai gow poker tables in the amount of $38,800. The capital lease is at 4.26% interest with monthly lease fees of $1,150 and with a $1 buyout at the end of the lease term, expiring July 31, 2009.
Lease expenses of $254,945 and $336,622 for the years ended December 31, 2008 and 2007, respectively, are included in general and administrative expenses in the accompanying statement of revenues, expenses and changes in fund deficit. Expected remaining payments under operating leases are $265,115, $243,024, $226,079, $173,583 and $4,275 for the years ending December 31, 2009 thru 2013, respectively.
11. LEGAL MATTERS
Runyan Litigation
On March 7, 2008, Norman Runyan, our former Chief Operations Officer, filed suit against the Authority, the Casino and Mr. Harvey Hopkins, the Chairman of the Tribe and a member of the Authority’s Board, in the Sonoma County Superior Court. Mr. Runyan’s complaint asserted causes of actions for breach of contract, wrongful termination in violation of public policy, intentional interference with contract and intentional infliction of emotional distress. He sought unspecified compensatory and punitive damages. Mr. Runyan alleged that he was wrongfully terminated from his employment because he opposed certain alleged actions on the part of the defendants, including contracts for construction work allegedly performed on the reservation by affiliates of the Tribe and Mr. Hopkins. Mr. Runyan claimed that the work violated the Indenture and that Mr. Runyan was forced to resign from his employment in violation of public policy after protesting that the alleged work violated the Indenture, the Compact, and the Securities Exchange Act of 1934. He also claimed that the defendants unlawfully discriminated against him in connection with his status as a debtor under the Bankruptcy Code. We believed that Mr. Runyan’s lawsuit is based on erroneous information and is without merit, and we and the Tribe vigorously defended against it.
On October 17, 2008, the judge of the Sonoma County Superior Court signed an Order dismissing the lawsuit filed by Norman Runyan against the Authority, the Casino and Mr. Harvey Hopkins, the Chairman of the Tribe and a member of the Authority’s Board. On December 3, 2008, the Order was entered and the case was dismissed.
On January 14, 2009, Mr. Runyan filed a Petition for Order Compelling Arbitration with the Sonoma County Superior Court, and on January 30, 2009, he filed a Motion for Order Compelling Arbitration. In both the Petition and the Motion, Mr. Runyan seeks to have the Court issue an order compelling arbitration of the claims asserted in the complaint that was dismissed by the court in December 2008. The Authority believes, based on fact that Mr. Runyan entered into a Severance Agreement and General Release with the Authority, the Casino, and other released parties, that there is no basis for Mr. Runyan to seek arbitration of his claims. The Authority, the Casino, and Mr. Hopkins plan to file a hybrid motion to quash summons and dismiss the Petition and Motion, together with an opposition to Mr. Runyan’s Motion.
Other Legal Matters
The Authority is involved in other litigation and disputes from time to time in the ordinary course of business with vendors and patrons. The Authority believes that the aggregate liability, if any, arising from such litigation or disputes will not have a material adverse effect on its results of operations, financial condition or cash flows.
12. COMPACT REVENUE SHARING TRUST FUND
The Compact requires the Authority to pay a quarterly fee to the State of California’s revenue sharing trust fund, based on the number of licensed gaming devices operated by the Tribe. Revenue sharing trust fund fees assessed were $1,335,000 for each of the years ended December 31, 2008, 2007 and 2006.
13. COMMITMENTS AND CONTINGENCIES
The Authority is an unincorporated instrumentality of the Tribe formed pursuant to an adopted law of the Tribe. While the Authority is not a separate corporation or other legal entity distinct from the Tribe, this tribal law allows the Authority to own and operate its business. This tribal law also provides that the Authority’s obligations and other liabilities are not those of the Tribe and that the obligations and liabilities of the Tribe are not those of the Authority. This law is untested and generally has no direct counterpart in other areas of the law. If this law should prove to be ineffective at limiting the Authority’s liability, the Authority’s business and assets could become subject to claims asserted against the Tribe or its assets. Similarly, the Authority would be liable for such claims if the Tribe waived its sovereign immunity to an extent that allowed enforcement of such claims against the Authority’s business or assets.
On March 18, 2008, the Tribe and the Sonoma County Board of Supervisors entered into a memorandum of agreement (“MOA”) that is expected to settle several long-standing legal disputes between Sonoma County (the “County”) and the Tribe and provide a binding framework for resolving future disputes. Pursuant to the MOA, the Tribe has agreed to pay the County up to $75 million in mitigation fees over the next 12 years to offset the potential losses and impacts to the County resulting from the Tribe’s various ongoing projects and to support the services being provided by the County. In addition to the mitigation fees, the Tribe will pay a fee in lieu of the County’s Transient Occupancy Tax in the amount of 9% of the rental collected on occupied hotel rooms, to be paid quarterly and continuing for five years after the later to occur of the termination of the MOA, as may be extended, or the Tribe’s Compact with the State (which is now terminable in 2020 at the earliest), which fees may be applied to programs and services that serve to promote tourism in the County. Such in lieu fees could total as much as $25 million during the term of the MOA.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 2009.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of River Rock Entertainment Authority and in the capacities and on the dates indicated.