Item 1. Business
General
The Mississippi Band of Choctaw Indians established the Choctaw Resort Development Enterprise to operate the Silver Star Hotel and Casino (the "Silver Star"), and to develop and operate the Golden Moon Hotel and Casino (the "Golden Moon"), and related businesses. References in this annual report to (1) the "Tribe" refer to the Mississippi Band of Choctaw Indians, and (2) the "Enterprise," "we," "our," "ours" and "us" refer to the Choctaw Resort Development Enterprise, a business enterprise of the Tribe.
The Tribe is a federally recognized, self governing Indian tribe with approximately 9,100 enrolled members, most of whom live on or near the Tribe's approximately 31,000-acre reservation in east-central Mississippi. The Indian Gaming Regulatory Act of 1988 permits federally recognized Indian tribes to conduct full-scale 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 Mississippi entered into a compact in 1992, which was approved by the U.S. Secretary of the Interior. The compact authorizes full Class III gaming to the same extent as non-Indian casinos in the State of Mississippi. The compact is not subject to a term of years and will continue unless mutually terminated, imposes no required payments to the State of Mississippi other than for certain agreed upon reimbursement of expenses and limits distributions from gaming revenues to each Tribal member to $1,000 per year. The Tribe is currently the only entity legally authorized to operate land-based casinos in the State of Mississippi.
Description of Business
The Enterprise is a business enterprise of the Tribe that was created on October 12, 1999 to operate the Silver Star and to develop and operate the Golden Moon and related businesses. Effective July 1, 2001, the Tribe contributed the Dancing Rabbit Golf Club (the "Dancing Rabbit"), to the Enterprise and effective July 8, 2002, the Tribe contributed the Geyser Falls Water Theme Park (the "Geyser Falls"), to the Enterprise. No consideration was or is intended to be given to the Tribe for such contributions.
The Silver Star Hotel and Casino
The Silver Star is a full service gaming and entertainment complex located on a 32-acre site on the Tribe's reservation on Highway 16 West approximately 70 miles northeast of Jackson, Mississippi. The Silver Star, along with the Golden Moon, are currently the only land-based casinos in the state and the casinos closest to Birmingham and Tuscaloosa, Alabama. Also, currently there are no legally authorized casinos in Alabama or Georgia.
The Silver Star opened in July 1994 at a total cost of approximately $32 million. The Silver Star originally opened with 100 hotel rooms and has increased its size through three major expansions, increasing the number of rooms to 496 and adding additional gaming space and conference facilities.
The Silver Star is an approximately 518,000 square foot facility that, as of September 30, 2003, featured: a 12-story hotel with 496 rooms, including 89 suites; approximately 82,500 square feet of gaming space with 2,933 slot machines, 70 table games and 11 poker tables; approximately 30,000 square feet of meeting and convention space, which also serves as a 2,000 seat live entertainment and sports venue with sky boxes; 2,308 parking spaces, including an approximately 1,100 space parking garage; seven restaurants with a total of 925 seats; three lounges; three retail outlets; an arcade; an outdoor swimming pool; a full-service spa; fitness facilities; and guest access to the adjacent Dancing Rabbit Golf Club and Geyser Falls.
The Golden Moon Hotel & Casino
The Golden Moon is a full service gaming and entertainment complex located on a 15 acre site that opened on August 26, 2002 at a cost of $259.2 million incurred through September 30, 2003. The Golden Moon, located directly across from the Silver Star, is connected to the Silver Star via an enclosed walkway bridge that spans the highway separating the two casinos. The bridge is enclosed and climate controlled and features moving ramps to ease movement from one casino to the other.
The Golden Moon is an approximately 843,000 square foot facility that, as of September 30, 2003, featured: a 28-story hotel with 571 rooms, including 112 suites and 32 VIP luxury suites; approximately 90,000 square feet of gaming and related circulation area space with 1,726 slot machines and 63 table games; approximately 11,600 square feet of meeting space; 2,581 parking spaces; seven restaurants with a total of 905 seats; five lounges; approximately 8,000 square feet of retail space; a 315-foot tower topped by an 80-foot geodesic sphere housing a restaurant and lounge; an aqua-scape, including fountains and other water effects; an indoor/outdoor swimming pool; fitness facilities; and guest access to the nearby Dancing Rabbit Golf Club and Geyser Falls.
The Dancing Rabbit Golf Club
Adjoining the Silver Star is Dancing Rabbit, a 750-acre property containing two 18-hole championship golf courses designed by golf course designer Tom Fazio and PGA veteran Jerry Pate. Each 18-hole golf course spans over 7,000 yards and offers five tee locations on each hole. The golf club also contains a full-service golf shop, a teaching and practice facility, eight guestrooms, event coordinators and a restaurant and bar. Dancing Rabbit was recently rated among the "25 Best Celebrity Designed U.S. Golf Courses" according to the July 2003 Zagat Survey. Additionally, in May 2003, Dancing Rabbit was rated by Golf Digest as one of "America's 100 Greatest Public Courses" and was ranked 25th in Golf Week's "America's Top 40 Resort Courses" in November 2002. Effective July 1, 2001, the Tribe contributed the Dancing Rabbit to the Enterprise. No consideration was or is intended to be given to the Tribe for such contribution.
The Geyser Falls Water Theme Park
Geyser Falls opened July 8, 2002 at a cost of $32.5 million incurred through September 30, 2003. This modern water park spans 23 acres and is capable of accommodating 7,000 guests per day. The park consists of 12 water slides, a wave pool and a lazy river. There is approximately 1,000 square feet of retail outlet space and numerous food and beverage carts located throughout the park. On May 24, 2003, Clearwater Key, a sand beach and beach club attraction located adjacent to and operated by Geyser Falls began operations. The addition of Clearwater Key added significantly to the amenities offered by Geyser Falls. The nearest competitor is Rapids on the Reservoir, located approximately 70 miles away in Jackson, MS, a 15-year old park that is similar in size to Geyser Falls. The park was contributed to the Enterprise by the Tribe effective July 8, 2002. No consideration was or is intended to be given to the Tribe for such contribution. On June 6, 2003, Hard Rock Beach Club, an independently owned and operated beach- themed restaurant and lounge, opened. The Hard Rock Beach Club is located adjacent to Geyser Falls on the Tribe's Reservation and leases it's operating facility from the Enterprise. The Enterprise and the Hard Rock Beach Club have entered into cooperative marketing arrangements to promote both Geyser Falls and the Hard Rock Beach Club to guests.
The Choctaw Hospitality Institute
The primary purpose of the Choctaw Hospitality Institute ("CHI") is to provide training and education for current and new employees of the Enterprise. CHI and its staff provide classroom and hands-on training for gaming, hospitality and professional employees of the Enterprise. CHI operates from an approximately 27,000 square foot facility located near the Golden Moon and includes classroom space, computer laboratories, slot and table games training areas, a culinary training laboratory and a gift shop. CHI has contracts with various public agencies that provide for reimbursement of certain costs incurred in connection with its training activities and these reimbursements are recognized as revenue when received. CHI officially opened November 9, 2001 at a cost of approximately $2,250,000.
Pearl River Resort
The Tribe markets the Silver Star, Golden Moon, Dancing Rabbit and Geyser Falls under the Pearl River Resort trade name and intends to continue to promote these collective properties as a premier regional entertainment and destination resort.
Market
According to the Mississippi Gaming Commission, the Mississippi gaming market, excluding the Silver Star and Golden Moon, generated $2.7 billion of annual gaming revenues in 2002. Including the Silver Star and Golden Moon, there are currently 31 casinos operating in Mississippi, covering 1.66 million square feet of gaming space and offering approximately 40,000 slot machines and 1,100 table games. Of the 31 casinos, the Silver Star and Golden Moon are the only land-based casinos in the state. Other casinos in the state must operate as dockside casinos and are moored on either the Mississippi River or the Mississippi Gulf Coast. The Silver Star and Golden Moon are separated by an approximately two and one-half hour drive from its nearest significant competitor.
Competition
The Tribe is currently the only legally authorized operator of land-based casinos in Mississippi. The primary competitors of the Silver Star and Golden Moon are the 29 casinos concentrated in Mississippi's three regional gaming markets: the North River Region, the South River Region and the Coastal Region. The Silver Star and Golden Moon currently draw most of their customers from within a 150-mile radius, including Jackson, Mississippi, and also have established customer bases in Birmingham, Montgomery and Tuscaloosa, Alabama.
The North River Region is located in Tunica County, approximately 180 miles northwest of the Silver Star and Golden Moon, and currently has ten dockside casinos along the Mississippi River. Major operators in this market include Boyd Gaming Corporation, Harrah's Entertainment, Inc., Hollywood Casino Corporation, Horseshoe Gaming, LLC, Mandalay Resort Group and Park Place Entertainment, Inc. Casinos in the North River Region attract a significant number of their customers from nearby Memphis, Tennessee and Little Rock, Arkansas.
The South River Region is located along the southern portion of the Mississippi River, approximately 125 miles west of the Silver Star and Golden Moon, and currently has seven dockside casinos in the cities of Vicksburg, Greenville and Natchez. Major operators in this market include Ameristar Casinos, Inc., Harrah's Entertainment, Inc. and Isle of Capri Casinos, Inc. The South River market customer base is primarily regional.
The Coastal Region is located approximately 200 miles south of the Silver Star and Golden Moon along the Mississippi Gulf Coast and is the largest gaming market in Mississippi with dockside and riverboat casinos in Biloxi, Gulfport and Bay St. Louis. Major operators in this market include Park Place Entertainment Inc., Pinnacle Entertainment, Inc., Penn National Gaming, Inc., Isle of Capri Casinos, Inc. and MGM Mirage. In addition to attracting gaming customers from the local area, Gulf Coast casinos, particularly the Beau Rivage operated by MGM Mirage, which is located in a traditional regional beach resort area, tend to draw a significant number of customers from greater Mississippi and from outside the state.
Description of Material Agreements
Tribal-State Compact
The Tribe entered into the Tribal-State Compact for Regulation of Class III Gaming on the Mississippi Band of Choctaw Indians Reservation (the "Compact") in Mississippi on December 4, 1992, which became effective on January 4, 1993 and was subsequently amended on August 26, 1994 and May 24, 1996. The Compact by its terms remains in effect until terminated by mutual consent of the parties or by Act of Congress. The Compact does not require the Tribe to make any contribution to the State of Mississippi except for reimbursement of expenses incurred by the State.
Under the Compact, the Tribe is permitted to operate all Class III gaming allowed by Mississippi law and under the IGRA. This allows the Tribe to conduct most forms of Class III gaming, including slot machines. The Tribe currently has no Class II gaming operations.
The Tribe is authorized to own and operate one or more casinos on its reservation. Reservation lands are land which are held in trust by the United States for the benefit of the Tribe as of October 17, 1988. The Tribe may not conduct Class III gaming on lands acquired by the United States in trust for the benefit of the Tribe after October 17, 1988, unless such lands are located within or contiguous to the boundaries of the Tribe's reservation as of October 17, 1988 and the Secretary of the Interior and the Governor of the State of Mississippi determine that gaming on such lands would be in the Tribe's best interest and not be detrimental to the surrounding community. The Silver Star and Golden Moon are wholly located on the Tribe's reservation.
Other provisions of the Compact provide as follows:
(1) The Tribe, the United States and the State of Mississippi exercise concurrent civil jurisdiction over Class III gaming activities at the Tribe's casinos. The Tribe exercises exclusive criminal and civil jurisdiction over Tribal members and all other Indians to the extent allowed by federal law, the United States retains its criminal jurisdiction over all of the Class III gaming on the reservation, and the State of Mississippi exercises exclusive or concurrent criminal jurisdiction over non-Indians as to some crimes to the extent allowed by federal law.
(2) No person under the age of 21 is permitted to play any Class III game.
(3) Net revenues to the Tribe from Class III gaming will be used only in accordance with budgets adopted by resolution of the Tribal Council and to fund tribal government operations and programs, to provide for the general welfare of the members of the Tribe, to promote economic development, to donate to charitable organizations or to help fund the operations of local government agencies. Per capita payments to tribal members from gaming revenues are limited to $1,000 per year.
(4) The Choctaw Gaming Commission, as established by the tribal government, has primary regulatory authority over the gaming activities of the Tribe. The Mississippi Gaming Commission cooperates with the Choctaw Gaming Commission and its agents have the right to inspect the operations of Class III gaming on reservation lands upon the presentation of appropriate identification to the on-site Choctaw Gaming Commission official without any further notice to the Choctaw Gaming Commission during normal business hours.
(5) The Tribe and the State of Mississippi shall mutually agree upon a budget for necessary and actual expenses that may be reasonably incurred by the State during the calendar year in connection with the gaming activities for regulation, enforcement and state-funded capital improvements that benefit the Tribe's casinos. The Tribe shall reimburse actual expenses specified in such budget incurred by the State within 30 days after the State submits a quarterly payment request. The Tribe and the State shall separately provide $250,000 each year in matching funds to be used for the advertising and promotion of tourism. The Tribe's contribution shall be paid in quarterly installments, conditioned on the Tribe receiving profits of at least $62,500 for the preceding quarter.
(6) The sale of alcoholic beverages on reservation lands designated by the Tribal Council as a resort area is permitted by the State of Mississippi. The Tribe is required to purchase alcoholic beverages exclusively from the state warehouse.
(7) All management officials and key employees and any other person who enters into a management contract with the Tribe is required to have a Class III gaming license or work permit issued by the Choctaw Gaming Commission.
Government Regulation
General
The Enterprise is subject to special federal, state and tribal laws applicable to both commercial relationships with Indians generally and to Indian gaming and the management and financing of casinos owned by an Indian tribe specifically. In addition, the Enterprise is regulated by federal and state laws applicable to the gaming industry generally and to the distribution of gaming equipment. The following description of the regulatory environment in which Indian gaming takes place and in which the Enterprise operates is only a summary and not a complete recitation of all applicable law. Moreover, this particular regulatory environment is very susceptible to changes in public policy. It is impossible to predict how particular provisions will be interpreted from time to time or whether they will remain intact. Changes in such laws could have a material adverse effect on the Enterprise's business, results of operations and financial position.
Possible Changes in Federal Law
Several bills have been introduced in Congress which would amend IGRA. While there have been a number of technical amendments to the law, to date there have been no material changes to IGRA. Any amendment of IGRA could change the governmental structure and requirements within which the Tribe could conduct gaming, and may have a material adverse effect on our results of operations or impose additional regulatory or operational burdens.
Tribal Law and Legal Systems
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 treaty or by the United States Congress. The power of Indian tribes to enact their own laws to regulate gaming, subject to federal laws, derives from the exercise of tribal sovereignty. 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.
Waiver of Sovereign Immunity; Jurisdiction; Exhaustion of Tribal Remedies. Indian tribes enjoy sovereign immunity from unconsented suit similar to that of the states and the United States. In order to sue an Indian tribe (or an agency or instrumentality of an Indian tribe such as the Enterprise), the tribe must have effectively waived its sovereign immunity with respect to the matter in dispute. Further, in most commercial disputes with Indian tribes, the jurisdiction of the federal courts, which are courts of limited jurisdiction, may be difficult or impossible to obtain. A commercial dispute is unlikely to present a federal question, and some courts have ruled that an Indian tribe as a party is not a citizen of any state for purposes of establishing diversity jurisdiction in the federal courts. The remedies available against an Indian tribe also depend, at least in part, upon the rules of comity requiring initial exhaustion of remedies of tribal tribunals and, as to some judicial remedies, the tribe's consent to jurisdictional provisions contained in the disputed agreements. The United States Supreme Court has held that where a tribal court exists, the jurisdiction in that forum must first be exhausted before any dispute arising on or involving the affected tribe's reservation and to which the tribe, a tribal entity such as the Enterprise or a tribal member is a party, can be properly heard by federal courts which would otherwise have jurisdiction. Generally, where a dispute as to the existence of jurisdiction in the tribal forum exists, the tribal court must first rule as to the limits of its own jurisdiction, subject to specific limited exceptions enumerated by the United States Supreme Court.
The Indian Gaming Regulatory Act of 1988
Regulatory Authority. The operation of casinos and of all gaming on Indian land are subject to the Indian Gaming Regulatory Act of 1988. IGRA is administered by the National Indian Gaming Commission, or NIGC, an independent agency within the U.S. Department of Interior, which exercises primary federal regulatory responsibility over Indian gaming. The NIGC has exclusive 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. Certain responsibilities under IGRA (such as the approval of per capita distribution plans to tribal members and the approval of transfer of lands into trust status for gaming) are retained by the Bureau of Indian Affairs, or BIA, which is a bureau of the United States Department of the Interior. The BIA also has responsibility to review and approve land leases and other agreements relating to Indian lands. Criminal enforcement is a shared responsibility of the United States Department of Justice, the state in which the tribe is located and the tribe, in accordance with federal law.
The NIGC is empowered to inspect and audit all Indian gaming facilities, to conduct background checks on all persons associated with Indian gaming, to hold hearings, issue subpoenas, take depositions, adopt regulations and 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 specific provisions of IGRA. These rules govern, among other things, the submission and approval of tribal gaming ordinances or resolutions and require an Indian tribe to have the sole proprietary interest in and responsibility for the conduct of any gaming. Tribes are required to issue gaming licenses only under articulated standards, to conduct or commission financial audits of their gaming enterprises, to perform or commission background investigations for primary management officials and key employees and to 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 of gaming operation employees.
Classes of Gaming. IGRA classifies games 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, pulltabs, lotto, punch boards, non-banked card games, tip jars, instant bingo and other games similar to bingo, if those games are played at the same location as bingo is played. "Class III Gaming" includes all other forms of gaming, such as slot machines, video casino games, table games and other commercial gaming, such as sports betting and pari-mutuel wagering.
Class I Gaming on Indian lands is within the exclusive jurisdiction of the Indian tribes and is not subject to IGRA. Class II Gaming is permitted on Indian lands if: the state in which the Indian lands lie permits such 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 which has been approved by the NIGC; an Indian tribe has sole proprietary interest and responsibility for the conduct of gaming; 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, which is a written agreement between the tribal government 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. Such 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 such laws and regulations, taxation by the Indian tribe of such activity in amounts comparable to those amounts assessed by the state for comparable activities, remedies for breach, standards for the operation of such activity and maintenance of the gaming facility, including licensing and any other subjects that are directly related to the operation of gaming activities. While the terms of tribal-state compacts vary from state to state, compacts within one state tend to be substantially similar. Tribal-state compacts usually specify the types of permitted games, establish technical standards for video gaming machines, set maximum and minimum machine payout percentages, entitle the state to inspect casinos, require background investigations and licensing of casino employees and may require the tribe to pay a portion of the state's expenses for establishing and maintaining regulatory agencies. Some tribal-state compacts are for set terms, while others are for indefinite duration. The Tribe's Compact has no fixed termination date and will continue in force until terminated by mutual agreement of the State of Mississippi and the Tribe or by Act of Congress.
There has been litigation challenging the authority of governors, under state law, to enter into tribal-state compacts. Federal courts have upheld the authority of the governors of Louisiana and Mississippi to enter into compacts, while the highest state courts of New Mexico and Kansas have held that the governors of those states did not have authority to enter into such compacts without the consent or authorization of the legislatures of those states. In the New Mexico and Kansas cases, the courts held that compacting is a legislative function under the respective state constitutions. The court in the New Mexico case also held that then existing state law did not permit casino-style gaming.
The Enterprise's operation of gaming is subject to the requirements and restrictions contained in the Compact. The Compact authorizes the Tribe to conduct most forms of Class III gaming. For additional information, see "Description of Material Agreements-The Compact".
Tribal Ordinances. Under IGRA, except to the extent otherwise provided in a tribal-state compact as described below, Indian tribal governments have primary regulatory authority over Class III Gaming on land within a tribe's jurisdiction. Therefore, the Enterprise's gaming operations, and persons engaged in gaming activities, are guided by and subject to the provisions of the Tribe's ordinances and regulations regarding gaming.
IGRA requires that the NIGC review tribal gaming ordinances and authorizes the NIGC to approve such ordinances only if they meet specific requirements relating to (1) the ownership, security, personnel background, recordkeeping and auditing of a tribe's gaming enterprises; (2) the use of the revenues from such gaming; and (3) the protection of the environment and the public health and safety.
Employee and Labor Relations
As of September 30, 2003, the Enterprise had 3,153 full-time employees. The number of employees has decreased from September 30, 2002 due to management's continuing efforts to consolidate certain casino and administrative responsibilities and to improve operational efficiency. Pursuant to the ordinance establishing the Enterprise, we are required to extend preferential treatment to qualified members of the Tribe in recruitment, employment and promotion. Our employees are not covered by any collective bargaining agreements. The Enterprise believes that our labor relations with our employees are good.
Item 2.
Item 2. Properties
The Enterprise currently operates the Silver Star, the Golden Moon, the Dancing Rabbit, Geyser Falls and Choctaw Hospitality Institute. Effective July 1, 2001 and July 8, 2002, the Tribe contributed the Dancing Rabbit and Geyser Falls, respectively, to the Enterprise. No consideration was or is intended to be given to the Tribe for such contributions. The Enterprise, however, does not and will not own the real property comprising the Silver Star, Golden Moon, Dancing Rabbit and Geyser Falls. Instead, the United States government holds and will continue to hold all of the Enterprise's real property in trust for the benefit of the Tribe.
Item 3.
Item 3. Legal Proceedings
The Enterprise is subject to various claims and litigation in the normal course of business. In the opinion of management, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse effect on the Enterprise's financial condition, results of operations 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 the Registrant's Common Stock and Related Stockholder Matters
The Enterprise has not issued or sold any equity securities.
Item 6.
Item 6. Selected Financial Data
Selected Historical Financial and Other Data
Prior to the establishment of the Enterprise, the Silver Star operated as a separate operating business entity of the Tribe. On October 12, 1999, the Tribe contributed the Silver Star to the Enterprise in a reorganization. This reorganization was accounted for as a reorganization of entities under common control. Effective July 1, 2001, the Tribe contributed the Dancing Rabbit to the Enterprise. Prior to its contribution to the Enterprise, the Dancing Rabbit operated as a separate, wholly-owned business enterprise of the Tribe. This reorganization has also been accounted for as a reorganization of entities under common control. Accordingly, the financial statements of the Enterprise for all periods are presented as if the reorganizations occurred at the beginning of the earliest period presented and include the accounts of the Enterprise, the Silver Star, and the Dancing Rabbit on a historical cost basis, in a manner similar to the treatment found in a pooling of interests transaction. On July 8, 2002 and August 26, 2002, the Enterprise began operating Geyser Falls and Golden Moon, respectively. All intercompany balances and transactions have been eliminated. You should read the following financial data in conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the related notes included in this Form 10-K.
(a) In December 1993, the Enterprise entered into a management agreement with Boyd Mississippi, Inc. ("Boyd"), a wholly owned subsidiary of Boyd Gaming Corporation, to finance the construction and operate the Silver Star. The term of the management agreement was seven years, commencing upon the opening of the Silver Star on July 1, 1994. The Enterprise effected an early termination of the management agreement on January 31, 2000. Pursuant to the provisions of the termination agreement, the Enterprise made a termination payment to Boyd in the amount of $72.0 million on February 1, 2000. The termination payment is reflected in the second quarter for the fiscal year ended September 30, 2000. No further management fee payments are required to be made to Boyd under the management agreement.
(b) Proceeds from a $75 million term loan were used to make the termination payment referred to above on January 31, 2000. To finance the construction of the Golden Moon, the Enterprise issued $200 million in unsecured senior notes in March 2001 and entered into a $125 million revolving credit facility. At September 30, 2003, $95,000,000 was outstanding under the revolving credit facility.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Enterprise is a business enterprise of the Tribe. The Tribe established the Enterprise on October 12, 1999 for the purpose of operating the Silver Star and developing and operating the Golden Moon and related businesses. Effective July 1, 2001, the Tribe contributed the Dancing Rabbit to the Enterprise in a reorganization. On October 12, 1999, the Tribe contributed the Silver Star to the Enterprise in a reorganization. No consideration was or is intended to be given to the Tribe for such contribution. Prior to the establishment of the Enterprise, the Silver Star operated as a separate, wholly-owned business entity of the Tribe. Both reorganizations were accounted for as reorganizations of entities under common control. Accordingly, the financial statements of the Enterprise for all periods are presented as if the reorganizations occurred at the beginning of the earliest period presented and include the accounts of the Enterprise, the Silver Star and the Dancing Rabbit on a historical cost basis, in a manner similar to the treatment found in a pooling of interests transaction.
- On July 1, 1994, the Silver Star commenced operations as a hotel and casino on the Tribe's reservation in east-central Mississippi. At its opening, the Silver Star had approximately 1,300 gaming positions, 100 hotel rooms and three restaurants.
- Hotel, convention and casino expansions and other major renovations were undertaken at the Silver Star in fiscal years 1995, 1996 and 1997.
- At the beginning of fiscal 1998, the Silver Star had approximately 2,800 slot machines, 84 table games, 473 hotel rooms, five restaurants and a spa and fitness facility.
- In November 2000, a 1,100 space parking garage was completed adjacent to the Silver Star.
- On November 9, 2001, CHI commenced operations from an approximately 27,000 square foot facility located near the Golden Moon. The CHI facility includes classroom space, computer laboratories, slot and table game training areas, a culinary training laboratory and a gift shop.
- On July 8, 2002, Geyser Falls commenced operations. This modern water park spans 23 acres and is capable of accommodating 7,000 guests per day. The park consists of 12 water slides, a wave pool and a lazy river. There is approximately 1,000 square feet of retail outlet space and numerous food and beverage carts located throughout the park.
- On August 26, 2002, the Golden Moon commenced operations. This 28 floor full-service hotel and casino has approximately 90,000 square feet of gaming and related circulation space, 1,726 slot machines, 63 table games, 571 hotel rooms and seven restaurants as of September 30, 2003.
- As of September 30, 2003, the Silver Star had approximately 82,500 square feet of gaming space, 2,933 slot machines, 70 table games, 11 poker tables, 496 hotel rooms, 30,000 square feet of meeting and convention space and seven restaurants.
Fiscal Year Ended September 30, 2003 Compared to Fiscal Year September 30, 2002
Net Revenues. Net revenues for the fiscal year ended September 30, 2003 were $298.3 million compared to $248.2 million for the fiscal year ended September 30, 2002. The $50.1 million, or 20.2%, increase in net revenues was primarily due to an increase in gaming revenues attributable to the opening of the Golden Moon on August 26, 2002. Complimentary revenues are included in gross revenues but are deducted as a promotional allowance to arrive at net revenues.
Casino. Casino revenues were $265.5 million for fiscal 2003 compared to $227.7 million for fiscal 2002, an increase of $37.8 million, or 16.6%. The increase in casino revenue for the fiscal year is discussed below.
Table game drop was $213.4 million for fiscal 2003 compared to table game drop of $167.4 million for fiscal 2002, an increase of $46.0 million, or 27.5%. Table game revenue was $36.8 million for fiscal 2003 compared to $31.3 million for fiscal 2002, an increase of $5.6 million, or 18.0%. The increase in revenue is the result of higher table drop that is attributable to the opening of the Golden Moon, offset somewhat by a lower hold percentage. Table game hold percentage was 17.2% for fiscal 2003 compared to 18.7% for fiscal 2002. Table game hold percentage is reasonably predictable over the long-term, but can fluctuate significantly from quarter to quarter, affecting table games revenue.
Slot revenues were $227.0 million for fiscal 2003, compared to $195.0 million for fiscal 2002, an increase of $32.0 million, or 16.4%. This increase is primarily due to an increase in coin-in for fiscal 2003, compared to fiscal 2002. The increase in coin-in is due primarily to the opening of the Golden Moon in late 2002.
Food and beverage. Food and beverage revenues increased $9.6 million, or 42.5%, from $22.6 million in fiscal 2002 to $32.2 million in fiscal 2003. Complimentary food and beverage revenues totaled $22.4 million for fiscal 2003 compared to $16.0 million for fiscal 2002, an increase of 40.0%. During fiscal 2003, the resort turned 2,085,000 restaurant covers with an average revenue per cover of $11.49 compared to 1,402,000 restaurant covers with an average revenue per cover of $12.75 for fiscal 2002.
Rooms. Room revenues were $16.9 million for fiscal 2003 compared to $9.4 million for fiscal 2002, an increase of $7.5 million, or 79.8%. This reflects an increase in average daily room rate to $57.37 for fiscal 2003 from $56.25 for fiscal 2002. Our occupancy rate decreased to 77.6% for fiscal 2003 compared to 87.9% for fiscal 2002. With the opening of the Golden Moon in August 2002, the Enterprise had a total of 1,067 rooms for fiscal 2003 compared to 496 rooms for the majority of fiscal 2002. During fiscal 2003, 59.1% of our hotel revenue was attributable to rooms occupied by resort customers on a complimentary basis. These complimentary revenues totaled $10.0 million for fiscal 2003 compared to $5.2 million for fiscal 2002, an increase of 92.3%.
Other. Other revenues were $19.2 million and $11.3 million for fiscal 2003 and 2002, respectively, representing a $7.9 million, or 69.9% increase. Other revenues are comprised of revenue from the casino's various retail outlets, the convention center, fees earned from cash advances to customers, other miscellaneous items, the Dancing Rabbit, Geyser Falls and the Choctaw Hospitality Institute. The increase in other revenue is primarily attributable to an increase in retail, golf revenue, water park revenues and revenues generated by Choctaw Hospitality Institute. Retail revenues were $5.0 million for fiscal 2003 compared to $2.0 million for fiscal 2002, an increase of $3.0 million or 150.0%. Convention center revenues were $2.1 million for fiscal 2003 compared to $2.2 million for fiscal 2002, a decrease of $0.1 million or 4.6%. Golf revenues were $4.3 million for fiscal 2003 compared to $3.8 million for fiscal 2002, an increase of $0.5 million or 13.2%. The increase in golf revenue is attributable to increased golf rounds due to the combined marketing efforts of the Dancing Rabbit, Silver Star and Golden Moon. Fiscal 2003 revenues from Geyser Falls, which opened on July 8, 2002, were $4.4 million compared to $1.2 million for fiscal 2002, while revenue generated by Choctaw Hospitality Institute totaled $1.4 million compared to $0.4 million in fiscal 2002. For fiscal 2003, other revenue including telephone, spa charges and miscellaneous items was $2.0 million compared to $1.7 million for fiscal 2002, a $0.3 million or 17.6% increase.
Promotional Allowances. Promotional allowances were $35.6 million for fiscal 2003 compared to $22.8 million for fiscal 2002, an increase of $12.8 million, or 56.1%. During fiscal 2003, promotional allowances increased to 13.4% of casino revenues from 10.0% during fiscal 2002. The increase in promotional allowances is the result of management's efforts to reward existing guests and generate visits from new customers in our outer markets in an effort to increase revenues and market share.
Costs and Expenses. Total costs and expenses were $220.4 million for fiscal 2003 compared to $151.2 million for fiscal 2002, an increase of $69.2 million, or 45.8%. The increase is primarily attributable to additional operating costs associated with operations of the Golden Moon. Included in total costs and expenses for fiscal 2002 are $9.7 million and $0.8 million of preopening costs related to Golden Moon and Geyser Falls, respectively.
Casino. Casino costs and expenses were $83.1 million for fiscal 2003, compared to $61.0 million for fiscal 2002, an increase of $22.1 million, or 36.2%. This increase is primarily attributable to the additional operating costs incurred in connection with the operation of Golden Moon.
Food and Beverage. Food and beverage costs were $13.7 million for fiscal 2003, compared to $8.3 million for fiscal 2002, an increase of $5.4 million, or 65.1%. This increase is primarily attributable to the increase in the number of restaurant covers and the additional operating costs incurred in connection with the operation of Golden Moon.
Other. Other costs and expenses were $12.5 million and $9.2 million for fiscal 2003 and 2002, respectively, representing a $3.3 million, or 35.8% increase. Other expenses are comprised of the costs related to the operation of retail outlets and the convention center and the operating expenses of the Dancing Rabbit, Geyser Falls and the Choctaw Hospitality Institute. Golf operating expenses were $5.3 million for fiscal 2003 compared to $5.1 million for fiscal 2002, an increase of $0.2 million or 3.9%. The increase in golf operating expenses is attributable to increased golf rounds. Water park operating expenses were $3.7 million for fiscal 2003 compared to $0.7 million for fiscal 2002, an increase of $3.0 million or 428.6%.
Selling, General and Administrative. Selling, general and administrative costs and expenses were $66.4 million for fiscal 2003 compared to $40.2 million for fiscal 2002, an increase of $26.2 million, or 65.2%. The increase in selling, general and administrative for fiscal 2003 versus that of fiscal 2002 is primarily due to additional administrative and marketing costs associated with the operation of Golden Moon.
Preopening Expense. Preopening expense was $ -0- and $10.5 million for the fiscal years ended September 30, 2003 and 2002, respectively. Preopening expense is comprised primarily of salaries and wages, materials and supplies and other costs incurred in connection with the opening of the Golden Moon and Geyser Falls. During fiscal 2002, the Enterprise incurred preopening expense of $9.7 million and $0.8 million related to Golden Moon and Geyser Falls respectively.
Depreciation Expense. Depreciation expense was $30.8 million for fiscal 2003 compared to $14.2 million for fiscal 2002, an increase of $16.6 million or 117%. The increase in depreciation expense is primarily attributable to the opening of Golden Moon and Geyser Falls, both of which occurred during summer 2002.
Operating Income (loss). Operating income was $77.9 million for fiscal 2003 compared to operating income of $97.0 million for fiscal 2002, a decrease of $19.1 million. The decrease is primarily attributable to additional operating costs incurred related to operation of Golden Moon, and to a lesser extent, the revenue and expense variations previously discussed.
Other Income (Expense). Other expense was $24.1 million for fiscal 2003 compared to other expense of $6.8 million for fiscal 2002, representing an increase of $17.3 million, which is primarily attributable to an increase in interest expense of $12.6 million, a decrease in interest income of $1.5 million, the recognition of $3.0 million other income during fiscal 2002 due to the insurance settlement described below and a $0.2 million decrease in other income related to the effect of interest rate changes on the interest swap agreement. Other income (expense) is comprised of interest income minus interest expense (net of capitalized interest) and other expense. Interest capitalized during the year ended September 30, 2003 was $ -0- compared to $10.0 million for the year ended September 30, 2002. The decrease in interest income is due to decreased cash and investment balances that were used to fund Golden Moon construction. On January 10, 2002 a $3.0 million settlement agreement for the insurance claim related to the April 2001 flood was entered into between the Enterprise and the insurance carriers. The Enterprise received the entire amount of the settlement during the quarter ended March 31, 2002 and recognized $2.5 million of other income and $0.5 million as a gain on disposal of assets.
Effective October 1, 2000, the Enterprise adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities", as amended by Statement of Financial Accounting Standards No. 138. The interest rate swap agreement referred to above is defined as a derivative instrument under SFAS 133. Although the Enterprise had designated this interest rate swap agreement as a hedge since its inception on February 1, 2000, the Enterprise did not elect to seek hedge accounting for this agreement upon adoption of SFAS 133. Accordingly, the Enterprise recognized other income of $0.8 million and other income of $1.0 million for 2003 and 2002, respectively, due to the effect of interest rate changes on the interest rate swap agreement.
Fiscal Year Ended September 30, 2002 Compared to Fiscal Year Ended September 30,
Net Revenues. Net revenues for the fiscal year ended September 30, 2002 were $248.2 million compared to $237.6 million for the fiscal year ended September 30, 2001. The $10.6 million, or 4.5%, increase in net revenues was primarily due to an increase in gaming revenues attributable to the opening of the Golden Moon on August 26, 2002. Complimentary revenues are included in gross revenues but are deducted as a promotional allowance to arrive at net revenues.
Casino. Casino revenues were $227.7 million for fiscal 2002 compared to $221.3 million for fiscal 2001, an increase of $6.4 million, or 2.9%. The increase in casino revenue for the fiscal year is discussed below.
Table game drop was $167.4 million for fiscal 2002 compared to table game drop of $171.4 million for fiscal 2001, a decrease of $4.0 million, or 2.3%. Table game revenue was $31.3 million for fiscal 2002 compared to $33.4 million for fiscal 2001, a decrease of $2.1 million, or 6.3%. The decrease in revenue is the result of lower table drop and a lower hold percentage. Table game hold percentage was 18.7% for fiscal 2002 compared to 19.5% for fiscal 2001. Table game hold percentage is reasonably predictable over the long-term, but can fluctuate significantly from quarter to quarter, affecting table games revenue.
Slot revenues were $195.0 million for fiscal 2002, compared to $186.6 million for fiscal 2001, an increase of $8.4 million, or 4.5%. This increase is primarily due to the increase in coin-in for fiscal 2002, compared to fiscal 2001. The increase in coin-in is due primarily to the opening of the Golden Moon in 2002.
Food and beverage. Food and beverage revenues increased $1.6 million, or 7.6%, from $21.0 million in fiscal 2001 to $22.6 million in fiscal 2002. Complimentary food and beverage revenues totaled $16.0 million for fiscal 2002 compared to $14.9 million for fiscal 2001, an increase of 7.4%. During fiscal 2002, the resort turned 1,401,900 restaurant covers with an average revenue per cover of $12.75 compared to 1,357,700 restaurant covers with an average revenue per cover of $11.72 for fiscal 2001.
Rooms. Room revenues were $9.4 million for fiscal 2002 compared to $8.5 million for fiscal 2001, an increase of $0.9 million, or 10.6%. This reflects an increase in average daily room rate to $56.25 for fiscal 2002 from $52.67 for fiscal 2001. Our occupancy rate decreased to 87.9% for fiscal 2002 compared to 89.6% for fiscal 2001. During fiscal 2002, 55.3% of our hotel revenue was attributable to rooms occupied by resort customers on a complimentary basis. These complimentary revenues totaled $5.2 million for fiscal 2002 compared to $5.1 million for fiscal 2001, an increase of 2.0%.
Other. Other revenues were $11.3 million and $9.5 million for fiscal 2002 and 2001, respectively, representing an $1.8 million, or 19.0% increase. Other revenues are comprised of revenue from the casino's various retail outlets, the convention center, fees earned from cash advances to customers, other miscellaneous items, the Dancing Rabbit, Geyser Falls and the Choctaw Hospitality Institute. The increase in other revenue is directly attributable to an increase in golf revenue, water park revenues and revenues generated by Choctaw Hospitality Institute. Convention center revenues were $2.2 million for fiscal 2002 compared to $2.3 million for fiscal 2001, a decrease of $0.1 million or 4.3%. Golf revenues were $3.8 million for fiscal 2002 compared to $3.6 million for fiscal 2001, an increase of $0.2 million or 5.6%. The increase in golf revenue is attributable to increased golf rounds due to the combined marketing efforts of the Dancing Rabbit, Silver Star and Golden Moon. Fiscal 2002 revenues from Geyser Falls, which opened on July 8, 2002, were $1.2 million, while revenue generated by Choctaw Hospitality Institute totaled $0.4 million compared to none for both facilities in fiscal 2001.
Promotional Allowances. Promotional allowances were $22.8 million for fiscal 2002 compared to $22.6 million for fiscal 2001, an increase of $0.2 million, or 0.9%. During fiscal 2002, promotional allowances decreased to 10.0% of casino revenues from 10.2% during fiscal 2001.
Costs and Expenses. Total costs and expenses were $151.2 million for fiscal 2002 compared to $128.4 million for fiscal 2001, an increase of $22.8 million, or 17.8%. The increase is primarily attributable to preopening costs incurred related to the opening of the Golden Moon and Geyser Falls as well as additional operating costs associated with operations of the Golden Moon and Geyser Falls. Included in total costs and expenses for fiscal 2002 are $9.7 million and $0.8 million of preopening costs related to Golden Moon and Geyser Falls, respectively.
Casino. Casino costs and expenses were $61.0 million for fiscal 2002, compared to $60.1 million for fiscal 2001, an increase of $0.9 million, or 1.5%. This increase is primarily attributable to the additional operating costs incurred in connection with operation of Golden Moon.
Food and Beverage. Food and beverage costs were $8.3 million for fiscal 2002, compared to $7.7 million for fiscal 2001, an increase of $0.6 million, or 7.8%. This increase is primarily attributable to the increase in the number of restaurant covers and the additional operating costs incurred in connection with operation of Golden Moon.
Other. Other costs and expenses were $9.2 million and $7.4 million for fiscal 2002 and 2001, respectively, representing a $1.8 million, or 24.3% increase. Other expenses are comprised of the costs related to the operation of retail outlets and the convention center and the operating expenses of the Dancing Rabbit and Geyser Falls. Golf operating expenses were $5.1 million for fiscal 2002 compared to $4.2 million for fiscal 2001, an increase of $0.9 million or 21.4%. The increase in golf operating expenses is attributable to increased golf rounds. Water park operating expenses were $0.7 million for fiscal 2002.
Selling, General and Administrative. Selling, general and administrative costs and expenses were $40.2 million for fiscal 2002 compared to $33.6 million for fiscal 2001, an increase of $6.6 million, or 19.6%. Approximately $1.0 million of this increase is due to the payment during the year ended September 30, 2002, as required by the "Settlement and General Release Agreement" with the former Chief Executive Officer of the Silver Star. The balance of the increase is due to additional administrative costs incurred related to the opening of the Golden Moon.
Preopening Expense. Preopening expense was $10.5 million and $0.4 million for the fiscal years ended September 30, 2002 and 2001, respectively. Preopening expense is comprised primarily of salaries and wages, materials and supplies and other costs incurred in connection with the opening of the Golden Moon and Geyser Falls. During fiscal 2002, the Enterprise incurred preopening expense of $9.7 million and $0.8 million related to Golden Moon and Geyser Falls respectively. During fiscal 2001, all preopening expense incurred was related to the Golden Moon.
Operating Income (loss). Operating income was $97.0 million for fiscal 2002 compared to operating income of $109.3 million for fiscal 2001, a decrease of $12.3 million. The decrease was due primarily to preopening costs incurred related to Golden Moon, and to a lesser extent, the revenue and expense variations previously discussed.
Other Income (Expense). Other expense was $6.8 million for fiscal 2002 compared to other expense of $11.3 million for fiscal 2001, representing a decrease of $4.5 million, which is primarily attributable to a decrease in interest expense of $0.7 million, a decrease in interest income of $2.0 million, the recognition of $3.0 million other income due to the insurance settlement described below and a $1.0 million increase in other income related to the effect of interest rate changes on the interest swap agreement. Other income (expense) is comprised of interest income minus interest expense (net of capitalized interest) and other expense. Interest capitalized during the year ended September 30, 2002 was $10.0 million compared to $1.2 million for the year ended September 30, 2001. The decrease in interest income is due to decreased cash and investment balances that were used to fund Golden Moon construction. On January 10, 2002 a $3.0 million settlement agreement for the insurance claim related to the April 2001 flood was entered into between the Enterprise and the insurance carriers. The Enterprise received the entire amount of the settlement during the quarter ended March 31, 2002 and recognized $2.5 million of other income and $0.5 million as a gain on disposal of assets.
Effective October 1, 2000, the Enterprise adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities", as amended by Statement of Financial Accounting Standards No. 138. The interest rate swap agreement referred to above is defined as a derivative instrument under SFAS 133. Although the Enterprise had designated this interest rate swap agreement as a hedge since its inception on February 1, 2000, the Enterprise did not elect to seek hedge accounting for this agreement upon adoption of SFAS 133. Accordingly, the Enterprise recognized other income of $1.0 million and other expense of $1.8 million for 2002 and 2001, respectively, due to the effect of interest rate changes on the interest rate swap agreement.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the recorded amount of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Significant accounting policies employed by the Enterprise, including the use of estimates and assumptions are presented in the Notes to the Consolidated Financial Statements. Management bases its estimates on it historical experience, together with other relevant factors, in order to form the basis for making judgments that will affect the carrying value of assets and liabilities. On an ongoing basis, management evaluates its estimates and makes changes to carrying values as deemed necessary and appropriate. The Enterprise believes that estimates related to the following areas involve a high degree of judgment and/or complexity: the allowance for doubtful accounts receivable, estimated accruals for jackpots and slot club bonus points, self insurance related to employee health plans and contingencies related to customer claims in the ordinary course of business.
The Enterprise maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in bad debt expense. The Enterprise determines the adequacy of this allowance by periodically evaluating individual customer receivables and considering the customer's financial condition, credit history and current economic conditions. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, the Enterprise may increase the allowance.
The Enterprise maintains accruals for health and workers compensation self-insurance and slot club point redemption, which are classified as accrued liabilities in the balance sheets. The Enterprise determines the adequacy of these accruals by periodically evaluating the historical experience and projected trends related to these accruals. If such information indicates that these accruals are overstated or understated, the Enterprise will adjust the assumptions utilized in the methodologies and reduce or provide for additional accruals as appropriate.
The Enterprise is subject to various claims and legal actions in the ordinary course of business. Some of these matters include personal injuries to customers and damage to customers' personal assets. The Enterprise estimates guest claims and accrues for such liability based on historical experience in accrued liabilities in the balance sheets.
Liquidity and Capital Resources
As of September 30, 2003, 2002, and 2001, the Enterprise held cash and cash equivalents of $49.7 million, $72.8 million, and $81.8 million, respectively. Our principal sources of liquidity have consisted of cash provided by operating activities and debt financing. Cash provided by operating activities was $77.8 million in fiscal 2003 compared to $111.5 million in fiscal 2002. The decrease of $33.7 million was due primarily to the decrease in net income to $53.8 million in fiscal 2003 from $90.3 million in fiscal 2002. Cash provided by operating activities was $117.2 million in fiscal 2001. The $5.7 million decrease in cash provided by operating activities in 2002 over 2001 was due primarily to the decrease in net income to $90.3 million in fiscal 2002 from net income of $98.0 million in fiscal 2001.
Cash used in investing activities in the fiscal year ended September 30, 2003 totaled $39.6 million of which $42.2 million was used for capital expenditures. During fiscal 2003, cash provided by investing activities totaled $2.6 million and was the result of changes in restricted cash. Cash used in investing activities in the fiscal year ended September 30, 2002 totaled $118.6 million of which $201.8 million was used for capital expenditures. The Enterprise also received $82.5 million from the sale of short-term investments in the fiscal year ended September 30, 2002. Cash used in investing activities in the fiscal year ended September 30, 2001 for capital expenditures totaled $47.6 million. The Enterprise also purchased $103.3 million in short term investments and received $21.4 million from the sale of short term investments in the fiscal year ended September 30, 2001. The source of cash for the majority of investing activities noted above was from the proceeds of debt financing activities related to construction of Golden Moon.
The Enterprise's outstanding revolving credit facility restricts our ability to make capital expenditures. The Enterprise may not spend more than $10 million on maintenance capital expenditures and improvements in any fiscal year for each of the Silver Star and Golden Moon. In addition, the Enterprise is limited to a maximum construction expenditure, exclusive of the Golden Moon project, which includes the parking garage adjacent to the Silver Star, of $25 million during the term of this revolving credit facility. In the ordinary course of business, the Enterprise will continue to maintain and improve the Silver Star and Golden Moon as necessary to continue to provide a competitive and attractive facility to our customers. The Enterprise intends to make capital expenditures up to the amounts permitted under our credit facilities to maintain the property.
During the years ended September 30, 2003, 2002, and 2001, the Tribe made contributions of property and equipment to the Enterprise of $11.1 million, $11.4 million, and $3.2 million, respectively. Contributions of property and equipment to the Enterprise are made at the Tribe's discretion and the Tribe is not legally obligated to continue making any such contributions in the future. The revolving credit facility does not limit the Tribe's ability to make contributions of property and equipment to the Enterprise, and any such contribution would not impact the Enterprise's $10 million capital expenditure limitation described above.
The Enterprise had $-0- and $2.6 million of restricted cash at September 30, 2003 and 2002 respectively. The balances were required by the Boyd management agreement for employment, workers compensation and other third party claims not otherwise covered by insurance proceeds that may be filed or become due after the date the management agreement was terminated. The claims reserve survived until January 31, 2003, and the unused portion of the claims reserve became unrestricted at that time.
Cash used in financing activities was $61.3 million in the fiscal year ended September 30, 2003 compared to cash used in financing activities of $1.9 million in the fiscal year ended September 30, 2002. The primary use of cash in each period was distributions to the Tribe of $83.5 million and $83.8 million in the fiscal years ended September 30, 2003 and 2002, respectively. Additionally during fiscal 2003, the Enterprise made repayments of long term debt totaling $5.3 million, which included $5.0 million on the revolving credit facility and $0.3 million to the Tribe. The primary source of funds provided by financing activities was $25.0 million and $75.0 million drawn on the revolving credit facility in 2003 and 2002, respectively, and cash contributions of $2.7 million and $6.9 million from the Tribe in 2003 and 2002, respectively. Cash provided by financing activities was $59.5 million in fiscal 2001. The primary use of cash for fiscal 2001 was distributions to the Tribe of $96.9 million and payments of $62.5 million on the term loan. The primary sources of cash during fiscal 2001 was the issuance of $200.0 million in notes and cash contributions from the Tribe totaling $24.7 million.
Pursuant to the indenture dated March 30, 2001, the Enterprise used a portion of the proceeds from the offering of the notes to repay the remaining outstanding balance under the term loan and has used the remaining proceeds to finance the construction of the Golden Moon.
On December 19, 2000, the Enterprise entered into a $125.0 million reducing senior secured revolving credit facility. The Facility has a maturity date of December 28, 2005. Borrowings available under the Facility reduce quarterly beginning on December 31, 2002 in the amount of $6.25 million per quarter, until the amount of the facility has been reduced to $40 million. Accordingly, borrowing capacity under the Facility has been reduced to $100.0 million of which $95.0 million was outstanding at September 30, 2003. The interest rate on the Facility varies based on the Enterprise's total recourse debt to gaming EBITDA ratio, as defined. The Facility contains certain affirmative and negative covenants, including limiting the Enterprise's Total Leverage Ratio and Fixed Charge Coverage Ratio, as defined, during the term of the agreement.
The terms of the notes and the revolving credit facility restrict the Enterprise's ability to sell or dispose of assets, incur additional debt or contingent obligations, extend credit, make investments, commingle our assets with the assets of other Tribal business enterprises, require us to maintain certain financial ratios, limit our ability to make distributions to the Tribe and limit the amount of capital expenditures we may incur related to the Silver Star and Golden Moon.
The notes contain specific covenants that restrict our ability to borrow additional money, pay dividends or make other distributions, make investments, create liens, enter into specific transactions with affiliates, and sell specific assets or merge with or into another person. Under limited circumstances, the covenant limiting our ability to make specific payments, distributions and investments will be suspended. The indenture prescribes that the Enterprise may make an annual distribution to the Tribe (the "Annual Service Payment") in the amount of $55 million per year (payable in equal monthly installments), which amount is increased annually on each September 30, commencing with September 30, 2001, by 5% per annum. Any distributions to the Tribe are made at the Tribe's discretion, but distributions other than the Annual Service Payment (referred to as "Restricted Payments") are limited by the covenants of the indenture. The most significant of such covenants limit Restricted Payments such that the cumulative Restricted Payments from inception of the indenture shall not exceed 50% of the Enterprise's cumulative net income (with measurement commencing on January 1, 2001) plus $75 million. Restricted Payments are further limited by the Indenture's requirement for the Enterprise to maintain a minimum Fixed Charge Coverage Ratio (as defined) of 2.5 to 1 (increasing to 3.0 to 1 after December 31, 2001), and thus limiting the Enterprise's ability to incur additional debt to make Restricted Payments.
During the three months ended December 31, 2002, the Enterprise violated covenants related to the Fixed Charge Coverage Ratio and the Total Leverage Ratio under the Facility. The Enterprise received a waiver for such covenant violations from the Facility lender. The Enterprise is required to meet these covenants each quarter. Accordingly the Enterprise entered negotiations relating to modification of these covenants with the Facility lender in order to ensure future compliance. On March 25, 2003 the Enterprise successfully completed these negotiations, which resulted in modification of terms of the credit facility. Based on the amended terms of the credit facility, the Enterprise is in compliance with the Fixed Charge Coverage Ratio and the Total Leverage Ratio at September 30, 2003 and management believes the Enterprise will achieve compliance with both the Fixed Charge Coverage Ratio and the Total Leverage Ratio going forward. As of September 30, 2003, the Enterprise was in compliance with all other debt covenants under the Notes and the Facility.
As of September 30, 2003 the Tribe had outstanding liabilities of $1.9 million under credit facilities with $2.4 million available in borrowings, which did not preclude recourse to assets held by the Enterprise.
The Enterprise believes that existing cash balances, short-term investments, operating cash flow and anticipated borrowings under the credit facility and the proceeds from the notes will provide sufficient resources to fund operations and to meet our debt payment obligations and expected distributions to the Tribe and foreseeable capital expenditure requirements at the Silver Star and Golden Moon.
The following table presents the long-term debt maturities, future minimum lease payments under non-cancellable leases, and the Annual Service Payment to the Tribe under the indenture governing the Notes as of September 30, 2003:
Additionally and in accordance with Tribal law, the Enterprise is required to remit to the Choctaw Gaming Commission a monthly fee equal to 1% of gaming revenues. Also, and in accordance with the Compact the Enterprise is required to provide $250,000 annually to the Tribal/State Tourism fund to be used for advertising and tourism promotional activities.
Insurance Proceeds
On January 10, 2002 a settlement agreement for the insurance claim related to the April 2001 flood was entered into between the Enterprise and the insurance carriers. The Enterprise received $3,023,322, which represents the entire amount of the settlement, during the quarter ended March 31, 2002. During the quarter ended March 31, 2002 the Enterprise recognized $2,473,293 of other income and $550,029 as a gain on disposal of assets related to the insurance settlement.
Recently Issued Accounting Pronouncements
On April 30, 2002 the FASB issued SFAS No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. In rescinding FASB Statement No. 4 (SFAS 4), Reporting Gains and Losses from Extinguishment of Debt, and FASB Statement 64 (SFAS 64), Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, SFAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. However, pursuant to SFAS 145, an entity would not be prohibited for classifying such gains and losses as extraordinary items so long as they meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30 (APB 30), Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 145 is effective for transactions occurring after May 15, 2002 and is effective for financial statements issued on or after May 15, 2002. The Enterprise has adopted the provisions of SFAS 145 which have had no effect on the financial statements.
In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies (for guarantees issued after January 1, 2003) that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee. At September 30, 2003, we do not have any outstanding guarantees and accordingly the adoption of FIN 45 did not have a material impact on our financial statements.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." This interpretation addresses the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interests. The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation outlines disclosure requirements for VIEs created after January 31, 2003. The Enterprise has reviewed its major relationships and its overall economic interests with other companies consisting of related parties and other suppliers to determine the extent of its variable economic interest in theses parties. The Enterprise will adopt FIN 46 effective December 31, 2003. Adoption of FIN 46 will not have any impact on the financial statements of the Enterprise.
On April 30, 2003, the FASB issued FASB Statement No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 Amends and clarifies the accounting guidance on derivative instruments (including certain derivative instruments embedded in other contracts) and hedging activities that fall within the scope of FASB Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 149 Is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003 and is to be applied prospectively. The Enterprise has adopted the provisions of SFAS 149 which have had no effect on the financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). As the Enterprise's equity securities are not publicly traded, the Enterprise is a nonpublic entity as defined by SFAS 150, this pronouncement will be effective at the beginning of the first interim period beginning after December 15, 2003. The adoption of SFAS 150 will not have a material impact on our financial position, results of operations or cash flows as the Enterprise does not have any such financial instruments.
Regulation and Taxes
The Silver Star and Golden Moon are subject to extensive regulation by the Choctaw Gaming Commission. Changes in applicable laws or regulations could have a significant impact on our operations.
The Enterprise is owned by the Tribe, a federally recognized Indian tribe located on reservation land held in trust by the United States of America; therefore, the Enterprise was not subject to federal or state income taxes for the years ended September 30, 2003, 2002, or 2001. Various efforts have been made in Congress over the past several years to enact legislation that would subject the income of tribal business entities, such as the Enterprise, to federal income tax. Although no such legislation has been enacted, similar legislation could be passed in the future. A change in our non-taxable status could have a material adverse affect on our business, cash flows from operations and financial condition.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Impact of Inflation
Absent changes in competitive and economic conditions or in specific prices affecting the hotel and casino industry, the Enterprise does not expect that inflation will have a significant impact on our operations. Changes in specific prices, such as fuel and transportation prices, relative to the general rate of inflation may have a material adverse effect on the hotel and casino industry in general.
Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. The Enterprise's primary exposure to market risk is interest rate risk, which was initially associated with our long-term debt. The Enterprise had previously entered into an interest rate swap agreement to fix the interest rate on our term loan at 8.25%. Pursuant to the indenture, the Enterprise used a portion of the proceeds from the offering of the notes to repay the remaining outstanding balance under our term loan. Upon the prepayment of the term loan, the Enterprise did not settle the existing interest rate swap agreement, which will terminate on January 31, 2004. At September 30, 2003, the interest rate swap agreement had a notional amount of $7.8 million. The notional amount does not represent amounts exchanged by the parties, and thus is not a measure of exposure to the Enterprise. The amount exchanged is based on the notional amount. The fair value liability of our interest rate swap is based on the cash termination value of the agreement using quotes from our counter-party and was approximately $0.1 million at September 30, 2003. If the floating rate increased 25 basis points, interest expense under the swap agreement for the year ended September 30, 2003 would have been lower by $41,667. Additionally, current borrowings under the revolving credit facility bear interest at the LIBOR base rate plus a margin rate of 2.5%. If the LIBOR base rate had increased 25 basis points, interest expense under the revolving credit facility would been higher by $246,631 during the year ended September 30, 2003.
Management has and will continue to limit our exposure to interest rate risk by maintaining a conservative ratio of fixed rate, long-term debt to total debt such that variable rate exposure is kept at an acceptable level and fixing long-term variable rate debt through the use of interest rate swaps or interest rate caps with appropriately matching maturities.
Item 8.
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors
Mr. Phillip Martin, Chief Mississippi Band of Choctaw Indians
Board of Directors Choctaw Resort Development Enterprise
In our opinion, the accompanying balance sheets and the related statements of operations, owner's equity, and cash flows present fairly, in all material respects, the financial position of the Choctaw Resort Development Enterprise (the "Enterprise"), an unincorporated business enterprise of the Mississippi Band of Choctaw Indians, at September 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Enterprise's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Las Vegas, Nevada November 14, 2003, except for Note 11, as to which the date is December 4, 2003
Note 1 - Summary of Significant Accounting Policies
Description of Operations
The Choctaw Resort Development Enterprise (the "Enterprise") is an enterprise of the Mississippi Band of Choctaw Indians (the "Tribe"). The Enterprise was established on October 12, 1999 by the Tribe for the purpose of managing the existing and future Tribal gaming and other resort operations at the Tribe's Pearl River Community. The operations of the Enterprise are collectively referred to as the Pearl River Resort. Prior to July 1, 2001, the Silver Star Hotel and Casino (the "Silver Star") was the sole operating entity of the Enterprise. The Silver Star commenced operations of a gaming, hotel, conference center and restaurant complex near Philadelphia, Mississippi on trust lands of the Tribe on July 1, 1994. In addition, the Enterprise has opened the Golden Moon Hotel and Casino (the "Golden Moon") which commenced operations on August 26, 2002. The Golden Moon operates a gaming, hotel and restaurant complex directly across the highway from Silver Star. The Enterprise also operates Dancing Rabbit Golf Club ("Dancing Rabbit"), which opened April 1, 1997, Geyser Falls Water Theme Park ("Geyser Falls"), which opened July 8, 2002, and the Choctaw Hospitality Institute, which opened November 9, 2001, for the training of Pearl River Resort employees. The Dancing Rabbit, Geyser Falls and the Choctaw Hospitality Institute were contributed to the Enterprise at the Tribe's historical cost.
In connection with the development of the Silver Star, the Tribe entered into a seven-year management agreement (the "Management Agreement") with Boyd Mississippi, Inc., a subsidiary of Boyd Gaming Corporation ("Boyd"), to construct and operate the Silver Star. The Tribe entered into a termination agreement (the "Termination Agreement") with Boyd to terminate the Management Agreement on January 31, 2000.
Basis of Presentation
The consolidated financial statements include the accounts of the Enterprise, the Silver Star, the Golden Moon, Geyser Falls, the Dancing Rabbit and the Choctaw Hospitality Institute. All necessary eliminating entries have been recorded.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit with banks and other financial institutions. The Enterprise considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
The Enterprise maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in bad debt expense. The Enterprise determines the adequacy of this allowance by periodically evaluating individual customer receivables and considering the customer's financial condition, credit history and current economic conditions. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, the Enterprise may increase the allowance.
The allowance for doubtful accounts and bad debt expense is as follows:
Inventories
Inventories, consisting primarily of food, beverage and gift shop merchandise, are stated at the lower of cost or market. Cost is determined using the first-in, first-out inventory method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Costs of major construction, including interest incurred during construction of new facilities, are capitalized; costs of normal repairs and maintenance are charged to expense as incurred. Gains or losses on disposals of assets are recognized as incurred. The Enterprise periodically reviews the carrying value of property and equipment to determine if circumstances exist indicating impairment in carrying value of the property and equipment. If impairment is indicated, an adjustment will be made to the carrying value of the property and equipment.
Deferred Loan Costs
Deferred loan costs consist of costs incurred in the issuance of long-term debt. Amortization of deferred loan costs is computed using the interest method over the stated maturity of long-term debt. Accumulated amortization of the deferred loan costs is $2,643,829 and $1,583,978 at September 30, 2003 and 2002, respectively.
Accounting for Derivative Instruments and Hedging Activities
On October 1, 2000, the Enterprise adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities", as amended by Statements of Financial Standards No. 138. See Note 4.
Contributed Capital
Contributed capital consists of (i) equipment and facilities related primarily to various construction and expansion projects since the Silver Star opened which have been funded by the Tribe and contributed upon their completion at the Tribe's cost, (ii) certain development costs for the Golden Moon, also funded by the Tribe and contributed at the Tribe's cost, (iii) cash to fund Golden Moon construction and development and (iv) cash to fund construction and development of Geyser Falls. Contributed capital is presented net of distributions.
Casino and Other Revenue
Casino revenue is net win from gaming activities, which is the difference between gaming wins and losses. Gross revenues include the estimated retail value of rooms, food and beverage, and other goods and services provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. The estimated cost of providing these promotional allowances is charged to the casino department in the following amounts:
Income Taxes
The Enterprise is an unincorporated business enterprise owned by the Tribe, a federally recognized Indian tribe located on reservation land held in trust by the United States of America; therefore, the Enterprise was not subject to Federal or state income taxes for the years ended September 30, 2003, 2002 and 2001.
Advertising Expense
Advertising is expensed as incurred and is included in selling, general, and administrative expense and casino costs and expenses. Advertising expense was $9,116,713, $4,812,520, and $5,285,965 for the years ended September 30, 2003, 2002 and 2001, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Enterprise include the estimated useful lives of depreciable assets and the estimated allowance for doubtful accounts receivable. Actual results could differ from those estimates.
Preopening Expenses
Preopening costs are expensed as incurred. Preopening costs incurred during the years ended September 30, 2003, 2002 and 2001, were $-0-, $10,498,580 and $375,206, respectively. Preopening expense is comprised primarily of salaries and wages, materials and supplies and other costs incurred in connection with the opening of the Golden Moon and Geyser Falls. During Fiscal 2002, the Enterprise incurred preopening expense of $9,664,211and $834,369 related to Golden Moon and Geyser Falls respectively. During fiscal 2001, all preopening expense incurred was related to the Golden Moon.
Change in Classification of Amounts Previously Reported
Distributions to the Tribe had previously been reported as reductions to retained earnings (or increases to accumulated deficit) regardless of whether CRDE was in a retained earnings or accumulated deficit position. CRDE has revised the previously reported amounts of contributed capital and accumulated deficit to present distributions in excess of retained earnings as reductions of contributed capital. The impact of this revision was to reduce the accumulated deficit and contributed capital as of September 30, 2002, 2001 and 2000 by $37,068,832. Such revision had no impact on total owner's equity, results of operations or cash flows.
Note 2 - Property and Equipment
Property and equipment consists of the following:
During the years ended September 30, 2002 and 2001 and in connection with development of the Golden Moon, the Enterprise capitalized interest totaling $10,018,536 and $1,225,772, respectively. No amounts of interest were capitalized during fiscal 2003.
Note 3 - Restricted Cash
The Enterprise had $ -0- and $2,617,915 of restricted cash classified as a non-current asset as of September 30, 2003 and 2002, respectively. The balances were required by the Management Agreement for employment, workers compensation, and other third party claims not otherwise covered by insurance proceeds (the "Claims Reserve") that may be filed or become due after the Management Agreement termination date. The claims reserve survived until January 31, 2003, and the unused portion of the claims reserve became unrestricted at that time.
Note 4 - Long-Term Debt
In March 2001, the Enterprise issued unsecured senior notes (the "Notes") in the amount of $200,000,000. The proceeds of the offering were used to retire a $75 million term loan (the "Loan") and to finance the construction of the Golden Moon. The Notes bear interest at 9.25% and require semiannual payments of interest beginning with the first payment on October 1, 2001 with the Notes maturing on April 1, 2009. The indenture governing the Notes (the "Indenture") contains certain financial covenants which restrict the Enterprise's ability to borrow money, pay dividends or make distributions, make investments, create liens, enter into certain transactions with affiliates and sell specific assets or merge with or into another entity. Under specific circumstances, the covenant limiting the Enterprise's ability to make certain payments, distributions and investments will be suspended.
After April 1, 2005, the Enterprise may redeem all or part of the Notes at specified redemption prices plus accrued and unpaid interest on the redemption date. The Notes are subject to redemption requirements imposed by certain gaming laws and regulations.
On December 29, 2000, the Enterprise entered into a $125 million reducing revolving credit facility (the "Facility"). The Facility will be used by the Enterprise to (i) finance the construction of the Golden Moon, (ii) provide working capital, (iii) finance permitted capital expenditures, and (iv) for general purposes of the Enterprise. As of September 30, 2003, a total of $95,000,000 is drawn and outstanding on the Facility. The Enterprise pays commitment fees based on 0.5% of the available balance of the Facility. For the years ended September 30, 2003 and 2002, the Enterprise paid commitment fees totaling$$271,208 and $559,124 respectively, on the Facility. Outstanding advances on the Facility at September 30, 2003 bear interest at LIBOR plus a margin rate of 3.125%. At September 30, 2003, outstanding advances on the Facility bore LIBOR interest at rates ranging from 1.17% to 1.31%. During the years ended September 30, 2003 and 2002 the Enterprise recorded interest expense totaling $4,528,398 and $509,358 respectively, on the outstanding balance of the Facility. On September 8, 2003, the Enterprise made a voluntary principal reduction in the amount of $5,000,000 on the Facility.
The Facility is collateralized by the personal property of and the revenue generated by the Silver Star and the Golden Moon. The Facility has a maturity date of December 28, 2005. Borrowings available under the Facility began reducing quarterly effective December 31, 2002 in the amount of $6.25 million per quarter, until the amount of the facility is reduced to $40 million. Accordingly, borrowing capacity available under the Facility has been reduced to $100,000,000, of which $95,000,000 was outstanding at September 30, 2003. The Facility contains certain affirmative and negative covenants, including limiting the Enterprise's Total Leverage Ratio and Fixed Charge Coverage Ratio, as defined, during the term of the agreement.
During the three months ended December 31, 2002, the Enterprise violated covenants related to the Fixed Charge Coverage Ratio and the Total Leverage Ratio under the Facility. The Enterprise received a waiver for such covenant violations from the Facility lender. The Enterprise is required to meet these covenants each quarter. Accordingly the Enterprise entered negotiations relating to modification of these covenants with the Facility lender in order to ensure future compliance. On March 25, 2003 the Enterprise successfully completed these negotiations, which resulted in modification of terms of the credit facility. Based on the amended terms of the credit facility, the Enterprise is in compliance with the Fixed Charge Coverage Ratio and the Total Leverage Ratio at September 30, 2003 and management believes the Enterprise will achieve compliance with both the Fixed Charge Coverage Ratio and the Total Leverage Ratio going forward. As of September 30, 2003, management believes that the Enterprise is in compliance with all other debt covenants under the Notes and the Facility.
On October 26, 1999, the Enterprise entered into a note agreement with MBCI Resort and Capital Fund, a related party, in the amount of $300,000 that is payable on demand with annual interest of 6% due monthly. On August 6, 2003, the Enterprise paid off in its entirety the balance of the note payable to MBCI Resort and Capital Fund plus accrued interest of $85,500.
Maturities of long-term debt at September 30, 2003 are as follows:
2004 $ 20,000,000 2005 25,000,000 2006 50,000,000 2007 - 2008 - Thereafter 200,000,000 -----------------
Total $ 295,000,000 -----------------
The Enterprise entered into an interest rate swap agreement with a major financial institution for the purpose of fixing interest rates on a term loan, thus reducing exposures to interest rate fluctuations. At September 30, 2003, the Enterprise's interest rate swap had a notional amount of $7,812,500. This agreement effectively fixed the interest rate on the term loan at 8.25%. The notional amount does not represent amounts exchanged by the parties, and thus is not a measure of exposure to the Enterprise. The amount exchanged is based on the notional amount. The term of the interest rate swap agreement is through January 31, 2004. The term loan was repaid on April 24, 2001, however, the Enterprise did not concurrently settle the interest rate swap agreement. The differences to be paid or received by the Enterprise under the interest swap agreement are recognized as an adjustment to interest expense.
Effective October 1, 2000, the Enterprise adopted SFAS 133. The interest rate swap agreement described above is defined as a derivative instrument under SFAS 133. In accordance with the transition provisions of SFAS 133, the Enterprise recorded a cumulative-effect-type transition adjustment of $541,847 in other comprehensive loss and in accrued expenses and other liabilities to recognize the fair value of the Enterprise's liability under this swap agreement on October 1, 2000. Although the Enterprise had designated this swap agreement as a hedge since its inception on February 1, 2000, the Enterprise did not elect to seek hedge accounting for this agreement upon adoption of SFAS 133. Accordingly, during the period from October 1, 2002 through September 30, 2003, the Enterprise recognized other income of $786,871 and a related decrease in accrued expenses and other liabilities representing the effect during this period of interest rate changes. Reclassifications to other comprehensive income during the period from October 1, 2002 through September 30, 2003 are $173,306. During the period from October 1, 2001 through September 30, 2002, the Enterprise recognized other income of $995,515 and a related decrease in accrued expenses and other liabilities. Reclassifications from other comprehensive income during the period October 1, 2001 through September 30, 2002 were $159,984. During the period from October 1, 2000 through September 30, 2001, the Enterprise recognized other expense of $1,838,801 and a related increase in accrued expenses and other liabilities. Reclassifications from other comprehensive income during the period October 1, 2000 through September 30, 2001 are $147,802.
Note 5 - Fair Value of Financial Instruments
The carrying values of the Enterprise's cash and cash equivalents, short-term investments, accounts receivable, note payable, and accounts payable approximate fair value because of the short maturity of those instruments. Estimated fair value of the Notes is $215,500,000 and $209,000,000 at September 30, 2003 and 2002, respectively, based on quoted market prices on or about September 30, 2003 and 2002, respectively.
Fair value of the Enterprise's interest rate swap agreement is based on the termination value of the agreement using quotes from the Enterprise's counter party. The fair value liability of the Enterprise's interest rate swap at September 30, 2003 and 2002 was $117,170 and $1,077,347, respectively, and is included in accrued expenses and other liabilities.
The carrying value of the Facility approximates fair value because of its variable interest rate.
Note 6 - Leases
The Enterprise leases various equipment and advertising billboards under operating leases. The initial terms of these leases range from one to five years. Future minimum lease payments required under the operating leases as of September 30, 2003 are as follows:
2004 $ 528,113 2005 141,590 Thereafter - ---------------
Total $ 669,703 ---------------
Rent expense incurred under operating leases was $542,063, $599,088 and $652,006 for the years ended September 30, 2003, 2002 and 2001, respectively.
Note 7 - Enterprise Licensing and Regulation
The Tribe, by vote of the Tribal members, authorized casino gaming on Tribal lands located in Mississippi. In accordance with the Indian Gaming Regulatory Act, the Tribe signed a Tribal-State Compact with the State of Mississippi on December 4, 1992 and enacted ordinances authorizing bingo (Class II) and casino-type (Class III) gaming. The Tribal Council created the Choctaw Gaming Commission and authorized it as the regulatory agency responsible for the licensing of the Casino and the on-site regulation of the gaming operations. The Choctaw Gaming Commission has promulgated regulations that govern the gaming operations.
Note 8 - Related Party Transactions
Distributions to the Tribe were $83,518,289, $83,768,497 and $96,905,012 for the years ended September 30, 2003, 2002 and 2001, respectively. Subsequent to January 31, 2000, the Enterprise makes distributions to the Tribe at the Tribe's discretion, subject to certain distribution restrictions.
The Indenture prescribes that the Enterprise may make an annual distribution to the Tribe (the "Annual Service Payment") in the amount of $55 million per year (payable in equal monthly installments), which amount is increased annually on each September 30, commencing with September 30, 2001, by 5% per annum. Any distributions to the Tribe are made at the Tribe's discretion, but distributions other than the Annual Service Payment (referred to as "Restricted Payments") are limited by the covenants of the indenture. The most significant of such covenants limit Restricted Payments such that the cumulative Restricted Payments from inception of the indenture shall not exceed 50% of the Enterprise's cumulative net income (with measurement commencing on January 1, 2001) plus $75 million. Restricted Payments are further limited by the Indenture's requirement for the Enterprise to maintain a minimum Fixed Charge Coverage Ratio (as defined) of 2.5 to 1 (increasing to 3.0 to 1 after December 31, 2001), and thus limiting the Enterprise's ability to incur additional debt to make Restricted Payments.
Future Annual Service Payments under the Indenture are as follows:
2004 $ 63,669,375 2005 66,852,844 2006 70,195,486 2007 73,705,260 2008 77,390,523 Thereafter - -----------------
Total $ 351,813,488 -----------------
Employees of the Enterprise are provided health coverage through the Tribe's health plan. The Enterprise paid $9,912,046, $8,589,282 and $7,856,211 to the Tribe under this arrangement for the years ended September 30, 2003, 2002 and 2001, respectively.
The Enterprise collects and remits to the Tribe a 7% sales tax on rooms, food, beverage, sundry and entertainment revenue. The total sales tax paid was $1,806,833, $1,004,041 and $778,561 for the years ended September 30, 2003, 2002 and 2001, respectively. For the years ended September 30, 2003, 2002 and 2001, the Enterprise paid rent for office space and purchased certain goods and services from the Tribe and its businesses in the amount of $5,778,015, $4,360,359 and $3,276,271, respectively.
The Enterprise purchases coarse paper and janitorial supplies from Choctaw Paper Company, Inc. in the ordinary course of business. Choctaw Paper Company, Inc. is majority owned by a member of the Enterprise's board of directors. For the years ended September 30, 2003, 2002 and 2001, the Enterprise made purchases of $1,543,631, $923,553 and $465,000 respectively, from Choctaw Paper Company, Inc.
The Enterprise paid $250,000 to the Tribal/State Tourism Fund for the promotion of tourism in Mississippi for each of the years ended September 30, 2003, 2002, and 2001, as required under the Tribal-State Compact. The Choctaw Gaming Commission was paid $2,687,372, $2,245,995 and $2,281,082 for the years ended September 30, 2003, 2002, and 2001, respectively, for fees assessed at 1% of gaming revenues per the Tribal Code. Amounts paid to the Choctaw Gaming Commission along with amounts paid to the Tribal/State Tourism fund are included in selling, general and administrative expense for the years ended September 30, 2003, 2002 and 2001.
The Enterprise paid $1,688,016 to the Choctaw Development Enterprise, a wholly owned enterprise of the Tribe, for construction services related to development of the beach club and sand beach adjacent to Geyser Falls during the year ended September 30, 2003. The Enterprise paid $1,021,202 to the Choctaw Development Enterprise for the construction of administrative offices and a hospitality institute and $57,000 for construction related to the Golden Moon project during the year ended September 30, 2002.
During the years ended September 30, 2003, 2002 and 2001, the Tribe contributed property and equipment to the Enterprise at the Tribe's cost of $11,097,108, $11,405,410 and $3,156,740, respectively. During the year ended September 30, 2001, the Tribe contributed other assets to the Enterprise at the Tribe's cost of $1,843,927. During the years ended September 30, 2003 and 2002, the Tribe contributed $2,689,575 and $6,931,380, respectively in cash to the Enterprise to fund construction and development of Geyser Falls. During the year ended September 30, 2001 the Tribe contributed $24,707,375 in cash to the Enterprise.
During November 2001, the Tribe purchased on behalf of the Enterprise a 2000 model King Air aircraft. The total purchase price of this aircraft was $4,551,215, of which $4,501,215 was paid by the Tribe. At the time of purchase, the aircraft was contributed to the Enterprise and a corresponding non-interest bearing payable to the Tribe was established. For the years ended September 30, 2003 and 2002 the Enterprise made payments to the Tribe totaling $1,875,465 and $2,625,750, respectively in connection with this purchase. At September 30, 2003, no amount is payable in connection with this purchase.
On October 26, 1999, the Enterprise, entered into a note agreement with MBCI Resort and Capital Fund, a related party, in the amount of $300,000 that is payable on demand with annual interest of 6% due monthly. On August 6, 2003, the Enterprise paid off in its entirety the balance of the note payable to MBCI Resort and Capital Fund plus accrued interest of $85,500.
As of September 30, 2003 the Tribe had outstanding liabilities of $1.9 million under credit facilities with $2.4 million available in borrowings, which did not preclude recourse to assets held by the Enterprise.
Note 9 - Employee Benefit Plans
Employees of the Enterprise are eligible to participate in the Tribe's 401(k) plan. The Enterprise expensed contributions to this plan of $2,121,117, $2,017,725 and $1,780,837 for the years ended September 30, 2003, 2002 and 2001, respectively.
The Enterprise has no formal commitments to provide post-retirement health care benefits to retirees.
Note 10 - Contingencies
The Enterprise is subject to various claims and litigation in the normal course of business. In the opinion of management, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse effect on the Enterprise's financial position, results of operation or cash flows.
Note 11 - Subsequent Events
On October 28, 2003, November 14, 2003 and December 4, 2003 the Enterprise distributed $3,000,000, $3,548,000 and $2,816,000 to the Tribe, respectively.
Note 12 - Insurance Proceeds
On January 10, 2002 a settlement agreement for the insurance claim related to the April 2001 flood was entered into between the Enterprise and the insurance carriers. The Enterprise received $3,023,322, which represents the entire amount of the settlement, during the quarter ended March 31, 2002. During the quarter ended March 31, 2002 the Enterprise recognized $2,473,293 of other income and $550,029 as a gain on disposal of assets related to the insurance settlement.
Note 13 - Recently Issued Accounting Pronouncements
On April 30, 2002 the FASB issued SFAS No. 145 (SFAS 145), Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. In rescinding FASB Statement No. 4 (SFAS 4), Reporting Gains and Losses from Extinguishment of Debt, and FASB Statement 64 (SFAS 64), Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, SFAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. However, pursuant to SFAS 145, an entity would not be prohibited for classifying such gains and losses as extraordinary items so long as they meet the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30 (APB 30), Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 145 is effective for transactions occurring after May 15, 2002, and is effective for financial statements issued on or after May 15, 2002. The Enterprise has adopted the provisions of SFAS 145 which have had no effect on the financial statements.
In November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies (for guarantees issued after January 1, 2003) that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligations undertaken in issuing the guarantee. At September 30, 2003, we do not have any outstanding guarantees and accordingly the adoption of FIN 45 did not have a material impact on our financial statements.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." This interpretation addresses the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interests. The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation outlines disclosure requirements for VIEs created after January 31, 2003. The Enterprise has reviewed its major relationships and its overall economic interests with other companies consisting of related parties and other suppliers to determine the extent of its variable economic interest in theses parties. The Enterprise will adopt FIN 46 effective December 31, 2003. Adoption of FIN 46 will not have any impact on the financial statements of the Enterprise.
On April 30, 2003, the FASB issued FASB Statement No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 Amends and clarifies the accounting guidance on derivative instruments (including certain derivative instruments embedded in other contracts) and hedging activities that fall within the scope of FASB Statement No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 149 Is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003 and is to be applied prospectively. The Enterprise has adopted the provisions of SFAS 149 which have had no effect on the financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). As the Enterprise's equity securities are not publicly traded, the Enterprise is a nonpublic entity as defined by SFAS 150, this pronouncement will be effective at the beginning of the first interim period beginning after December 15, 2003. The adoption of SFAS 150 will not have a material impact on our financial position, results of operations or cash flows as the Enterprise does not have any such financial instruments.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
The Enterprise maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Enterprise's reports pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Enterprise's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management's control objectives.
As of the end of the period covered by this report, the Enterprise carried out an evaluation, under the supervision and with the participation of the Enterprise management, including the Enterprise's Chief Executive Officer along with the Enterprise's Chief Financial Officer, of the effectiveness of the design and operation of the Enterprise's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d - 15(e). Based upon the foregoing, the Enterprise's Chief Executive Officer along with the Enterprise's Chief Financial Officer concluded that the Enterprise's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Enterprise in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There have been no significant changes in the Enterprise's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Enterprise carried out its evaluation.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Choctaw Resort Development Enterprise
The Tribe established the Enterprise on October 12, 1999, as an unincorporated business enterprise of the Tribe, to operate the Silver Star and to develop and operate the Golden Moon. The Enterprise is governed by a five-member Board of Directors, which consists of the Tribal Chief, the Secretary-Treasurer of the Tribal Council and three other members appointed by the Tribal Council. The Tribal Chief and the Secretary-Treasurer serve on the Board of Directors during their term of office on the Tribal Council. The other members of the Board of Directors serve staggered four-year terms. To establish staggered terms, the initial terms of such members are either two years or four years as determined by the Tribal Council.
Enterprise Management
The table below sets forth the names, ages and positions of the executive officers of the Enterprise.
Jay Dorris assumed the position of President for the Enterprise in August 2001. Mr. Dorris has over 10 years experience in architectural and project development. For over 10 years, Mr. Dorris has worked directly and indirectly for the Tribe developing various projects, including most recently serving as Tribal Project Manager for the Golden Moon project and the Tribe's recreational lake project.
Michael Donald assumed the position of Vice President of Resort Finance for the Enterprise in August 2001. Mr. Donald is a Certified Public Accountant with over 14 years experience in accounting and financial management. For the past three years, Mr. Donald has served as Director of Tribal Gaming Audit and Financial Compliance for the Tribe. Mr. Donald began his career with KPMG Peat Marwick and spent eight years in public accounting before joining the Tribe as Senior Internal Auditor in May 1996.
James R. Angus assumed the position of Vice President of Construction Operations for the Enterprise in August 2001. Mr. Angus has over 33 years experience in the construction industry. For the previous four years, Mr. Angus worked as a Vice President of Operations and Construction for Boyken International, Inc. From the end of 1994 until mid-1997, he worked as a general contractor for Precept Builders.
Donna L. Brolick assumed the position of Vice President of Human Relations for the Enterprise on October 1, 2001. Prior to joining the Enterprise, Ms. Brolick served as Human Resources Director with the Mississippi Department of Education for over 8 years. Ms. Brolick has approximately 15 years experience in the field of Human Resources.
Anthony Taeubel assumed the position of Vice President/ Chief Operating Officer of Gaming for the Enterprise in March 2002. Mr. Taeubel has over 18 years of experience in the gaming industry. Prior to joining the Enterprise, Mr. Tauebel was employed by Ameristar Casino Council Bluffs where he worked for nearly seven years and was Senior VP and General Manager. Prior to Ameristar, Mr. Taeubel spent six years as an agent with the Nevada Gaming Control Board and five years in operations at Reno, NV casinos.
Martin Moore assumed the position of Executive Director of Hospitality Operations for the Enterprise in June 2003. Mr. Moore has over 21 years experience in the hospitality and gaming industry. Mr. Moore was hired at the Silver Star in November 2001 as Director of Advertising and Promotions and was later promoted to Executive Director of Casino Marketing. Prior to joining the Silver Star, Mr. Moore was employed as Vice President of Marketing, Sales and Entertainment for New York, New York Casino in Las Vegas, Nevada. Mr. Moore also held various executive positions from 1984 to 1995 with Hilton Gaming, a division of Hilton Hotels.
Richard F. Stewart assumed the position as Vice President of Resort Operations in December 2001. Mr. Stewart has over 26 years experience in the gaming industry. He was hired at the Silver Star in 1996 as marketing director and remained in that position following the management transition from Boyd Gaming. Prior to joining the Silver Star, Mr. Stewart was the marketing director for Boomtown Casino based in Reno, Nevada from 1993 to 1996.
Kim Beranek assumed the position of Vice President/ Chief Operating Officer of the Water Park for the Enterprise in January 2002. Ms. Beranek has over 16 years of experience in the amusement and recreation industry. She was most recently employed as Park Director for a Six Flags water park in California.
John Enriquez assumed the position of Vice President of Information Technology for the Enterprise in March 2003. Mr. Enriquez has over 15 years of experience in the information technology and gaming fields and possesses a bachelor's degree in computer science from Iowa State University. He was most recently employed as regional director for information systems for Isle of Capri Casinos Inc. based in Biloxi, Mississippi. Prior to Isle of Capri, Mr. Enriquez served in a number of information technology roles for casinos located in Missouri and Puerto Rico.
Ruth Allison Dover assumed the position of the Enterprise's General Counsel on April 22, 2002. Ms. Dover came to the Enterprise from the Mississippi Band of Choctaw Indians Office of the Attorney General. At the Attorney General's Office, she served as the Deputy Attorney General for the Tribe for approximately six (6) years. In that capacity she represented the Tribe in both the Government Services Division as well as the Business Enterprise Division. She is licensed to practice law in Mississippi and Arkansas and has been admitted to practice before the Mississippi Band of Choctaw Indians Tribal Court.
Board of Directors
The table below sets forth the names, ages and positions of our directors and the year in which their current term expires.
Set forth below is a description of the current business experience during the past five years of each of the directors listed above.
Chief Phillip Martin has been elected to six four-year terms as Tribal Chief, served as a leader of the Tribe for over 40 years and has served as Chairman of the Enterprise's Board of Directors for 4 years. After returning from a ten-year tour in the Air Force, Chief Martin is credited with introducing the Tribe into various industries including the production of wire harnesses for automobiles, greeting cards, electronic components, plastics, printing and publishing and casino gaming. As a result, unemployment on the Tribe's reservation has dropped from 75% in the 1970s to approximately 2.6% today.
Harrison Ben has been a member of the Tribal Council for seven years and a Board member for 4 years.
Rufus Tubby has been a member of the Tribal Council for approximately twelve years and a Board member for 4 years.
Gerald Stoliby has been a member of the Tribal Council for six years and a Board member for 4 years. Mr. Stoliby is the President, Chief Executive Officer and majority owner of Choctaw Paper Company, Inc., a private coarse paper and janitorial supply company which does business with the Enterprise.
Billy Chickaway has been a member of the Tribal Council for six years and a Board member for 2 years.
Compensation of Directors
Members of our Board of Directors do not receive any compensation from the Enterprise or the Tribe for their services as members of our board or any committee thereof.
Audit Committee of the Board and Audit Committee Financial Expert
On October 1, 2002, the first day of our fiscal year, the Enterprise had fewer than 300 security holders of record, and we are not required to file reports under Section 15(d) of the Securities Exchange Act of 1934. The Enterprise's securities are not registered under Section 12 of that Act. Therefore, we are not an issuer under the Sarbanes-Oxley Act of 2002.
Although the Enterprise is not an issuer under the Sarbanes-Oxley Act of 2002 and our securities are not listed, our Board of Directors has established an Audit Committee. The Board of Directors has determined that the Audit Committee does not have an Audit Committee Financial Expert as that term is defined under the Sarbanes-Oxley Act of 2002. The Board is currently comprised entirely of elected members of the Tribal Council. As a committee of the Board, the Audit Committee is comprised exclusively of members of the Board. The Audit Committee is authorized to contract with financial experts as needed.
Code of Ethics
The Enterprise has not adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. Enterprise officers are held to high ethical standards under Tribal law, by contract and by Enterprise policy.
The Tribe
The Tribe is a federally recognized, self governing Indian tribe with approximately 9,100 enrolled members, most of whom live on or near the Tribe's 31,000-acre reservation in east-central Mississippi. Pursuant to the Tribe's Constitution, an elected Tribal Chief and a 16-member Tribal Council govern the Tribe and oversee all Tribal government operations and services. The Tribe's Constitution vests all executive powers of the Tribe in the Tribal Chief and all legislative powers in the Tribal Council, including the power to establish unincorporated business enterprises of the Tribe. The Tribal Chief is the principal executive officer of the Tribe. The Tribal government has functions similar to local, state and federal governments and is responsible for providing Tribal members with education, healthcare, job training, housing, police and fire protection, Tribal courts, utilities and other community infrastructure. The Tribe operates one of the largest unified reservation school systems in the United States, with more than 1,700 students enrolled in kindergarten through grade twelve.
The Tribe is one of the ten largest employers in Mississippi with more than 6,000 permanent, full-time employees and an annual payroll of approximately $170 million. The Tribe has nine manufacturing plants on its reservation, which provide supplies to the automotive industry and other companies, including Caterpillar. In addition, the Tribe operates the Silver Star, Golden Moon, Geyser Falls and the Dancing Rabbit through the Enterprise.
Tribal Council
The Tribe is governed by the Tribal Chief and a 16-member Tribal Council that is responsible for passing all tribal laws and regulations on the reservation. Tribal Council members are elected for staggered four-year terms from the seven communities comprising the Tribe's reservation.
The table below sets forth information about the Tribal Council.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
This section provides certain summary information concerning compensation paid by the Enterprise to its senior executive officers.
(1) Enterprise employees are eligible to receive a performance based bonus at the annual discretion of the Board of Directors. There were no bonuses authorized by the Enterprise's Board of Directors for fiscal 2003. Fiscal 2002 bonuses were paid during February 2003.
(2) Mr. Taeubel was provided with a relocation allowance of $26,765 that was paid in fiscal 2002.
(3) Mr. Angus received a one-time payment of $25,000 upon employment with the Enterprise. Mr. Angus was provided with a relocation allowance of $3,159 that was paid in fiscal 2001.
(4) Mr. Stewart was employed by Boyd prior to February 1, 2000, and as such, had salaries paid by Boyd and charged to Silver Star for the period October 1, 1999 through January 31, 2000.
(5) Mr. Dorris was employed by the Tribe prior to August 6, 2001, and as such, had salaries paid by the Tribe for the period October 1, 2000 through August 6, 2001. Mr. Angus began his employment on August 6, 2001. Prior to that time he was not employed by the Tribe or any of its enterprises.
(6) Mr. HeLal was provided with a relocation allowance of $4,895 that was paid in fiscal 2002.
(7) The Enterprise's Board of Directors authorized the bonus for Doug Pattison for the fiscal year 2001 as part of the Settlement and General Release Agreement dated December 31, 2001.
(8) On December 13, 2001 a Settlement and General Release Agreement was entered into between Mr. Pattison and the Enterprise. This agreement terminated the employment of Mr. Pattison effective December 13, 2001. Pursuant to the agreement the Enterprise paid Mr. Pattison a gross sum of $800,000 as severance pay, as well as $122,600 for bonuses earned for fiscal 2001, $25,000 for bonuses earned for fiscal 2002 up to and until the effective date of termination, and $43,638 of accrued and unused vacation time.
(9) Mr. Moore was provided with a relocation allowance of $10,828 that was paid in fiscal 2002.
(10) Mr. Pattison elected to receive a total distribution of amounts in his deferred compensation plan. This distribution was paid in fiscal 2003.
(11) Mr. Helal resigned effective June 14, 2003. During fiscal 2003 Mr. Helal was paid a pro rata portion of his annual base salary through date of resignation, unused accrued vacation and a portion of his base salary as a severance payment.
Employment Contracts
Jay Dorris
An agreement to employ Mr. Dorris as the President was executed on August 6, 2001. The employment agreement provides for a term ending August 5, 2005, renewing automatically for one-year periods after the end of the initial four-year term.
Mr. Dorris will receive a base salary of $212,500 which amount was pro-rated for the two months he was employed in fiscal year 2001. Mr. Dorris also has the opportunity to receive an incentive bonus based on the bonus program approved by the Board of Directors on May 3, 2001.
Mr. Dorris is entitled to all amounts due under the agreement, unless he resigns or is terminated by the Enterprise for cause or under other limited circumstances, in which case he will only be entitled to payments of salary and bonus earned but unpaid to the date of resignation or termination, as the case may be. Mr. Dorris may be terminated by the Enterprise without cause, in which event he will be entitled to payment of one year base salary in effect on the date of termination plus $25,000 for relocation expense.
Michael Donald
An agreement to employ Mr. Donald as the Enterprise's Vice President of Resort Finance was executed on August 2, 2001. Mr. Donald has an initial four-year contract through August 2005, with an annual salary of $135,000. Under his agreement, Mr. Donald also receives the typical fringe benefits of Tribal employees.
James Angus
An agreement to employ Mr. Angus as the Enterprise's Vice President of Construction Operations was executed on August 2, 2001. Mr. Angus has an initial four-year contract through August 2005, with an annual salary of $210,000. Under his agreement, Mr. Angus received typical moving expenses, temporary living quarters, the use of an automobile and receives other typical fringe benefits of Tribal employees. Mr. Angus also received a one-time payment of $25,000 in fiscal 2001.
Anthony Taeubel
An agreement to employ Mr. Taeubel as the Enterprise's Chief Operating Officer of Gaming Operations was executed on March 20, 2002. The employment agreement provides for a term ending March 19, 2006, renewing upon mutual agreement after the end of the initial four-year term.
Under his agreement, Mr. Taeubel receives an initial annual base salary of $260,000. Mr. Taeubel also has the opportunity to receive an incentive bonus based on the bonus program approved by the Board of Directors on May 3, 2001.
Mr. Taeubel is entitled to all amounts due under the agreement, unless he resigns or is terminated by the Enterprise for cause or under other limited circumstances, in which case he will only be entitled to payments of salary and bonus earned but unpaid to the date of resignation or termination, as the case may be. Mr. Taeubel may be terminated without cause, in which event he will be entitled to payment of one year base salary in effect at the date of termination.
Andrew HeLal
An arrangement to employ Mr. HeLal as the Enterprise's Chief Operating Officer of Hospitality Operations was executed on April 18, 2002. Under his agreement, Mr. HeLal had an annual base salary of $200,000 and also received typical moving expenses and other typical fringe benefits of Tribal employees. Mr. Helal resigned his position with the Enterprise effective June 14, 2003.
Ruth Allison Dover
The Enterprise reached an arrangement to employ Ms. Dover as the Enterprise's General Counsel on April 22, 2002. The employment agreement has an initial term of six months and automatically renews for additional six month periods unless either party gives notice of intent not to renew. Under her agreement, Ms. Dover receives an annual base salary of $125,000 and also receives typical fringe benefits of Tribal employees. In the event Ms. Dover is terminated without cause, she will be entitled to payment of three months base salary in effect at the date of termination.
Doug Pattison
An agreement to employ Mr. Pattison as the Chief Executive Officer of the Silver Star was executed on December 1, 1999. The employment agreement provided for an initial term ending September 30, 2005.
Mr. Pattison received a base salary of $400,000 in fiscal year 2001.
On December 13, 2001 a Settlement and General Release Agreement was entered into between Mr. Pattison and the Enterprise. This agreement terminated the employment of Mr. Pattison effective December 13, 2001. Pursuant to the agreement, the Enterprise paid Mr. Pattison a gross sum of $800,000 as severance pay, as well as $122,600 for bonuses earned for fiscal 2001, $25,000 for bonuses earned for fiscal 2002 up to and until the effective date of termination, and $43,638 of accrued and unused vacation time.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Enterprise has no outstanding equity securities.
Item 13.
Item 13. Certain Relationships and Related Transactions
Recourse Liabilities
As of September 30, 2003, the Tribe had outstanding liabilities of $1.9 million under credit facilities with $2.4 million available in borrowings, which do not preclude recourse to assets held by the Enterprise. If other assets of the Tribe are insufficient to repay this existing debt, then the Tribe's creditors may seek to recover the liabilities from the Enterprise. Under the indenture relating to the notes, the Tribe has agreed that it will not incur indebtedness in the future that would give such creditors recourse to the assets of the Enterprise, except as may be incurred by the Enterprise under the indenture.
Payments to the Tribe
Distributions to the Tribe were $83,518,289, $83,768,497 and $96,905,012 for the years ended September 30, 2003, 2002 and 2001, respectively. Subsequent to January 31, 2000, the Enterprise makes distributions to the Tribe at the Tribe's discretion, subject to certain distribution restrictions under the Notes described in Note 4.
Employees of the Enterprise are provided health coverage through the Tribe's health plan. The Enterprise paid $9,912,046, $8,589,282 and $7,856,211 to the Tribe under this arrangement for the years ended September 30, 2003, 2002 and 2001, respectively.
The Enterprise collects and remits to the Tribe a 7% sales tax on rooms, food, beverage, sundry and entertainment revenue. The total sales tax paid was $1,806,833, $1,004,041 and $778,561 for the years ended September 30, 2003, 2002 and 2001, respectively. For the years ended September 30, 2003, 2002 and 2001, the Enterprise paid rent for office space and purchased certain goods and services from the Tribe and its businesses in the amount of $5,778,015, $4,360,359 and $3,276,271, respectively.
The Enterprise paid $250,000 to the Tribal/State Tourism Fund for the promotion of tourism in Mississippi for each of the years ended September 30, 2003, 2002, and 2001, as required under the Tribal-State Compact. The Choctaw Gaming Commission was paid $2,687,372, $2,245,995 and $2,281,082 for the years ended September 30, 2003, 2002, and 2001, respectively, for fees assessed at 1% of gaming revenues per the Tribal Code. Amounts paid to the Choctaw Gaming Commission along with amounts paid to the Tribal/State Tourism fund are included in selling, general and administrative expense for the years ended September 30, 2003, 2002 and 2001.
The Enterprise paid $1,116,534 to the Choctaw Development Enterprise, a wholly owned enterprise of the Tribe, for construction services related to development of the beach club and sand beach adjacent to Geyser Falls during the year ended September 30, 2003. The Enterprise paid $1,021,202 to the Choctaw Development Enterprise for the construction of administrative offices and a hospitality institute and $57,000 for construction related to the Golden Moon project during the year ended September 30, 2002.
During the years ended September 30, 2003, 2002 and 2001, the Tribe contributed property and equipment to the Enterprise at the Tribe's cost of $11,097,108, $11,405,410 and $3,156,740, respectively. During the year ended September 30, 2001, the Tribe contributed other assets to the Enterprise at the Tribe's cost of $1,843,927. During the years ended September 30, 2003 and 2002, the Tribe contributed $2,689,575 and $6,931,380, respectively in cash to the Enterprise to fund construction and development of Geyser Falls. During the year ended September 30, 2001 the Tribe contributed $24,707,375 in cash to the Enterprise.
During November 2001, the Tribe purchased on behalf of the Enterprise a 2000 model King Air aircraft. The total purchase price of this aircraft was $4,551,215, of which $4,501,215 was paid by the Tribe. At the time of purchase, the aircraft was contributed to the Enterprise and a corresponding non-interest bearing payable to the Tribe was established. For the years ended September 30, 2003 and 2002 the Enterprise made payments to the Tribe totaling $1,875,465 and $2,625,750, respectively in connection with this purchase. At September 30, 2003, no amount is payable in connection with this purchase.
On October 26, 1999, the Enterprise, entered into a note agreement with MBCI Resort and Capital Fund, a related party, in the amount of $300,000 that is payable on demand with annual interest of 6% due monthly. On August 6, 2003, the Enterprise paid off in its entirety the balance of the note payable to MBCI Resort and Capital Fund plus accrued interest of $85,500.
As of September 30, 2003 the Tribe had outstanding liabilities of $1.9 million under credit facilities with $2.4 million available in borrowings, which did not preclude recourse to assets held by the Enterprise.
Affiliate Transactions
Gerald Stoliby, a member of our board of directors and a Tribal Council Member, owns a majority interest in and is the President and Chief Executive Officer of Choctaw Paper Company, Inc. The Enterprise purchases coarse paper and janitorial supplies from Choctaw Paper Company, Inc. in the ordinary course of business. For the years ended September 30, 2003, 2002 and 2001, the Enterprise made purchases of $1,544,000, $924,000 and $465,000 respectively, from Choctaw Paper Company, Inc.
Item 14.
Item 14. Principal Accountant Fees and Services
Audit Fees
Total aggregate fees billed by PricewaterhouseCoopers LLP for professional services in connection with the audit and review of the Enterprise's consolidated financial statements and consultation regarding financial accounting and reporting standards were $322,400 and $319,800 in fiscal years 2003 and 2002, respectively.
Audit Related Fees
Total aggregate fees billed by PricewaterhouseCoopers LLP for audit related services in connection with the audit of the Enterprise's electronic data processing system were $33,000 and $36,500 in fiscal years 2003 and 2002, respectively.
Tax Fees
None
All Other Fees
Total aggregate fees billed by PricewaterhouseCoopers LLP for all other fees including work related to compliance with the Sarbanes -Oxley Act of 2002 were $24,286 and $-0- in fiscal years 2003 and 2002, respectively.
Audit Committee Pre-Approval Policies
The Enterprise's Audit Committee has not adopted a pre-approval policy with respect to audit fees, audit related fees, tax fees or all other professional fees. The Enterprise's Audit Committee does however select and approve all audit and audit related services and other professional services.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements
The following financial statements are filed as part of this Report under "Item 8 - Financial Statements and Supplementary Data":
Report of Independent Auditors Consolidated Balance Sheets at September 30, 2003 and 2002 Consolidated Statements of Operations for the Three Fiscal Years in the Period Ended September 30, 2003 Consolidated Statements of Changes in Owners' Equity for the Three Fiscal Years in the Period Ended September 30, 2003 Consolidated Statements of Cash Flows for the Three Fiscal Years in the Period Ended September 30, 2003 Notes to Consolidated Financial Statements
Reports on Form 8-K
None
Exhibits
The following exhibits are filed as a part of this Report:
Exhibit No. Description of Exhibit - ----------- -------------------------
3.1* Revised Constitution and Bylaws of the Mississippi Band of Choctaw Indians, as approved by the Commissioner of Indian Affairs on March 28, 1975 (ratified by Tribe on December 17, 1974).
3.2* Ordinance 56 by the Mississippi Band of Choctaw Indians, an ordinance providing for classification, regulation, and creation of wholly-owned Tribal business enterprises and establishment of business enterprise division of the Tribal Government Executive Branch, dated November 20, 1997.
3.3* Resolution CHO 00-010 by the Mississippi Band of Choctaw Indians, a resolution to establish the Choctaw Resort Development Enterprise under Ordinance 56, dated October 12, 1999.
3.6* Title XXV, Choctaw Tort Claims Act, added by Tribal Ordinance 16-CCC to the Choctaw Tribal Code on January 19, 2000.
4.1* Indenture, dated March 30, 2001, among the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise, the Mississippi Band of Choctaw Indians and Firstar Bank, N.A., as Trustee, relating to the 9 1/4% Senior Notes due 2009 of the Choctaw Resort Development Enterprise.
4.2* Form of 144A Global 9 1/4% Senior Note due 2009 of the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise (contained in the Indenture, filed as Exhibit 4.1).
4.3* Form of Regulation S Global 9 1/4% Senior Note due 2009 of the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise (contained in the Indenture, filed as Exhibit 4.1).
4.4* Form of registered Global 9 1/4% Senior Note due 2009 of the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise.
4.5* Registration Rights Agreement, dated March 30, 2001, among the Choctaw Resort Development Enterprise, Banc of America Securities LLC, as Representative of the Initial Purchasers.
10.1* Tribal-State Compact for Regulation of Class III Gaming on the Mississippi Band of Choctaw Indians Reservation in Mississippi, dated December 4, 1992, between the Mississippi Band of Choctaw Indians and the State of Mississippi.
10.2* First Amendment to the Tribal-State Compact for Regulation of Class III Gaming on the Mississippi Band of Choctaw Indians Reservation in Mississippi, dated August 26, 1994, between the Mississippi Band of Choctaw Indians and the State of Mississippi.
10.3* Second Amendment to the Tribal-State Compact for Regulation of Class III Gaming on the Mississippi Band of Choctaw Indians Reservation in Mississippi, dated May 24, 1996, between the Mississippi Band of Choctaw Indians and the State of Mississippi.
10.4* Contractor's Agreement, dated January 24, 2001, between the Mississippi Band of Choctaw Indians dba Choctaw Resort Development Enterprise and W.G. Yates & Sons Construction Company.
10.5* Basic Architectural Services Contract, dated October 13, 1999, between the Mississippi Band of Choctaw Indians and Arquitectonica International Corp.
Exhibit No. Description of Exhibit - ----------- -------------------------
10.6* Loan Agreement, dated December 19, 2000, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise, the Mississippi Band of Choctaw Indians and Bank of America, N.A., as leader of syndicate of lenders.
10.7* Consent Letter of the Administrative Agent under the Amended and Restated Term Loan Agreement and the Loan Agreement, dated March 30,
10.8* Employment Agreement of Douglas Pattison, dated December 1, 1999, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Douglas Pattison.
10.9* Amendment No. 1 to Employment Agreement of Douglas Pattison, dated July 18, 2001, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Douglas Pattison.
10.10* Employment Agreement of Mike Donald, dated August 2, 2001, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Mike Donald.
10.11* Employment Agreement of Jim Angus, dated August 2, 2001, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Jim Angus.
10.12** Employment Agreement of Jay Dorris, dated August 6, 2001, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Jay Dorris.
10.13** Employment Agreement of Donna Brolick, dated September 14, 2001, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Donna Brolick.
10.14** Settlement and General Release Agreement, dated December 13, 2001, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Douglas Pattison.
10.15*** Employment Agreement of Anthony Taeubel, dated March 20, 2002, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Anthony Taeubel.
10.16*** Employment Agreement of Andew Helal, dated April 18, 2002, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Andrew Helal.
10.17*** Employment Agreement of Ruth Allison Dover, dated April 22, 2002, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise and Ruth Allison Dover.
10.18 Amendment No. 2 to Loan Agreement, dated December 19, 2000, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise, the Mississippi Band of Choctaw Indians and Bank of America, N.A., as leader of syndicate of lenders.
10.19 Amendment No. 3 to Loan Agreement, dated December 19, 2000, between the Mississippi Band of Choctaw Indians d/b/a Choctaw Resort Development Enterprise, the Mississippi Band of Choctaw Indians and Bank of America, N.A., as leader of syndicate of lenders.
23.1* Consent of Latham & Watkins (contained in Exhibit 5.1).
24.1* Power of attorney (included on the signature page).
31.1 Certification of President pursuant to Rule 13a-14(a).
31.2 Certification of Vice President of Resort Finance pursuant to Rule 13a-14(a).
* Filed by the Enterprise with its Registration Statement on Form S-4 (file no. 333-63348), and incorporated herein by reference
** Filed by the Enterprise with its Annual Report on Form 10-K (file no. 333-63348) for the year ended September 30, 2001, and incorporated herein by reference.
*** Filed by the Enterprise with its Annual Report on Form 10-K (file no. 333-63348) for the year ended September 30, 2002, and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, on the Mississippi Band of Choctaw Indian's reservation in the city of Choctaw, state of Mississippi, on December 23, 2003.
CHOCTAW RESORT DEVELOPMENT ENTERPRISE
By: /s/ Phillip Martin ---------------------------- Phillip Martin Chairman of the Board
By: /s/ Billy Chickaway ----------------------------- Billy Chickaway Secretary-Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.