ITEM 1. BUSINESS
OVERVIEW
IMG RESORT AND CASINO
IMG Resort and Casino, established on April 2, 2003, is a wholly owned enterprise of the Tribe with the exclusive power to conduct and regulate gaming activities on the Tribe's reservation. We operate New Mexico's only all-season gaming destination resort on the Tribe's 725 square mile reservation in south-central New Mexico. We are located in the forests of the Sacramento Mountains and our operations include: a full- service casino, the Travel Center, offering 17,000 square feet of gaming space including 503 slot machines and 15 table games as of April 30, 2005; a new resort hotel and casino on the banks of Lake Mescalero; offering 38,000 square feet of gaming space including 1,000 slot machines and 41 table games as of April 30, 2005; the second largest ski resort in New Mexico; a championship golf course; big-game hunting and various other outdoor recreational activities. We are located approximately 120 miles north of El Paso, Texas and the Mexican border, approximately 200 miles south of Albuquerque, New Mexico and approximately 10 miles west of the resort town of Ruidoso. Ruidoso and its surrounding area offers tourists a variety of year-round activities, including skiing, golfing, hunting, boating, fishing, camping, swimming, horseback riding and cultural events. The neighboring town of Ruidoso Downs features the Ruidoso Downs Race Track and Casino, offering quarter horse and thoroughbred racing throughout the summer months and is home of the world's richest quarter horse race, the All-American Futurity. White Sands National Monument, which attracts in excess of 500,000 visitors a year, is located approximately 60 miles away from our properties.
Our casinos and resort hotel are conveniently located off of a heavily traveled four-lane highway, U.S. Highway 70. According to the New Mexico State Highway and Transportation Department, approximately 5.9 million vehicles travel across U.S. Highway 70 each year. We are the only full-service casino operator within our primary market area, encompassing southern New Mexico, including the cities of Ruidoso, Alamogordo, Las Cruces and Roswell and western Texas, including the cities of El Paso, Lubbock and Odessa, and northern Mexico, including Ciudad Juarez.
THE PROJECT
We have completed a two-phase construction project, which we refer to as the Project. We successfully completed Phase I of the Project, construction of our new Casino Apache Travel Center in May 2003, at a cost of $16.0 million. We have completed construction of Phase II of the Project, the Inn of the Mountain Gods Resort and Casino, on March 15, 2005. Total construction cost to complete Phase II of the Project was $143.9 million. In March 2005, the contractor was issued a certificate of substantial completion and the Resort started commercial operation on March 15, 2005. A final certificate of completion and acceptance will be issued following the successful completion of identified incomplete items. At April 30, 2005, a total of $8.1 million in retainage remains outstanding in restricted cash account with the trustee and will be disbursed following the issuance of the final completion certificate.
Management believes the Project has positioned us as the "Southwest's Best All-Season Resort" by expanding and modernizing our gaming and hotel facilities to meet customer demand and address the limitations of our old casino, Casino Apache, and our old hotel, the Inn of the Mountain Gods. Casino Apache operated at capacity on weekends, holidays and during promotional events even though it was originally designed as a two-floor convention space and not a high-traffic casino. Casino Apache was also affected by poor ventilation and limited parking and gaming space. Although it was opened in 1975 as a luxury resort hotel, by 2002, the Inn of the Mountain Gods hotel was an aging and dated facility that required significant modernization to serve the needs of our customers. These capacity and design issues have limited our ability to attract additional gaming and resort customers from both within and beyond our primary market area. Nevertheless, our gaming revenues have continued to grow, experiencing a compound annual growth rate of approximately 12.7% from our fiscal year ended April 30, 2000 through April 30, 2005.
PHASE I -- TRAVEL CENTER
In May 2003, we successfully completed Phase I of the Project, construction of the Travel Center, on time and on budget. The Travel Center targets locals and casual day-trip visitors and complements our gaming operations at Inn of the Mountain Gods. The Tribe funded the entire construction cost of the Travel Center with equity contributions to us from cash on hand. The 14-acre Travel Center, which includes a 30,000 square foot main building, is located on U.S. Highway 70, and at April 30, 2005 featured:
o 17,000 square feet of gaming space including 503 slot machines and 15 table games, including blackjack and roulette;
o two video poker bars -- a 12-seat circular bar located in the center of the facility, which features video poker at all 12 seats, and an 11-seat full-service bar, which features video poker at five seats;
o "Smokey-B's Grill," a 2,300 square foot, 135-seat casual dining restaurant;
o a 2,500 square foot convenience store, which carries food, candy, hot and cold beverages and travel and sundry items;
o an 800 square foot tax-free smoke shop, which offers a variety of brand-name carton cigarettes at discounted prices;
o a Conoco-branded fuel station with 12 gasoline and eight diesel pumping stations;
o a 2,000 square foot shower and laundry facility;
o 700 on-site parking spaces, including a separate parking area for semi-trucks, with over 24 over-sized spaces; and
o shuttle service to the Inn of the Mountain Gods.
PHASE II -- INN OF THE MOUNTAIN GODS RESORT AND CASINO
In March 2005, we successfully completed Phase II of the Project, construction of IMG Resort and Casino, on time and on budget. The Resort is designed to be a premier gaming resort destination hotel and casino, targeting the mature, affluent gaming and entertainment patron, as well as middle market clientele. IMG Resort and Casino offers higher table gaming and slot machine limits and a broader mix of table games than the Travel Center. IMG Resort and Casino, as of April 30, 2005, featured:
o a casino featuring 38,000 square feet of gaming space, 1,000 slot machines (and capacity for 1,500 machines) and 41 table games, including craps, blackjack, roulette, three-card poker and "Let it Ride";
o a 273-room hotel, featuring over-sized deluxe guest rooms, with a balcony view of Lake Mescalero and either Sierra Blanca Mountain or the forest-lines golf course, an indoor swimming pool and fitness center including a yoga and aerobics workout area, steam and sauna facilities for both men and women and a family locker area;
o food and beverage venues including a 158-seat indoor/outdoor casual and fine dining restaurant; a 250-seat buffet style restaurant; a 100-seat spots bar, a 75-seat night club featuring live entertainment and dancing and a "quiet" lounge featuring an oversized fireplace;
o a 37,000 square foot events center, which can accommodate a wide variety of activities, including entertainment and sports events, such as concerts, comedy shows and boxing, as well as trade shows and exhibitions; and
o a 1,700 space underground parking structure and 500 spaces of surface parking.
OUR BUSINESS ACTIVITIES
IMG Resort and Casino was formed by the Tribe on April 2, 2003 to be the holding company for all of the Tribe's gaming and resort enterprises. Prior to the formation of IMG Resort and Casino, the Tribe operated all of its gaming and resort activities through four separate tribal enterprises: Casino Apache, which owned and operated the Tribe's original casino, Casino Apache, since the commencement of its operations in 1992; Ski Apache, which owned and operated the Tribe's ski resort, since the commencement of its operations in 1964; Inn of the Mountain Gods, which owned and operated the Tribe's resort hotel, the Inn of the Mountain Gods, since the commencement of its operations in 1975; and the Travel Center, which owned and operated the Tribe's second gaming facility, Casino Apache Travel Center, since the commencement of its operations in April 2003. On April 2, 2003, each of the Tribe's gaming and resort enterprises - the Travel Center, Casino Apache, Ski Apache and Inn of the Mountain Gods - were contributed to IMG Resort and Casino by the Tribe and are wholly-owned subsidiaries of IMG Resort and Casino.
GAMING
We currently operate two gaming facilities, the Travel Center and IMG Resort and Casino. The Travel Center, opened on May 21, 2003, is located directly on U.S. Highway 70 and is highly visible to drivers in both directions. As of April 30, 2005, the Travel Center featured 17,000 square feet of gaming space, 503 slot machines and 15 table games, including blackjack and roulette. IMG Resort and Casino opened on March 15, 2005, and is located two miles off of U.S. Highway 70, adjacent to the site of our old casino, Casino Apache. As of April 30, 2005, IMG Resort and Casino featured 38,000 square feet of gaming space, 1,000 slot machines and 41 table games, including craps, blackjack, roulette, three-card poker and "Let it Ride;" a 100-seat buffet restaurant; a gift shop and approximately 2,200 customer parking spaces.
Our gaming operations have experienced continued growth since fiscal 2000. Gaming revenues have increased from $35.4 million for the twelve months ended April 30, 2000 to $64.3 million for the twelve months ended April 30, 2005, a compound annual growth rate of 12.7%. Gaming revenues for the twelve months ended April 30, 2004 and 2003 were $60.3 million and $46.9 million, respectively. On May 21, 2003, we opened the Travel Center with approximately 500 slot machines, comprised of approximately 200 slot machines moved from Casino Apache and approximately 300 new slot machines. On March 15, 2005, we opened the IMG Resort and Casino with 1,000 slots and 41 table games.
RESORT AMENITIES
Since opening the original 118-room hotel as a five-star resort facility in 1975, we have built a strong reputation as a leading destination resort in our region. Our cool mountain climate and resort amenities typically attract capacity crowds from May through September. Our resort amenities include our championship golf course, rated the 35th "Best Golf Resort" in the country in 2002 by Golf Week(TM), a golf pro shop, big game hunts, shooting ranges, horseback riding, boating, fishing and a casual dining restaurant and bar.
SKIING
We have owned and operated Ski Apache since 1964. Ski Apache has 750-acres of ski area and is the second largest snow ski area (based upon acres of ski area) in the State of New Mexico. Our ski resort is located on U.S. Forest and Tribal land on the 12,003-foot Sierra Blanca Mountain, on the southern tip of the Rocky Mountains, approximately 20 miles from the site of the Resort. Approximately 200,000 skiers, primarily from New Mexico, Texas, Arizona and Mexico, visited Ski Apache during each of our last three ski seasons, which typically run from Thanksgiving to Easter. At April 30, 2005, Ski Apache featured:
o 11 lifts providing the largest lift capacity in New Mexico (over 16,500 people per hour), which include a four-passenger gondola (the only one in New Mexico), two quad chair lifts, five triple chairs, one double chair lift and two surface lifts;
o a base elevation of 9,600 feet and a vertical drop of 1,900 feet;
o 55 ski trails, of which 20 percent are beginner, 35 percent are intermediate and 45 percent are advanced, as well as Apache Bowl, an expert open bowl ski area;
o a Professional Ski Instructors of America ski and snowboarding school; and
o a sport shop with ski rental, offering top quality ski and snowboarding equipment.
Although Ski Apache typically averages over 15 feet of snowfall each year, Ski Apache features a multi-million dollar snowmaking system, which covers 1,000 feet of vertical drop, trails for all ability levels and the use of 8 of its 11 lifts.
BUSINESS STRATEGY
We are the only full-service casino operator offering both slot machines and table games within our primary market area, which encompasses southern New Mexico, including the cities of Ruidoso, Alamogordo, Las Cruces and Roswell, western Texas, including the cities of El Paso, Lubbock and Odessa and northern Mexico, including Ciudad Juarez. Our primary feeder markets include cities over 200 miles away. We have identified this market based on information we have obtained from our approximately 118,630 member customer loyalty program, the
Apache Spirit Club. We believe that our facilities will continue to be attractive to these customers because of our location. Within our primary market area we are the closest gaming facility to offer both slot machines and table games and we are the closest resort destination offering all-season amenities, including skiing and championship golf.
We believe that as a result of completing the Project, we will be able to increase penetration within our existing primary market and expand our market to include a greater number of customers from New Mexico, Mexico, Texas, Oklahoma, Colorado, Arizona, and California. We intend to fully implement a comprehensive business and marketing strategy to enhance operations at our facilities. Key measures include:
o CROSS MARKET OUR RESORT FACILITIES - Cross market all of our resort facilities to increase market penetration and expand our market by highlighting our diverse range of attractive all-season activities;
o INTEGRATE MANAGEMENT - Further expand our management team and consolidate our management structure across our resort enterprises, which were formerly operated as separate businesses, to drive greater operating efficiencies and economies of scale for our resort enterprises as a whole;
o BROADEN CUSTOMER BASE - Offer different gaming and slot machine limits, mixes of table games, and non-gaming amenities across our casino and new resort to broaden our customer base;
o IMPLEMENT PREMIUM PRICING - Capitalize on our new resort facilities, including luxury accommodations, to implement premium pricing to target a more affluent customer base;
o SHOULDER AND OFF-PEAK MARKETING - Create targeted promotions to achieve higher utilization during shoulder and off-peak periods; and
o EXPAND CUSTOMER LOYALTY PROGRAM - Continue to expand the Apache Spirit Club across all of our resort facilities, to recognize gaming and non-gaming spending habits and create individually targeted promotions for our customers. We have increased memberships in the Apache Spirit Club by approximately 61.0% from March 2003 through April 2005.
The Project is part of our business strategy to develop an integrated resort, increase our market reach and realize operating benefits from business synergies. We may not be able to fully implement this strategy if we experience changes in general or local economic conditions, increased competition, other changes in our industry, or our plan to promote our customers' utilization of our various resort amenities, including our gaming, hotel, entertainment and other amenities does not achieve its intended results.
GAMING IN NEW MEXICO
COMPETITION
Our primary market area encompasses southern New Mexico, including the cities of Ruidoso, Alamogordo, Las Cruces and Roswell, western Texas, including the cities of El Paso, Lubbock and Odessa and northern Mexico, including Ciudad Juarez. According to the U.S. Census Bureau and Desarrollo Economico de Ciudad Juarez/INEGI there are approximately 3.1 million people in our primary market area and 1.8 million adults.
Currently, we are the only full-service casino operator within our primary market area. We currently face competition in our primary market area from two racinos, Ruidoso Downs, 10 miles away in Ruidoso and Sunland Park Racetrack and Casino, 125 miles away in Sunland Park, New Mexico. Ruidoso Downs offers quarter horse and thoroughbred racing from May through September, as well as a 20,000 square foot casino featuring 300 slot machines and a buffet restaurant. Sunland Park offers quarter horse and thoroughbred racing from mid-November to early-April, a 36,000 square foot casino facility, 700 slot machines and five restaurants. Both of these facilities lack table games and lodging facilities. In addition, we compete with 11 other New Mexico Indian casinos and one racino located in and around Albuquerque and Santa Fe, New Mexico, which is outside of our primary market area.
We also compete with other forms of legal gaming in New Mexico, Texas and Northern Mexico, including horse racing, Class II gaming, pari-mutuel wagering, the New Mexico State Lottery, the Texas State Lottery, as well as non-gaming leisure activities. We intend to expand our existing geographic market and increase the percentage of our overnight and larger spending customers who tend to live greater distances from us. We hope that with the completion of the Project, we will be able to compete more directly for regional overnight and national customers with casinos and resorts located in other parts of the country.
MESCALERO APACHE TRIBE
TRIBAL ADMINISTRATION
The Tribe is a federally recognized Indian tribe located on a 750 square mile reservation in south-central New Mexico and has approximately 4,100 members. The Indian Reorganization Act of 1934 and subsequent federal legislation govern the relationship between the Tribe and the United States government. The Tribe operates under a constitution approved by the United States Secretary of the Interior on March 25, 1936, revised on January 12, 1965, and amended on May 31, 1985.
In accordance with its Constitution, the Tribe is governed by and enacts laws through ordinances and resolutions of the Mescalero Apache Tribal Council, or the Tribal Council, which is comprised of a President, Vice President and eight Council Members, each of whom is elected by a majority vote of the eligible adult enrolled members of the Tribe. The President is a non-voting member of the Tribal Council and the Vice President only votes if necessary to break a tie. Each member of the Tribal Council serves a two-year term, with the terms of the voting members staggered so that each year four of those eight positions are up for election. The Tribal Council has the power, by ordinance, to establish the principles and policies governing the operation and control of all enterprises of the Tribe. The Tribal President has the power to contract for the Tribe upon authorization from the Tribal Council.
The Tribal Executive Committee, or the Executive Committee, has responsibility for oversight of all business activities on behalf of the Tribal Council. The Executive Committee is comprised of the President and Vice President as well as a Secretary and Treasurer, both of whom are appointed by the President.
TRIBAL COURT SYSTEM
The Constitution and Tribal Code provides for the establishment of the tribal court known as the Mescalero Apache Tribal Court, or Tribal Court. The jurisdiction of the Tribal Court extends to all matters, criminal and civil, except where prohibited by the Constitution, laws or treaties of the United States of America, and except as this jurisdiction may be otherwise limited from time to time by ordinance of the Tribal Council. The criminal offenses over which the Tribal Court has jurisdiction may be embodied in a Code of Laws, adopted by ordinance of the Tribal Council, and subject to review by the Secretary of the Interior. The duties and procedures of the Tribal Court are determined by ordinance of the Tribal Council.
The Tribal Court consists of a chief judge and two associate judges, appointed by the President of the Tribe, with the concurrence of not less than a three-fourths majority vote of the whole membership of the Tribal Council. The Tribal Council also sits as a court of appeals whenever necessary and may hear appeals at any regular or special meeting. The tenure and salary of tribal judges is established by resolution of the Tribal Council.
A judge of the Tribal Court must be an Indian as defined in the Tribal Code, not less than thirty-five years or more than seventy years of age; and cannot have been convicted of a felony, or, within one year, of a misdemeanor. The Tribal Code defines an "Indian" as someone who possesses at least one-quarter Indian blood, and is a member of any federally recognized tribe, nation, or band of Indians, or is an Eskimo, Aleut, or other Alaskan.
The Tribe has adopted its own rules of procedure and evidence, which are found in the Tribal Code. In determining cases, a tribal court judge relies on the applicable laws in the following order of precedence: (a) Tribal Constitution, Tribal Code, ordinances, traditions and customs and (b) federal laws not in conflict with tribal laws and customs.
MESCALERO APACHE TRIBAL GAMING COMMISSION
On August 20, 1999, the Tribe formed the Mescalero Apache Tribal Gaming Commission as a governmental subdivision of the Tribe. The Mescalero Apache Tribal Gaming Commission consists of 4 members, including a Chairman, Vice Chairman and Secretary-Treasurer and Commissioner. The Mescalero Apache Tribal Gaming Commission is vested with the authority to regulate all licenses and gaming activity conducted on tribal lands, including licensing persons, vendors, financial sources and contractors employed by the casino, ensuring compliance with internal control standards established by the National Indian Gaming Commission, or the NIGC, an independent agency within the U.S. Department of the Interior and establishing technical specifications for gaming devices. The Mescalero Apache Tribal Gaming Commission is responsible for carrying out the Tribe's regulatory responsibilities under federal, state and tribal law and the 2001 Compact.
GOVERNMENT REGULATION
GENERAL
We are subject to federal, state and tribal laws governing commercial relationships with Indians, Indian gaming and the management and financing of casinos owned by an Indian tribe. In addition, we are 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 we operate our casinos is only a summary and not a complete recitation of all applicable law. Moreover, this particular regulatory environment is more susceptible to changes in public policy considerations than others. We cannot predict how certain provisions will be interpreted from time to time or whether they will remain intact. Changes in these laws could have a material adverse impact on our business and results of operations and our ability to meet our debt service obligations.
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 U.S. Congress. The power of Indian tribes to enact their own laws to regulate gaming derives from the exercise of tribal sovereignty and is subject to federal law. Indian tribes maintain their own governmental systems and often their own judicial systems. Indian tribes have the right to tax persons and businesses operating 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. To sue an Indian tribe (or an enterprise, agency or instrumentality of an Indian tribe, such as us), 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 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, on 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. Under U.S. Supreme Court case law, where a tribal court exists, the remedies in that forum first may have to be exhausted before any dispute arising on or involving the affected tribe's reservation and to which the tribe, a tribal enterprise such as us or a tribal member is a party, can be properly heard by federal or state courts which would otherwise have jurisdiction. Generally, where a dispute as to the existence of jurisdiction in the tribal forum exists, the tribal court first may need to rule as to the limits of its own jurisdiction, subject to certain limited exceptions enumerated by the U.S. Supreme Court.
THE INDIAN GAMING REGULATORY ACT OF 1988
REGULATORY AUTHORITY. The operation of casinos and of all gaming on Indian land is subject to IGRA. IGRA is administered by the NIGC 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, and conduct investigations and generally monitor tribal gaming. The Bureau of Indian Affairs, or the BIA, which is a bureau of the Department of the Interior, retains certain responsibilities under IGRA (such as the approval of per capita distribution plans to tribal members and the approval of transfers of lands into trust status for gaming). 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 U.S. Department of Justice, the state in which the Tribe is located and the Tribe, in accordance with federal law.
The NIGC is empowered to impose civil penalties for violations of IGRA. IGRA also provides for federal criminal penalties for illegal gaming on Indian land and for theft from Indian gaming facilities. The NIGC has adopted rules implementing certain provisions of IGRA. These rules govern, among other things, the submission and approval of tribal gaming ordinances or resolutions and require an Indian tribe to have the sole proprietary interest in and responsibility for the conduct of any gaming on its lands. Tribes are required to issue gaming licenses only under articulated standards, conduct or commission financial audits of their gaming enterprises, perform or commission background investigations for primary management officials and key employees and maintain facilities in a manner that adequately protects the environment and the public health and safety. These rules also set out review and reporting procedures for tribal licensing 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, banked 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:
o the state in which the Indian lands lie permits that gaming for any purpose by any person, organization or entity;
o the gaming is not otherwise specifically prohibited on Indian lands by federal law;
o the gaming is conducted in accordance with a tribal ordinance or resolution which has been approved by the NIGC;
o an Indian tribe has sole proprietary interest and responsibility for the conduct of the gaming;
o the primary management officials and key employees are tribally licensed; and
o 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. IGRA requires Indian tribes to enter into tribal-state compacts in order to conduct Class III gaming.
TRIBAL-STATE COMPACTS. Tribal-state compacts may include provisions for the allocation of criminal and civil jurisdiction between the state and the Indian tribe necessary for the enforcement of these laws and regulations, taxation by the Indian tribe of the Class III gaming activity in amounts comparable to those amounts assessed by the state for comparable activities, remedies for breach, standards for the operation of the Class III gaming 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.
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, a tribe's gaming operations, and persons engaged in gaming activities, are guided by and subject to the provisions of that tribe's ordinances and regulations regarding gaming.
IGRA requires that the NIGC review tribal gaming ordinances and authorizes the NIGC to approve these ordinances only if they meet requirements relating to:
o the ownership, security, personnel background, recordkeeping and auditing of a tribe's gaming enterprises;
o the use of the revenues from that gaming; and
o the protection of the environment and the public health and safety.
POSSIBLE CHANGES IN FEDERAL LAW
Several bills have been introduced in Congress that 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 we could conduct gaming, and may have an adverse effect on our business and results of operations or impose additional regulatory or operational burdens.
EMPLOYEE AND LABOR RELATIONS
As of April 30, 2005, we had 1,627 full-time team members, excluding approximately 400 additional full-time team members which will be hired during the ski season at Ski Apache, which typically runs from Thanksgiving to Easter. We hired approximately 450 additional full-time team members in connection with the opening of the Resort. We have developed and implemented training programs for our hotel and resort team members and believe that we will be able to hire and train a sufficient number of employees for the operation of the Resort. Our team members are not covered by any collective bargaining agreements. We believe we have good labor relations with our team members.
WEBSITE AVAILABILITY OF OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
We maintain a website with the address www.innofthemountaingods.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this annual report on Form 10-K. We intend to make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file that material with, or furnish such material to, the Securities and Exchange Commission.
ITEM 2.
ITEM 2. PROPERTIES
We do not currently, and will not, own the land on which our gaming and resort enterprises are located, including the IMG Resort and Casino, the Travel Center and a portion of Ski Apache. The U.S. government holds all of the land in trust for the benefit of the Tribe. The use of tribal land is provided to us rent-free. In addition, we have a special use permit from the United States Department of Agriculture, Forest Service for the operation of the remaining portion of Ski Apache. The special use permit expires on December 31, 2014.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
We are involved in litigation incurred in the normal course of business; however, we are not currently a party to any material pending claim or legal action.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Resort has not issued or sold any equity securities.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The selected financial data set forth below for each of the five fiscal years ended April 30, 2001, 2002, 2003, 2004, and 2005 have been derived from our audited financial statements. You should read the following financial data in conjunction with the section in this Form 10-K entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with our financial statements and the related notes included in this Form 10-K beginning on page. Our financial statements for each of the fiscal years ended April 30, 2001, 2002, 2003 and 2004 were audited by Grant Thornton LLP. Our financial statements for the year ended April 30, 2005, were audited by BDO Seidman LLP, an independent registered public accounting firm, and are included in this Form 10-K.
We caution you that amounts presented in accordance with our definition of EBITDA may not be comparable to similar measures disclosed by other issues because not all issuers and analysts calculate EBITDA in the same manner. EBITDA is presented in this Form 10-K because management believes it is a useful supplement to income from operations and cash provided by operating activities in understanding cash flows available for debt service, capital expenditures and Tribal distributions. Accordingly, our management utilizes EBITDA along with net income, income from operations and other GAAP measures in evaluating our operations and performance. EBITDA should not be considered as an alternative measure of our net income, income from operations, cash flow or liquidity. EBITDA is not a measurement of financial performance or liquidity in accordance with GAAP. Although we believe EBITDA enhances your understanding of our financial condition and results of operations, this non-GAAP financial measure, when viewed individually, is not necessarily a better indicator of any trend as compared to GAAP financial measures (E.G., income from operations, net revenues, cash provided by operating activities) conventionally computed in accordance with GAAP.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
OVERVIEW
IMG Resort and Casino is an unincorporated enterprise of the Tribe. The Tribe formed IMG Resort and Casino to operate its resort enterprises, comprised of Casino Apache Travel Center, Ski Apache and Inn of the Mountain Gods, each of which is an unincorporated Tribal enterprise wholly-owned by IMG Resort and Casino. The combined activities of these enterprises comprise the operations of IMG Resort and Casino. Our four primary areas of operation are:
GAMING. Our gaming activities are authorized by IGRA, our gaming compact with the State of New Mexico and a Tribal gaming ordinance. As of April 30, 2005, we had 55,000-square feet of combined gaming space featuring 1,503 slot machines and 56 table games between our facilities at IMG Resort and Casino, opened in March 2005, and the Travel Center, opened in May 2003.
FOOD AND BEVERAGE. IMG Resort and Casino operates Wendell's, a 158-seat casual and fine dining restaurant; Gathering of the Nations Buffet, a 250-seat buffet style restaurant; a 100-seat sports bar; a 75-seat night club featuring live entertainment and dancing, Wendell's Lounge, a "piano" lounge featuring an oversized fireplace and the Apache Summit BBQ restaurant, a 85-seat casual restaurant in the golf clubhouse. The Travel Center features Smoky `Bs, a 135-seat casual dining restaurant and two sports type bars. Ski Apache operates one main restaurant and five satellite food and beverage outlets.
ROOMS. On March 15, 2005, we opened IMG Resort and Casino which includes 273 luxury hotel rooms. The hotel varies between four and eight stories in height, depending upon the location along the hotel corridor, and allows for easy traveling distance to and from the casino and events center. Our over-sized deluxe guest rooms are either 480 square feet or 610 square feet and our suites are 1,200 square feet (with the ability to connect to a 480 square foot deluxe guest room, providing a total of 1,680 square feet in that configuration). In-room amenities include high-speed Internet access, coffee makers, ironing boards and irons, mini-bars, toiletries, free and pay-per-view movies and other standard and premium channels. All rooms feature a balcony view of Lake Mescalero and either Sierra Blanca Mountain or the forest-lined golf course. The hotel also features an indoor swimming pool and fitness center including a yoga and aerobics workout area, steam and sauna facilities for both men and women and a family locker area.
RECREATION AND OTHER. Our all-season recreational operations include a 750-acre, 55-trail ski resort, the second largest in New Mexico, an 18-hole championship golf course, seasonal big-game hunts, a shooting range, horseback riding, boating and fishing. Our ski resort is typically open from Thanksgiving until Easter, while our golf course generally operates from March through October. Our retail outlets include a gift shop, golf and pro shop, ski shop, a 2,500-square foot convenience store, an 800-square foot smoke shop, a Conoco-branded fuel station with 12 gasoline and eight diesel pumping stations and laundry and shower facilities.
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 us, including the use of estimates and assumptions, are presented in the notes to our consolidated financial statements included elsewhere in this Form 10-K. Management bases its estimates on its 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. We believe that estimates related to the following areas involve a high degree of judgment and/or complexity: the liability associated with unredeemed Apache Spirit Club points, the estimated lives of depreciable assets and pension costs. Actual results could differ from those estimates.
REVENUE RECOGNITION. In accordance with gaming industry practice, we recognize gaming revenues as the net win from gaming activities, which is the difference between gaming wins and losses. Gaming revenues are net of accruals for anticipated payouts of progressive slot jackpots and table games. These anticipated jackpot payments
are reflected as current liabilities on our balance sheets. Net slot win represents all amounts played in the slot machines reduced by both (1) the winnings paid out and (2) all amounts we deposit into slot machines to ensure there are a sufficient number of coins to pay out the winnings. Table games net win represents the difference between table game wins and losses. The table games historical win percentage is reasonably predictable over time, but may vary considerably during shorter periods. Revenues from food, beverage, rooms, recreation, retail and other are recognized at the time the related service or sale is completed. Player reward redemptions for food and beverage, hotel rooms and other items are included in gross revenue at full retail value.
PROMOTIONAL ALLOWANCES. We reward our customers with "points" based on the volume of their gaming activity through our customer loyalty program, the Apache Spirit Club. These points are redeemable for player reward services or merchandise. Points are accrued and reflected as current liabilities on our consolidated balance sheets. We determine the adequacy of these accruals by periodically evaluating the historical experience and projected trends related to these accruals. If such information indicates that the accruals are overstated or understated, we will adjust the assumptions utilized in the methodologies and reduce or provide for additional accruals as appropriate. The retail value of these promotional allowances are recognized by the Casino as a reduction from gross revenue.
DISPOSAL OF LONG-LIVED ASSETS. Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," or SFAS 144, provides for the treatment of the disposal of long-lived assets. SFAS 144 provides that if an entity commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, depreciation estimates shall be revised to reflect the use of the asset over its shortened useful life. In January 2003, we demolished a substantial portion of the Inn to allow for the construction of the Resort. As a result of the demolition, the adoption of SFAS 144 for the fiscal year ended April 30, 2003 had the effect of increasing depreciation in fiscal 2003 by $5.4 million.
CAPITALIZATION OF INTEREST. In accordance with Statement of Financial Accounting Standards No. 34, "Capitalization of Interest Cost" ("SFAS 34"), interest cost associated with major development and construction projects is capitalized as part of the cost of the project. Interest is capitalized on amounts expended on the project using the weighted-average cost of our outstanding borrowings. Capitalization of interest started with the construction of the project began in January 2004 and ended with the completion of the project in March 2005. Interest capitalized on the Resort project totaled $14.3 million for the twelve months ended April 30, 2005.
PRE-OPENING AND DEVELOPMENT COST. Pre-opening and development cost are expensed as incurred, consistent with Statement of Position 98-5 "REPORTING ON THE COST OF START-UP ACTIVITIES." Pre-opening cost for the IMG Resort and Casino were $8.3 million for the fiscal year ended April 30, 2005 and consisted principally of personnel costs, training costs, marketing cost and payroll costs for retaining the former employees of the Inn.
DISAGREEMENTS WITH THE STATE OF NEW MEXICO. The Tribe challenged the legality of the revenue sharing prescribed by the 1997 Compact, claiming them to be an illegal tax on Indian gaming under the IGRA. The Tribe invoked its right to seek a resolution of the disagreements through the arbitration process provided for in the 1997 Compact and no revenue sharing or regulatory fees were remitted to the State.
On April 20, 2004, the Tribe settled with the State of New Mexico all of its obligations under the 1997 Compact. Under the settlement agreement, the State of New Mexico and the Tribe agreed that the Tribe would pay the State of New Mexico $25.0 million and enter into a new compact, which we refer to as the 2001 Compact. On April 20, 2004, we paid an initial payment of $2.0 million pursuant to the terms of the settlement agreement. The settlement agreement provided that the $25.0 million payment settles all revenue sharing and regulatory fees payable under the 1997 Compact as well as all revenue sharing fees payable under the 2001 Compact through March 2005. The 2001 Compact provides for a revenue sharing amount equal to 8% of "net win" from gaming machines, payable no later than 25 days after the last day of each calendar quarter and an annual regulatory fee of $100,000, paid in quarterly installments of $25,000 on the first day of each calendar quarter. Pursuant to the terms of the settlement agreement, the Resort began accruing revenue sharing payments to the State of New Mexico at the rate of 8% of "net win" pursuant to the 2001 Compact in March 2005, with the first revenue sharing payment under the 2001 Compact due in July 2005. In addition, pursuant to the terms of the settlement agreement, the Resort began accruing regulatory fees, at the rate of $100,000 per year, from the date the approval of the 2001 Compact is published in the Federal Register with our first payment for regulatory fees under the 2001 Compact due on the first day of the first full calendar quarter thereafter. As a result of the compact settlement, the Resort reversed approximately $27.1 million
of previously recorded revenue sharing expenses. On June 1, 2004, the Tribe and the State of New Mexico entered into the 2001 Compact. On July 22, 2004 the Department of Interior approved the 2001 Compact. The Resort made the remaining $23.0 million payment required under the settlement agreement in August 2004. Following the payment of the $25.0 million settlement amount, the additional $3.0 million we had reserved to pay for our accrued liability relating to the 1997 Compact, held in a restricted account, became unrestricted cash. The settlement with the State of New Mexico was reflected in operating costs and expenses as a settlement of revenue sharing and regulatory fees in the consolidated statements of income and regulatory fees paid in advance through 2005 and recorded as a prepaid expense in the consolidated balance sheets.
The terms of the 2001 Compact are substantially similar to the terms of the 1997 Compact and revenue sharing agreement, except for the following material differences:
o revenue sharing fees under the 2001 Compact are 8% of "net win" from gaming, rather than 16% as provided by the 1997 Compact;
o regulatory fees under the 2001 Compact are $100,000 per year, while the 1997 Compact requires quarterly regulatory fees (subject to an annual increase of 5% beginning on January 1, 1999) of $6,250 per gaming facility, $300 per gaming machine and $750 per gaming table;
o the 2001 Compact expires June 30, 2015, while the 1997 Compact expires on August 29, 2006, subject to an automatic one year extension; and
o insurance coverage required by the 2001 Compact to insure the Tribe, IMG and its employees and agents from claims against liability for bodily injury and property damages by a visitor is required to be at least $50 million, while the 1997 Compact requires $10.0 million of such coverage.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED APRIL 30, 2005 COMPARED TO FISCAL YEAR ENDED APRIL 30, 2004
NET REVENUES. Net revenues increased $12.1 million, or 15.0%, to $93.0 million for the fiscal year ended April 30, 2005 from $80.9 million for the fiscal year ended April 30, 2004. The increase was due to increases in gaming revenues, food and beverage revenue, recreation and retail revenue, and revenue from our new hotel. Player reward redemptions are included in gross revenues but are deducted as a promotional allowance to arrive at net revenues.
GAMING. Gaming revenues increased $4 million, or 6.6%, to $64.3 million for the fiscal year ended April 30, 2005 from $60.3 million at the fiscal year ended April 30, 2004. Slot revenues led the increase, growing to $55.2 million for the fiscal year ended April 30, 2005 from $64.3 million for the fiscal year ended April 30, 2004, an increase of $2.5 million, or 4.7%. Gross slot win per unit was $147 for the fiscal year 2005 compared to $140 for the fiscal year 2004; in this period the weighted average number of units increased by 323, or 27.4%. Table games revenue increased $1.5 million, or 19.7%, to $9.1 million for the fiscal year ended April 30, 2005 from $7.6 million for the fiscal year ended April 30, 2004. The increase was the result of the increase in the table game hold to 22.5% for the fiscal year ended April 30, 2005 from 18.7% for the fiscal year ended April 30, 2000, while drop remained relatively stable increasing $0.2 million to $40.5 million for fiscal year 2005 from $40.2 million for fiscal year 2004.
FOOD AND BEVERAGE. Food and beverage revenues increased $0.8 million, or 14.3%, to $6.4 million for the fiscal year ended April 30, 2005 from $5.6 million for the fiscal year ended April 30, 2004. The increase was due to the opening of IMG Resort and Casino in March 2005 and increased sales at Smokey B's, our casual dining restaurant at the Travel Center.
Smokey B's, our casual dining restaurant at the Travel Center in May 2003 and the opening of the new resort in March 2005.
ROOMS. Room revenues totaled $1.2 million for the fiscal year ended April 30, 2005 following the opening of the new resort in March 2005.
RECREATION AND OTHER. Recreation and other revenues increased $6.5 million, or 39.4%, to $23.0 million for the fiscal year ended April 30, 2005 from $16.5 million for the fiscal year ended April 30, 2004. The increase was due to increases in revenues at Ski Apache as a result of additional skiers due to a much better then average snowfall and increased retail revenues at the Travel Center.
PROMOTIONAL ALLOWANCES. Promotional allowances increased $0.4 million, or 28.6%, to $1.8 million for the fiscal year ended April 30, 2005 from $1.4 million for the fiscal year ended April 30, 2004. The increase in gaming revenues and the opening of IMG Resort and Casino have resulted in an increase in promotional allowances.
TOTAL OPERATING EXPENSES. Total operating expenses increased $43.1 million, or 116.5%, to $80.1 million for the fiscal year ended April 30, 2005 from $37.0 million for the fiscal year ended April 30, 2004. The increase was primarily due to the reversal of previously recorded revenue sharing and State regulatory fees as a result of the settlement of the Compact dispute offset by an increase in our gaming and pre-opening expenses and depreciation expense associated with the opening of IMG Resort and Casino in March 2005.
GAMING. Gaming expenses increased $0.4 million, or 1.6%, to $25.8 million for the fiscal year ended April 30, 2005 from $25.4 million for the fiscal year ended April 30, 2004. The increase was primarily due to the addition of team members at IMG Resort and Casino which opened in March 2005.
FOOD AND BEVERAGE. Food and beverage expenses increased $0.7 million or 0.7%, to $7.3 million for the fiscal year ended April 30, 2005 from $6.6 million for the fiscal year ended April 30, 2004, primarily due to the addition of food and beverage team members at IMG Resort and Casino which opened in March 2005.
ROOMS. Costs and expenses associated with hotel rooms increased $0.6 million, or 600.0%, to $0.7 for the fiscal year ended April 30, 2005 from $0.1 million for the fiscal year ended April 30, 2004, due to the opening of IMG Resort and Casino in March 2005.
RECREATION AND OTHER. Recreation and other costs increased $4.7 million, or 43.9%, to $15.4 million for the fiscal year ended April 30, 2005 from $10.7 million for the fiscal year ended April 30, 2004. The increase was primarily attributable to the increased cost of sales and related expenses for the convenience store, smoke shop, refueling center and laundry and shower facilities and additional expenses at Ski Apache to support the additional skier visits during the year ended April 30, 2005.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $0.8 million, or 8.9%, to $9.8 million for the fiscal year ended April 30, 2005 from $9.0 million for the fiscal year ended April 30, 2004. The increase was primarily due to an increase in expenses due to the addition of executive staff in response to the needs of our new resort complex and increased reporting requirements associated with the issuance of the Notes as well as an increase in marketing, advertising and promotional activities.
PENSION EXPENSES. Pension expenses allocated by the Tribe decreased $0.6 million, or 31.6%, to $1.3 million for the fiscal year ended April 30, 2005 from $1.9 million for the fiscal year ended April 30, 2004. The decrease was primarily due to the decision by the Tribe to curtail the retirement plan on November 30, 2004, resulting in our ability to cease making contributions to the retirement plan as of that date.
GAMING REGULATORY COMMISSION EXPENSES. Gaming and regulatory commission expenses allocated by the Tribe increased $1.4 million, or 116.7%, to $2.6 million for the fiscal year ended April 30, 2005 from $1.2 million for the fiscal year ended April 30, 2004. The increase was primarily due to an increase in expenses due to the addition of staff in response to the needs of IMG Resort and Casino.
MEDICAL INSURANCE EXPENSES. Medical and health insurance expenses administered by the Tribe increased $0.5 million, or 55.6%, to $1.4 million for the fiscal year ended April 30, 2005 from $0.9 million for the fiscal year ended
April 30, 2004. The increase was primarily due to an increase in expenses due to the addition of staff in response to the needs of IMG Resort and Casino.
TELECOMMUNICATIONS EXPENSES. Telecommunications expenses charge by the Mescalero Apache Telecommunications decreased $0.1 million, or 33.3%, to $0.2 million for the fiscal year ended April 30, 2005 from $0.3 million for the fiscal year ended April 30, 2004. The decrease was primarily due to use of advanced technology at IMG Resort and Casino.
PRE-OPENING COSTS AND EXPENSES. Pre-opening expenses were $8.3 million for the fiscal year ended April 30, 2005 compared to $3.1 million for the fiscal year ended April 30, 2004, and consisted principally of personnel costs, training costs and payroll costs for retaining the former employees of the Inn. Pre-opening costs and expenses are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $2.4 million to $7.3 million for the fiscal year ended April 30, 2005 from $4.9 million for the fiscal year ended April 30, 2004. The increase was primarily the result of the opening of IMG Resort and Casino in March 2005.
OPERATING INCOME. Operating income decreased $31.0 million, or 70.6%, to $12.9 million for the fiscal year ended April 30, 2005 from $43.9 million for the fiscal year ended April 30, 2004. The decrease in operating income was primarily due to the reversal of previously recorded revenue sharing and State regulatory fees as a result of the settlement of the Compact dispute in the prior year and increase in pre-opening expenses and depreciation expenses associated with the opening of IMG Resort and Casino in March 2005.
OTHER INCOME (EXPENSES). Other income (expenses) increased $6.6 million to $(10.8) million for the fiscal year ended April 30, 2005 from $(4.2) million for the fiscal year ended April 30, 2004. The increase was primarily due to interest expense, net of amounts capitalized, in an amount equal to $11.5 million during the period. Other income (expenses) is comprised of interest income and other income minus interest expense and other expense.
FISCAL YEAR ENDED APRIL 30, 2004 COMPARED TO FISCAL YEAR ENDED APRIL 30, 2003
NET REVENUES. Net revenues increased $14.6 million, or 22.0%, to $80.9 million for the fiscal year ended April 30, 2004 from $66.3 million for the fiscal year ended April 30, 2003. The increase was due to an increase in gaming revenues offset by a decrease in room revenue and a decrease in food and beverage revenue due to the closure of the Inn in January 2003. Player reward redemptions are included in gross revenues but are deducted as a promotional allowance to arrive at net revenues.
GAMING. Gaming revenues increased $13.4 million, or 28.6%, to $60.3 million for the fiscal year ended April 30, 2004 from $46.9 million at the fiscal year ended April 30, 2003. Slot revenues led the increase, growing to $52.7 million for the fiscal year ended April 30, 2004 from $41.2 million for the fiscal year ended April 30, 2003, an increase of $11.5 million, or 27.9%. Gross slot win per unit was $134 for the fiscal year 2004 compared to $155 for the fiscal year 2002; in this period the weighted average number of units increased by 552, or 87.9%. Table games revenue increased $1.8 million, or 31.0%, to $7.6 million for the fiscal year ended April 30, 2004 from $5.8 million for the fiscal year ended April 30, 2003. The increase was the result of the increase in the table game drop of $11.7 million, or 40.9%, to $40.3 million for the fiscal year ended April 30, 2004 from $28.6 million for the fiscal year ended April 30, 2003, combined with a reduction in hold percentage to 18.7% for the fiscal year ended April 30, 2004 from 20.2% for the fiscal year ended April 30, 2003.
FOOD AND BEVERAGE. Food and beverage revenues increased $.7 million, or 14.3%, to $5.6 million for the fiscal year ended April 30, 2004 from $4.9 million for the fiscal year ended April 30, 2003. While there was a loss of revenue due to the closing of the restaurants located at the Inn in January 2003, this loss was offset by the opening of Smokey B's, our casual dining restaurant at the Travel Center in May 2003.
ROOMS. Room revenues decreased $3.4 million, or 100%, for the fiscal year ended April 30, 2004 due to the closure of the Inn in January 2003.
RECREATION AND OTHER. Recreation and other revenues increased $4.5 million, or 37.5%, to $16.5 million for the fiscal year ended April 30, 2004 from $12.0 million for the fiscal year ended April 30, 2003. The increase was due
to the opening of our Travel Center in May 2003, which resulted in increased revenues from the convenience store, smoke shop, and gasoline and diesel sales located at the facility.
PROMOTIONAL ALLOWANCES. Promotional allowances increased $0.5 million, or 55.6%, to $1.4 million for the fiscal year ended April 30, 2004 from $0.9 million for the fiscal year ended April 30, 2003. The increase in gaming revenues and the opening of the Travel Center have resulted in an increase in promotional allowances.
TOTAL OPERATING EXPENSES. Total operating expenses decreased $15.0 million, or 28.8%, to $37.0 million for the fiscal year ended April 30, 2004 from $52.0 million for the fiscal year ended April 30, 2003. The decrease was primarily due to the reversal of previously recorded revenue sharing and State regulatory fees as a result of the settlement of the Compact dispute offset by an increase in our gaming and pre-opening expenses associated with the opening of the Travel Center in May 2003.
GAMING. Gaming expenses increased $5.9 million, or 30.3%, to $25.4 million for the fiscal year ended April 30, 2004 from $19.5 million for the fiscal year ended April 30, 2003. The increase was primarily due to the addition of team members at the Travel Center which opened in May 2003.
FOOD AND BEVERAGE. Food and beverage expenses increased $1.6 million or 32.0%, to $6.6 million for the fiscal year ended April 30, 2004 from $5.0 million for the fiscal year ended April 30, 2003, primarily due to the addition of food and beverage team members at the Travel Center coupled with an increase in the cost of sales due to increased food covers.
ROOMS. Costs and expenses associated with hotel rooms decreased $1.5 million, or 93.8%, to $0.1 for the fiscal year ended April 30, 2004 from $1.6 million for the fiscal year ended April 30, 2003, primarily due to a reassignment of team members as a result of closure of the Inn in January 2003.
RECREATION AND OTHER. Recreation and other costs increased $4.9 million, or 84.5%, to $10.7 million for the fiscal year ended April 30, 2004 from $5.8 million for the fiscal year ended April 30, 2003. The increase was primarily attributable to the addition of new team members at the Travel Center and increased cost of sales and related expenses for the convenience store, smoke shop, refueling center and laundry and shower facilities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $2.5 million, or 38.5%, to $9.0 million for the fiscal year ended April 30, 2004 from $6.5 million for the fiscal year ended April 30, 2003. The increase was primarily due to an increase in expenses due to the addition of executive staff in response to the needs of our new resort complex and increased reporting requirements associated with the issuance of the Notes as well as an increase in marketing, advertising and promotional activities. This increase in expenses was partially offset by a reduction in utilities and other expenses related to the closure of the Inn in January 2003.
PENSION EXPENSES. Pension expenses allocated by the Tribe increased $0.3 million, or 18.8%, to $1.9 million for the fiscal year ended April 30, 2004 from $1.6 million for the fiscal year ended April 30, 2003. The increase was primarily due to an increase in expenses due to the addition of staff in response to the needs of the Travel Center.
GAMING REGULATORY COMMISSION EXPENSES. Gaming and regulatory commission expenses allocated by the Tribe increased $0.4 million, or 50.0%, to $1.2 million for the fiscal year ended April 30, 2004 from $0.8 million for the fiscal year ended April 30, 2003. The increase was primarily due to an increase in expenses due to the addition of staff in response to the needs of the Travel Center.
MEDICAL INSURANCE EXPENSES. Medical and health insurance expenses administered by the Tribe increased $0.3 million, or 50.0%, to $0.9 million for the fiscal year ended April 30, 2004 from $0.6 million for the fiscal year ended April 30, 2003. The increase was primarily due to an increase in expenses due to the addition of staff in response to the needs of the Travel Center.
TELECOMMUNICATIONS EXPENSES. Telecommunications expenses charge by the Mescalero Apache Telecommunications increased $0.1 million, or 50.0%, to $0.3 million for the fiscal year ended April 30, 2004 from $0.2 million for the fiscal year ended April 30, 2003. The increase was primarily due to an increase in expenses due to the opening of the Travel Center.
PRE-OPENING COSTS AND EXPENSES. Pre-opening expenses were $3.1 million for the fiscal year ended April 30, 2004 compared to $1.4 million for the fiscal year ended April 30, 2003, and consisted principally of personnel costs, training costs and payroll costs for retaining the former employees of the Inn. Pre-opening costs and expenses are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $4.3 million to $4.9 million for the fiscal year ended April 30, 2004 from $9.2 million for the fiscal year ended April 30, 2003. The decrease was primarily the result of the demolition of the Inn in January 2003.
OPERATING INCOME. Operating income increased $29.7 million, or 209.2%, to $43.9 million for the fiscal year ended April 30, 2004 from $14.2 million for the fiscal year ended April 30, 2003. The increase in operating income was primarily due to the reversal of previously recorded revenue sharing and State regulatory fees as a result of the settlement of the Compact dispute offset by an increase in our gaming and pre-opening expenses associated with the opening of the Travel Center in May 2003.
OTHER INCOME (EXPENSES). Other income (expenses) increased $4.6 million to $(4.2) million for the fiscal year ended April 30, 2004 from $0.4 million for the fiscal year ended April 30, 2003. The increase was primarily due to interest expense, net of amounts capitalized, in an amount equal to $5.3 million during the period. Other income (expenses) is comprised of interest income and other income minus interest expense and other expense.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2005 and 2004, we had cash and cash equivalents (net of amounts in restricted accounts) of $13.7 million and $15.8 million, respectively. Our principal sources of liquidity for fiscal year 2005 consisted of net cash provided by financing activities of $95.2 million and for fiscal 2004 consisted of net cash provided in operating activities of $38.1 million. Net cash used in operating activities for fiscal 2005 were primarily a payment of revenue sharing expenses of $23.0 million as a result of the compact settlement. Net cash provided by operating activities for fiscal 2004 increased $6.1 million over fiscal 2003. Cash flows from operating activities was $38.1 million for the fiscal year ended April 30, 2004 compared to $32.0 million for the fiscal year ended April 30, 2003. The $6.1 million increase included net income of $39.7 million in net income with increases in interest payable of $12.0 million offset by a reduction of accrued revenue sharing and regulatory fees of $16.8 million and an increase in prepaid revenue sharing fees as a result of the Compact settlement.
Cash used in investing activities for fiscal year 2005 and 2004 was $94.1 million and $100.5 million, respectively, and primarily relates to construction costs for the Project. Cash used in investing activities for fiscal year 2003 was $23.5 and primarily relates to construction costs for the Travel Center.
Cash provided from financing activities for fiscal year 2005 was $95.2 million and primarily related to the use of restricted cash to pay construction payables of $96.9 million along with $10.0 million in contributions by the Tribe offset by $13.0 million in Tribal distributions. Cash provided from financing activities was $68.9 million for the fiscal year ended April 30, 2004 compared to $20.9 million used by financing activities for the fiscal year ended April 30, 2003. The $89.8 million increase in cash provided from financing activities is primarily due to the issuance of $200.0 million in senior notes offset by $10.9 million in deferred financing costs, $4.7 million in debt payments, and $151.6 million of cash held for use in paying construction expenditures for the construction of the Project. Cash used from financing activities for fiscal year 2003 was $21.0 million and primarily related to distributions and payments to the Tribe offset by equity contributions to fund the Travel Center and other costs related to the Project.
We believe that existing cash balances and operating cash flows will provide adequate funds for our working capital needs, planned capital expenditures, including equipment and furnishings for the Resort and debt service requirements for the foreseeable future. However, our ability to fund our operations, make planned capital expenditures, make scheduled payments and refinance our indebtedness depends on our future operating performance and cash flow, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. Additionally, as a result of the offering, our ability to incur additional indebtedness is limited under the terms of the indenture governing the 12% Senior Notes due 2010, or the Notes.
DESCRIPTION OF INDEBTEDNESS
THE NOTES
On November 3, 2003, we issued $200.0 million senior notes, with fixed interest payable at a rate of 12% per annum. Interest on the Notes is payable semi-annually on May 15 and November 15. The Notes mature on November 15, 2010. At April 30, 2005 accrued interest payable on the Notes was $11.2 million. The Notes are secured until completion of the Resort, by first priority security interests in the following accounts:
o an interest reserve account, which was funded at the time the notes were sold with approximately $36.4 million, which, together with interest earned thereon, will be used to make the first three (3) interest payments on the Notes. As of April 30, 2005, the balance in the interest reserve account was $11.9 million;
o a construction disbursement account, which was funded at the time the Notes were sold with approximately $94.3 million and was used to fund completion of the Resort. As of April 30, 2005, the balance in the construction disbursement account was $1,180;
o a construction reserve account, which was funded at the time the Notes were sold approximately $53.6 million and was be used to (i) fund contingencies related to the construction of the Resort and (ii) fund a resolution of the Tribe's disagreement relating to the 1997 Compact. As of April 30, 2005, the balance in the construction reserve account was $15.6 million; and
o a construction retainage account. As of April 30, 2005, the balance in the construction retainage account was $8.2 million.
The Notes rank senior in right of payment to all of our future indebtedness or other obligations that are, by their terms, expressly subordinated in right of payment to the notes. In addition, the notes rank equal in right of payment to all of our existing and future senior unsecured indebtedness and other obligations that are not, by their terms, expressly subordinated in right of payment to the notes. Casino Apache, Inn of the Mountain Gods, Casino Apache Travel Center and Ski Apache are guarantors of the notes.
GENERAL INDEBTEDNESS
The Tribe, for the benefit of the Inn, executed a promissory note dated September 1, 1982, which we refer to as the BIA Note in favor of the Department of Interior, Bureau of Indian Affairs in the amount of approximately $3.5 million. The BIA Note accrues interest at the rate of 8.5% per annum payable annually from the date of the BIA Note until paid in full on September 1, 2011. The Inn has been making payments of approximately $27,000 on the BIA Note each month. As of April 30, 2005, there was approximately $1.5 million outstanding on the BIA Note.
CREDIT FACILITY
On June 15, 2004, we entered into a $15.0 million credit facility with Key Equipment Finance, a Division of Key Corporate Capital Inc., one of the nation's largest financial services firms. The fixed rate loan is fully
amortizable over five years and bears an interest rate indexed off the 3-year Treasury Interest Rate Swaps. Proceeds from the loan will be used to fund furniture, fixtures and equipment for the Project. At April 30, 2005 no funds had been drawn against this facility. During May and June 2005, we drew $14.9 million against this facility to finance purchases of furniture, fixtures and equipment for the Project.
OFF-BALANCE SHEET ARRANGEMENTS
As of April 30, 2005, we have no off-balance sheet arrangements that affect our financial condition, liquidity and results of operation. We have certain contractual obligations including long-term debt, operating leases and employment contracts.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table sets forth, as of April 30, 2005, our scheduled principal, interest and other contractual annual cash obligations due by us for each of the periods indicated below (Dollars in thousands):
Under the 2001 state compact, the Resort is obligated to pay revenue sharing expenses based on 8% of slot revenue and also a state regulatory fee of $100,000 per year.
A special use permit was obtained from the United States Department of Agriculture Forest Service for Ski Apache's use of 80 acres of land in Lincoln National Forest. The permit is dated April 23, 1985, and has a term of 30 years with a quarterly occupancy fee based on revenue and gross fixed assets. Occupancy fee for the years ended April 30, 2003, 2004 and 2005 totaled approximately $121,000, $130,000 and 137,200 respectively.
IMPACT OF INFLATION
Absent changes in competitive and economic conditions or in specific prices affecting the industry, we do not expect that inflation will have a significant impact on our operations. Changes in specific prices, such as fuel and transportation prices, relative to the general rate of inflation may have a material adverse effect on the hotel and casino industry in general.
REGULATION AND TAXES
We are subject to extensive regulation by the Mescalero Apache Tribal Gaming Commission, the NIGC and, to a lesser extent, the New Mexico Gaming Control Board. Changes in applicable laws or regulations could have a significant impact on our operations. We are unincorporated Tribal enterprises, directly or indirectly owned by the Tribe, a federally recognized Indian tribe, and are located on reservation land held in trust by the United States of America; therefore, we were not subject to federal or state income taxes for the fiscal years ended April 30, 2003, 2004 or 2005 , nor is it anticipated we will be subject to such taxes for the foreseeable future. Various efforts have been made in the U.S. Congress over the past several years to enact legislation that would subject the income of tribal business entities, such as us, to federal income tax. Although no such legislation has been enacted, similar legislation could be passed in the future. A change in our non-taxable status could have a material adverse affect on our cash flows from operations.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 151, "Inventory Costs," ("SFAS 151"), an amendment of Accounting Research Bulletin No. 43, Chapter 4. SFAS No. 151 is the result of a broader effort by the FASB working with the International Accounting Standards Board to reduce differences between United States and international accounting standards. SFAS No. 151 eliminates the "so abnormal" criterion in ARB 43 and companies will no longer be permitted to capitalize inventory costs on their balance sheets when the production defect rate varies significantly from the expected rate. It also makes clear that fixed overhead should be allocated based on "normal capacity." SFAS 151 is effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a material effect on our results of operations or consolidated financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 153 will have a material effect on our results of operations or consolidated financial position.
In May 2005, the Financial Accounting Standards Board, issued Statement of Financial Accounting Standards SFAS No. 154, "Accounting Changes and Error Corrections"("SFAS 154"). SFAS 154 replaces APB No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements" and establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of SFAS 154 will have a material effect on our results of operations or consolidated financial position
RISK FACTORS
SEVERAL OF THE MATTERS DISCUSSED IN THIS REPORT CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. FACTORS ASSOCIATED WITH THE FORWARD-LOOKING STATEMENTS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE PROJECTED OR FORECASTED IN THIS REPORT ARE INCLUDED IN THE STATEMENTS BELOW. IN ADDITION TO OTHER INFORMATION CONTAINED IN THIS REPORT, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING CAUTIONARY STATEMENTS AND RISK FACTORS. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY RISKS AND UNCERTAINTIES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO MAY IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS COULD SUFFER. THE RISKS DISCUSSED BELOW ALSO INCLUDE FORWARD-LOOKING STATEMENTS AND OUR ACTUAL RESULTS MAY DIFFER SUBSTANTIALLY FROM THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS
RISKS RELATING TO OUR BUSINESS
WE HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
As of April 30, 2005, we had an aggregate of approximately $201.5 million of indebtedness outstanding, which includes $200.0 million of debt on the notes issued on November 3, 2003. This substantial indebtedness could have important consequences to you and significant effects on our business and future operations. For example, it could:
o make it more difficult for us to satisfy our debt service obligations;
o increase our vulnerability to general adverse economic and industry conditions or a downturn in our business;
o limit our ability to fund future working capital, capital expenditures and other general operating requirements;
o require us to dedicate a substantial portion of our cash flow from operations to service our outstanding indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, the Project and other general operating requirements;
o place us at a competitive disadvantage compared to our competitors that have less debt; and
o limit our ability to borrow additional funds.
Our indebtedness could result in a material adverse effect on our business, financial condition and results of operations. If we incur additional debt in the future, these adverse consequences could intensify.
OUR FAILURE TO GENERATE SUFFICIENT CASH FLOW FROM OUR GAMING AND OTHER RESORT OPERATIONS COULD ADVERSELY AFFECT OUR ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS.
Our ability to make payments on and repay or refinance our debt will depend on our ability to generate cash flow from the operations of our gaming and other resort operations. Our ability to generate sufficient cash flow from operations to satisfy our obligations will depend on our future operating performance, which is subject to many economic, competitive, regulatory and other business factors that are beyond our control. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. For the following reasons, among others, these alternatives may not be available to us on reasonable terms or at all, or, if available, they may not be available in amounts adequate to enable us to satisfy our debt service obligations:
o unlike non-governmental businesses, we are prohibited by law from generating cash through an offering of equity securities;
o our ability to incur additional debt is limited by the covenants of the indenture governing the notes; and
o the indenture governing the notes includes covenants which limit our ability to create liens on or sell our assets.
If our cash flow is insufficient and we are unable to raise additional capital, we may not be able meet our debt service obligations.
RESTRICTIVE COVENANTS IN THE INDENTURE GOVERNING THE NOTES MAY LIMIT OUR ABILITY TO EXPAND OUR OPERATIONS AND CAPITALIZE ON OUR BUSINESS OPPORTUNITIES.
The indenture governing the notes includes covenants which limit our ability to borrow money, make investments, create liens, sell assets, engage in transactions with affiliates, engage in other businesses and engage in mergers or consolidations. These restrictive covenants may limit our ability to expand our operations and capitalize on business opportunities. If we are unable to expand our operation or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected and we may not be able to meet our debt service obligations.
WE MAY NOT BE ABLE TO REALIZE THE BENEFITS OF OUR BUSINESS STRATEGY.
The Project is part of our business strategy to develop an integrated resort, increase our market reach and realize operating benefits from business synergies. We may not be able to fully implement this strategy or may not fully realize these anticipated benefits. Implementation of our business strategy could be adversely affected by a number of factors beyond our control, including general or local economic conditions, increased competition or other changes in our industry. In particular, we may not be able to attract a sufficient number of guests, gaming customers and other visitors in order to achieve our performance goals. Furthermore, we may not be successful in our plan to promote our customers' utilization of our various resort amenities, including our gaming, hotel, entertainment and other amenities as anticipated or to a degree that will allow us to achieve our performance goals. Additionally, our business strategy, intended to capitalize on the spending levels of our patrons, attract customers from new target
markets and reduce seasonality, may not achieve its intended results. A failure to effectively implement our business strategy could have a material adverse effect on our business, financial condition, results of operations and our ability to meet our debt service obligations.
FEDERAL, STATE AND TRIBAL LAWS AND REGULATIONS, AND OUR GAMING COMPACT, REGULATE OUR GAMING OPERATIONS AND NONCOMPLIANCE WITH THESE LAWS AND REGULATIONS BY US OR THE TRIBE, AS WELL AS CHANGES IN THESE LAWS AND REGULATIONS (WHICH ARE SUSCEPTIBLE TO CHANGES IN PUBLIC POLICY) OR FUTURE INTERPRETATIONS THEREOF, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR ABILITY TO CONDUCT GAMING, AND THUS ON OUR ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS.
Federal, state and Tribal laws and regulations, and our gaming compact, regulate our gaming operations. For example, various regulatory bodies, including the NIGC, the Mescalero Apache Tribal Gaming Commission and the New Mexico Gaming Control Board have oversight of our gaming operations. In addition, Congress has regulatory authority over Indian affairs and can establish and change the terms upon which Indian tribes may conduct gaming. The operation of all gaming on Indian lands is subject to IGRA.
The legal and regulatory environment governing our activities, which involve gaming and commercial relations with Indian tribes, is susceptible to changes in public policy regarding these matters. For example, over the past several years, legislation has been introduced in Congress designed to address a myriad of perceived problems with IGRA, including proposed legislation repealing many of the provisions of IGRA and prohibiting the operation of gaming on Indian reservations in states where gaming is not otherwise allowed on a commercial basis. While none of the substantive proposed amendments to IGRA have proceeded out of committee hearings to a vote by either house of the U.S. Congress, we cannot predict the ramifications of future legislative acts. Changes in applicable laws or regulations, or a change in the interpretation of these laws or regulations or our gaming compact with the State of New Mexico could limit or materially affect the types of gaming, if any, that we may offer. Any restrictions with respect to gaming could have a material adverse effect on our business, financial condition, results of operations and our ability to meet our debt service obligations.
WE COMPETE WITH CASINOS, OTHER FORMS OF GAMING AND OTHER RESORT PROPERTIES. IF WE ARE NOT ABLE TO SUCCESSFULLY COMPETE, WE WILL NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE OBLIGATIONS..
Currently, we compete with 15 tribal gaming casinos and non-tribal racinos operated within 200 miles of our location, one of which, Ruidoso Downs, is approximately 10 miles away from us in Ruidoso, and another, Sunland Park Racetrack and Casino, is approximately 125 miles away from us in Sunland Park, New Mexico. Ruidoso Downs offers quarter horse and thoroughbred racing from May through September, as well as a 20,000 square foot casino featuring approximately 300 slot machines and a buffet restaurant. Sunland Park offers quarter horse and thoroughbred racing from mid-November to early-April, a 36,000 square foot casino featuring approximately 700 slot machines and five restaurants. The other 11 tribal gaming casinos and one racino are located in and around Albuquerque and Santa Fe, New Mexico, all which are outside of our primary market area. We also compete with other forms of legal gaming in New Mexico, Texas and Northern Mexico, including horse racing, Class II gaming, pari-mutuel wagering, the New Mexico State Lottery, the Texas State Lottery, as well as non-gaming leisure activities. We intend to expand our existing geographic market and increase the percentage of our overnight and larger spending customers who tend to live greater distances from us. The Project will allow us to compete more directly for regional overnight and national customers with casinos and resorts located in other parts of the country. Many of our competitors in this expanded geographical market have substantially greater resources and name recognition than we do or are in a more convenient location, which is closer to a major population center or transportation hub. If we are unable to compete successfully, our business, financial condition and results of operations could be materially adversely affected and we may not be able to meet our debt service obligations.
WE ARE HIGHLY DEPENDENT ON OUR SURROUNDING MARKET AREA. AS A RESULT, WE FACE GREATER RISKS THAN A GEOGRAPHICALLY DIVERSE COMPANY.
We rely primarily on drive-in customers living within our primary market area consisting of southern New Mexico, western Texas and northern Mexico for the majority of our revenues. We expect to increase our market reach, but if our marketing strategy is not successful, our primary customer base will continue to be a predominately local one. Therefore, we are subject to greater risks than more geographically diversified gaming or resort
operations. Among others, the following conditions could have a material adverse effect on our results of operations:
o a decline in the economies of our primary market area or a decline in the number of gaming customers from these areas for any reason;
o an increase in competition in our primary market area or the surrounding area;
o inaccessibility due to road construction or closures of primary access routes; and
o natural and other disasters in the surrounding area including forest fires and floods.
These factors may cause a disruption in our business and as a result have a material adverse effect on our business, financial condition, result of operations and our ability to meet our debt service obligations.
OUR BUSINESS IS SUBJECT TO CONTINGENCIES BEYOND OUR CONTROL, INCLUDING THE AFTERMATH OF TERRORIST ACTS AND WARS, WHICH MAY SIGNIFICANTLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND ABILITY TO MEET OUR DEBT SERVICE OBLIGATIONS.
We hope to attract customers from beyond our primary market who will have to travel by air to our property. The recent war with Iraq, the terrorist attacks of September 11, 2001, the United States' ongoing military campaign against terrorism, and continued violence, conflicts and instability in other areas of the world have created many economic and political uncertainties, some of which may affect our ability to attract customers outside our current primary market as well as our operations and profitability. The potential short-term and long-term effects that these and similar other situations and events may have for our customers, our primary and secondary markets and the U.S. economy in general are uncertain. These and similar other future events could have a significant impact on the number of customers visiting the Travel Center and the Resort and, as a result, may have a material adverse effect on our business, financial condition, results of operations and ability to meet our debt service obligations.
WE MAY FACE DIFFICULTIES IN RECRUITING, TRAINING AND RETAINING QUALIFIED EMPLOYEES.
The operation of our resort requires us to continuously recruit and retain a substantial number of qualified professionals, employees, executives and managers with gaming, hospitality, management and financial reporting experience. There can be no assurances that we will be able to recruit, train and retain a sufficient number of qualified employees. A failure to be able to recruit and retain qualified personnel could result in management, operating and financial reporting difficulties or affect the experience and enjoyment of our patrons, either of which could have a material adverse effect on our business, financial condition, results of operations or ability to meet our debt service obligations.
WE DO NOT HAVE A HISTORY OF OPERATING ON AS LARGE OF A SCALE AS CONTEMPLATED BY THE PROJECT.
As a result of the Project, our business operations is significantly expanded in size and diversity. Our gaming space grew by more than 32,000 square feet (including the addition of a second casino location) and our gaming positions by approximately 700 slot machines and 22 table games. In addition, we have significantly expanded restaurant, lounge and bar operations, a fuel station and a number of additional retail facilities. The expansion of our resort operations places a significant demand on our management resources which may affect our ability to effectively manage our growth. These increased demands on our management could distract them from the operation of our business, which could have a material adverse effect on our business, financial condition, results of operations and ability to meet our debt service obligations.
A CHANGE IN OUR CURRENT NON-TAXABLE STATUS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR CASH FLOW AND OUR ABILITY TO FULFILL OUR DEBT SERVICE OBLIGATIONS.
Based on current interpretations of federal and state tax laws, we are not a taxable entity for federal and state income tax purposes. If these interpretations are reversed or modified, or if the applicable tax law changes in this regard, our cash flow and ability fulfill our debt service obligations may be adversely affected.
Efforts have been made in Congress over the past several years to tax the income of tribal business enterprises. These have included a House of Representatives bill that would have taxed gaming income earned by Indian tribes as business income subject to corporate tax rates. Although that legislation has not been enacted, similar legislation could be enacted in the future. Any future legislation permitting the taxation of the Tribe or our businesses could have a material adverse effect on our business, financial condition, results of operations or ability to meet our debt service obligations.
THE TERMS OF FOUR OF THE EIGHT VOTING MEMBERS OF THE TRIBAL COUNCIL EXPIRE EACH YEAR AND THE TERMS OF THE TRIBE'S PRESIDENT AND VICE PRESIDENT EXPIRE EVERY TWO YEARS; CHANGES IN THE TRIBAL COUNCIL OR ITS POLICIES COULD AFFECT THE PROJECT OR OTHER ASPECTS OF OUR BUSINESS.
The Tribe is governed by a ten member Tribal Council, consisting of the President and Vice President of the Tribe and eight voting Tribal Council members. The President is a non-voting member of the Tribal Council and the Tribe's Vice President only votes in the event of a tie in the voting of the eight voting members of the Tribal Council. Terms of all Tribal Council members (including the President and Vice President of the Tribe) are two years, with members elected on a staggered basis so that four Tribal Council members are elected each year. The terms of four of the voting members of the Tribal Council expire in January 2006. If there is a significant change in the composition of the Tribal Council, the new Tribal Council may not have the same agenda or goals as the current government, in particular with respect to the Project. In addition, the Tribal Council acts by majority vote and with respect to any issue or policy, a change in views by one or more members could result in a change in the policy adopted by the Tribal Council. Changes in the Tribal Council or its policies could result in significant changes in our structure or operations or in the Project, which could adversely affect our business plan or otherwise result in a material adverse effect in our business, financial condition, results of operations or ability to meet our debt service obligations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. The Resort's primary exposure to market risk is interest rate risk associated with our short term debt. As of April 30, 2005, we had no variable rate debt outstanding.
Management has and will continue to limit our exposure to interest rate risk by maintaining a conservative ratio of fixed rate, long-term debt to total debt such that variable rate exposure is kept at an acceptable level and fixing certain long-term variable rate debt through the use of interest rate swaps or interest rate caps with appropriately matching maturities.
As of April 30, 2005, the Resort held no derivative instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Consolidated Financial Statements and notes thereto appear on pages through.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this annual report, we conducted an evaluation, under the supervision and with the participation of IMG Resort and Casino's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level and designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within IMG Resort and Casino have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, along with the other members of management, evaluate our disclosure controls and procedures as of the end of the period covered by our reports filed pursuant to the Exchange Act. Our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective in alerting the Chief Executive Officer and Chief Financial Officer on a timely basis to material information relating to IMG Resort and Casino and its consolidated subsidiaries required to be included in our periodic and other filings with the Commission.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Tribe has established IMG Resort and Casino as an unincorporated enterprise of the Tribe to operate its gaming, hotel, resort and ski businesses. IMG Resort and Casino is governed by a Management Board comprised of between seven to nine members, including: the four members of the Executive Committee of the Tribe (including the President of the Tribe who serves as Chairperson, as well as the Vice President, Secretary and Treasurer of the Tribe); the Chief Operating Officer of IMG Resort and Casino, and at least one, and up to three, independent members. The Management Board designates officers to administer the economic and business affairs of IMG Resort and Casino.
The following are our current officers and members of the Management Board of IMG Resort and Casino:
MARK CHINO has served as Chairperson of the Management Board of IMG Resort and Casino and President of the Tribe since January 2004. Mr. Chino's term on the Tribal Council and Executive Committee expires in January 2006. Prior to his election as President of the Tribe, Mr. Chino was employed by the Bureau of Indian Affairs for nearly 30 years, serving as a Police Officer, Lead Police Officer (Sergeant) and Supervisory Police Officer (Lieutenant) from 1975 to 1988, and then as a Criminal Investigator from 1988 to 2004. Mr. Chino received a Bachelor of Police Science degree from New Mexico State University in 1977.
FREDERICK CHINO, SR. has served as a member of the Management Board of IMG Resort and Casino since January 2005 and Vice President of the Tribe since January 2005. Mr. Chino retired from the Public Health Service in 1993 following 23 years of service and has been active in Tribal activities.
ALFRED LAPAZ has served as a member of the Management Board of IMG Resort and Casino since June 2004. Mr. LaPaz also serves as Treasurer of the Tribal Council and as Chairperson of the Programs Committee. Mr. LaPaz's term on the Tribal Council and Executive Committee expires in January 2005. Since 2000, Mr. LaPaz has been employed by IMG Resort and Casino as Director of Security. Prior to his experience at IMG Resort and Casino, Mr. LaPaz was employed with the Federal Law Enforcement and retired as Captain after 30 years service.
NAOMI SAINZ was appointed to the Mescalero Apache Tribal Council in August of 2004. She serves as Secretary to the Tribal Council and as Chairperson of the Audit Committee of the Management Board. Ms. Sainz has also worked with the Mescalero Fire Department since 2003. Prior to working with the Fire Department, Ms. Sainz worked as a grant writer for the Tribe from 2001-2003.
MANUEL LUJAN JR. has served as an independent member of the Management Board of IMG Resort and Casino since January 2004. Mr. Lujan also currently serves as the Chairman of the board of directors of Laguna Construction Company, which is owned by the Pueblo of Laguna in New Mexico. Mr. Lujan served as U.S.
Congressman representing the State of New Mexico from January 1969 to January 1989 and as Secretary of the Interior under the Bush Administration from 1989 to 1993. Since 1993, Mr. Lujan has served as a lobbyist in Washington, D.C. through his company Manuel Lujan Associates, a consulting firm dealing with matters involving federal agencies.
R. MILES LEDGERWOOD has served as a member of the Management Board of IMG Resort and Casino since March 2004. Mr. Ledgerwood has also served as President and CEO of Alamogordo Federal Savings and Loan Association since 1983. Mr. Ledgerwood also currently serves as a member of the Board of Directors of Alamogordo Financial Corporation, Alamogordo Federal Savings and Loan Association and Space Age City Service Corporation.
BRIAN PARRISH has served as a member of the Management Board of IMG Resort and Casino and as acting Chief Operating Officer since July 2005. Prior to serving as acting Chief Operating Officer, Mr. Parrish served as the Director of Marketing of IMG Resort and Casino since January 2003. Mr. Parrish has over 15 years of marketing experience, recently at the Venetian Resort Hotel Casino in Las Vegas, Nevada, where he was Vice President of Marketing from 2000 to 2002. Prior to his experience at the Venetian, Mr. Parrish served as Vice President of Hotel Operations and Regional Marketing of the Boyd Gaming Corporation from 1999 to 2000 and as Regional Vice President of Marketing from 1997 to 1999. Mr. Parrish also served as Director of Casino Marketing for the Flamingo Hilton in Las Vegas, Nevada from 1993 to 1995. Mr. Parrish also worked in the U.S. Defense Intelligence Industry from 1983 to 1988.
RICHARD WILLIAMS has served as Chief Financial Officer of IMG Resort and Casino since September 2003. Mr. Williams has over 30 years of financial management experience in public and private companies, and has significant experience in the casino and development industries, most recently as Chief Financial Officer at the East Valley Tourist Development Authority, an instrumentality of the Cabazon Band of Mission Indians near Palm Springs, California, from July 2002 to September 2003. Mr. Williams also served as Chief Financial Officer of the Cabazon Tribe from September 2001 to June 2002. Prior to his experiences at the Cabazon Tribe and the Authority, from 1996 to 2001, Mr. Williams was Senior Vice President of Finance for Herbalife International, Inc. and The Irvine Company from 1985 to 1995. Mr. Williams also served as Vice President and Controller at Caesars World, Inc., Wickes Companies, Inc. and Trusthouse Forte, Inc., and as an Adjunct Professor of Finance for the Executive M.B.A. Program of the University of Southern California, or USC, Chairman of the Board of Advisors for USC's School of Accounting and member of the Real Estate Committee of the AICPA. Mr. Williams is a certified public accountant.
WAYNE MARKS has served as Director of Finance of IMG Resort and Casino since March 2004. Previously, Mr. Marks served as a Financial Consultant of IMG Resort and Casino from December 2003 to March 2004. Mr. Marks has over 35 years of financial management and consulting experience in public and private companies, and has significant experience in the casino and financial services industries, most recently as Director of Finance at the East Valley Tourist Development Authority (Fantasy Springs Resort and Casino), an instrumentality of the Cabazon Band of Mission Indians near Palm Springs, California, from January 2000 to December 2003. Prior to his experiences at the Authority, Mr. Marks was General Manager of Fiesta Slots and Bingo in Lima, Peru from July 1997 to December 1999 and served as Chief Financial Officer of sureBET Casino, Inc. the parent company of Fiesta Slots and Bingo. Mr. Marks also worked and held senior financial positions in the Federal Farm Credit System for 18 years.
AUDIT COMMITTEE FINANCIAL EXPERT
On behalf of the Board, the Audit Committee is responsible for providing an independent, objective review of our auditing, accounting and financial reporting process, public reports and disclosures, and system of internal controls regarding financial accounting. Currently, R. Miles Ledgerwood serves as the audit committee financial expert.
CODE OF ETHICS
We have adopted a Code of Business Conduct and Ethics applicable to all of our employees, including our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and all other senior financial executives, and to our directors when acting in their capacity as directors. Our Code of Business Conduct and Ethics
is designed to set the standards of business conduct and ethics and to help directors and employees resolve ethical issues. The purpose of our Code of Business Conduct and Ethics is to ensure to the greatest possible extent that our business is conducted in a consistently legal and ethical manner. Employees may submit concerns or complaints regarding audit, accounting, internal controls or other ethical issues on a confidential basis by means of a toll-free telephone call or an anonymous email. We investigate all concerns and complaints. Copies of our Code of Business Conduct and Ethics are available to investors upon written request. Any such request should be sent by mail to Inn of the Mountain Gods Resort and Casino, 287 Carrizo Canyon Road, Mescalero, New Mexico 88340, Attn: Chief Operating Officer or should be made by telephone by calling (505) 464-7004.
We intend to disclose on our website amendments to, or waivers from, any provision of our Code of Business Conduct and Ethics that apply to our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and persons performing similar functions and amendments to, or waivers from, any provision which relates to any element of our Code of Business Conduct and Ethics described in Item 406(b) of Regulation S-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Operating Officer and as to each of the other four most highly compensated executive officers whose compensation exceeded $100,000 during fiscal 2005 (referred to as the named executive officers), information concerning all compensation paid for services to us in all capacities for each of the three years ended April 30 indicated below.
COMPENSATION OF THE MANAGEMENT BOARD AND AUDIT COMMITTEE
Members of the Management Board who are officers of the Resort but are not Tribal members do not receive any additional compensation or fees for attending Management Board or Audit Committee meetings. Tribal members serving on the Management Board and Audit Committee receive $200 per meeting. Independent members serving on the Management Board and Audit Committee receive $500 per meeting and an additional $1,000 per quarter.
EMPLOYMENT AGREEMENTS
BRIAN PARRISH. Effective July 22, 2005, Mr. Parrish was appointed acting Chief Operating Officer of IMG Resort and Casino. Pursuant to an employment agreement dated December 2002, Mr. Parrish provides services to the IMG Resort and Casino as its Director of Marketing until April 30, 2008. The agreement provides that either Mr. Parrish or IMG Resort and Casino may terminate the agreement for any reason whatsoever. If either Mr. Parrish or IMG Resort and Casino terminates the agreement involuntarily, IMG Resort and Casino is obligated to pay Mr. Parrish the then current monthly base salary, benefits and allowance continuation for a period of six months or until Mr. Parrish has secured employment with another employer. IMG Resort and Casino is not required to pay any compensation if Mr. Parrish terminates the agreement voluntarily. Mr. Parrish receives an annual salary of $181,105, as well as a bonus based on one-quarter of one percent (.25%) of the adjusted net profits of IMG Resort and Casino's resort operations.
RICHARD WILLIAMS. Pursuant to an employment agreement dated September 22, 2003, Mr. Williams provides services to the IMG Resort and Casino as its Chief Financial Officer until April 30, 2006. The agreement provides that either Mr. Williams or IMG Resort and Casino may terminate the agreement for any reason whatsoever. If either Mr. Williams or IMG Resort and Casino terminates the agreement involuntarily, IMG Resort and Casino is obligated to pay Mr. Williams the then current monthly base salary, benefits and allowance continuation for a period of six months or until Mr. Williams has secured employment with another employer. IMG Resort and Casino is not
required to pay any compensation if Mr. Williams terminates the agreement voluntarily. Mr. Williams receives an annual salary of $207,000, as well as a signing bonus, housing allowance and a bonus equal to the greater of $25,000 per year or one-quarter of one percent (.25%) of the adjusted net profits of IMG Resort and Casino's resort operations.
WAYNE E. MARKS. Pursuant to an employment agreement dated March 2004, Mr. Marks provides services to the IMG Resort and Casino as its Director of Finance and Chief Accounting Officer until March 2007. The agreement provides that either Mr. Marks or IMG Resort and Casino may terminate the agreement for any reason whatsoever. If either Mr. Marks or the IMG Resort and Casino terminates the agreement involuntarily, IMG Resort and Casino is obligated to pay Mr. Marks the then current monthly base salary, benefits and allowance continuation for a period of six months. IMG Resort and Casino is not required to pay any compensation if Mr. Marks terminates the agreement voluntarily. Mr. Marks receives an annual salary of $130,000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
None.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
DISTRIBUTIONS TO THE TRIBE WITH OTHER PAYMENTS
Distributions to the Tribe were $45.7 million, $13.2 and $13.0 million for the fiscal years ended April 30, 2003, 2004 and 2005, respectively. We make distributions to the Tribe under the terms of an annual Tribal budget resolution passed at the discretion of the Tribal Council. We intend to continue to make distributions to the Tribe subject to the restrictions set forth in the indenture, which generally provide we can make no distributions unless we meet certain debt leverage tests, other than the following: (a) $5.0 million in aggregate at any one time, (b) $8.0 million a year for government services and (c) amounts to fund a resolution of the Tribe's dispute with the State of New Mexico regarding the 1997 Compact.
The Tribe provides health insurance to IMG Resort and Casino, which reimburses the Tribe for all costs and expenses associated with this insurance. IMG Resort and Casino paid the Tribe approximately $0.6 million, $0.9 million and $1.4 million for the fiscal years ended April 30, 2003, 2004 and 2005, respectively.
The Tribe provides pension benefits to IMG Resort and Casino. No contributions have been made to the Tribe for any period through October 2003. Beginning in November 2003, IMG Resort and Casino began making payments equal to our pro-rata share of the Tribe's periodic pension cost. The pro-rata periodic pension cost related to IMG Resort and Casino has been $1.6 million, $1.9 million and $1.3 million for the fiscal years ended April 30, 2003, 2004 and 2005, respectively. On November 30, 2004, the Tribe elected to curtail the retirement plan, resulting in IMG Resort and Casino's ability to cease making contributions to the retirement plan as of that date.
TRIBAL TAXES
The Tribal Code provides for the imposition of a gross receipts tax on the sale of food, beverages, retail sales and services and the rental of rooms on the Mescalero Reservation. The rate of the tax is comparable to the cumulative state and local sales or use tax imposed on identical transactions taking place outside the reservation and within the State of New Mexico. This tax applies to sales at our current operations and will apply to sales on future operations. IMG Resort and Casino collects and remits the gross receipts tax to the Tribe on a monthly basis.
The Tribal Code also provides for the collection of an excise tax on gasoline sold at retail on the Mescalero Reservation. The rate of the tax is equivalent to the same tax imposed by the State of New Mexico on identical transactions taking place outside the reservation and within the State of New Mexico. IMG Resort and Casino collects and remits the excise tax to the Tribe on a monthly basis.
The Tribal Code also provides for the imposition of a special assessment school tax on the resort enterprises to provide a source of funds to service debt incurred to construct the Tribe's K-12 School. The rate of the tax, for each month, is equal to the difference between $200,000 and all taxes imposed on or collected by and remitted by the resort enterprises to the Tribe for that month. If the total taxes imposed on us by the Tribe for any month is greater than $200,000, then the special assessment tax for that month is zero.
SHARED SERVICES AND COST ALLOCATIONS
In connection with the issuance of the original notes, IMG Resort and Casino and the Tribe entered into a service and cost allocation agreement, provides that the Tribe or its enterprises will continue to provide IMG Resort and Casino and its resort enterprises the following services in accordance with past practice: (i) insurance; (ii) telecommunications; (iii) propane; (iv) payroll processing; and (v) gaming regulation, and that IMG Resort and Casino and its resort enterprises will pay, on behalf of the Tribe, for (a) revenue sharing and regulatory fee obligations required under the 1997 Compact or any new compact, (b) federal regulatory fees required by IGRA, (c) an amount equal to the monthly payments required under the BIA Note and (d) amounts for certain other miscellaneous liabilities.
EMPLOYEE BENEFITS COST ALLOCATIONS
In connection with the issuance of the original notes, IMG Resort and Casino and the Tribe entered into an employee benefits cost allocation agreement, which provides that the Tribe will continue to provide IMG Resort and Casino and its resort enterprises with certain employee benefits in accordance with past practice, including group health benefits, worker's compensation insurance, disability insurance, unemployment benefits and pension benefits.
ATM FEES
IMG Resort and Casino does not receive revenues from the use by our customers of the ATM machines provided at our business locations. Pursuant to agreements with third party ATM providers, the Tribe receives a portion of the transaction fees paid by ATM users. The Tribe will continue to receive payments related to the ATM services provided in our new facilities under similar arrangements, and we will receive no revenue from these services.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table sets forth the aggregate fees billed to IMG Resort and Casino for fiscal 2005 by BDO Seidman, LLP and Grant Thornton LLP and 2004 by Grant Thornton LLP:
"Audit Fees" billed during fiscal 2004 and 2005 were for professional services rendered for the audit of our financial statements. "Audit-Related Fees" were for services related to accounting consultation and review of documents filed with the Securities and Exchange Commission. "All Other Fees" consist of fees for products and services other than the services reported above.
The Audit Committee has adopted a policy for the pre-approval of all audit and non-audit services to be performed for IMG Resort and Casino by its independent auditor. The Audit Committee has considered the role of BDO Seidman, LLP and Grant Thornton LLP in providing audit and audit-related services to IMG Resort and Casino and has concluded that such services are compatible with BDO Seidman, LLP and in the prior year Grant Thornton LLP's role as IMG Resort and Casino's independent auditor. For the twelve months ended April 30, 2005 BDO Seidman, LLP rendered services totaling $257,971 and Grant Thornton LLP rendered services totaling $86,748.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS - See Index to Consolidated Financial Statements of this Annual Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES - All financial statement schedules have been omitted because they are not applicable or are not required, or because the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. (3) EXHIBITS - See Exhibit Index on pages 36-37 of this Annual Report on Form 10-K. (b) None.
(c) See Exhibit Index on pages 36-37 of this Annual Report on Form 10-K.
* Incorporated by reference to IMG Resort and Casino's Registration Statement on Form S-4 filed with the SEC on February 27, 2004 (SEC File No. 333-113140).
** Incorporated by reference to IMG Resort and Casino's Amendment No. 1 to Registration Statement on Form S-4 filed with the SEC on April 22, 2004 (SEC File No. 333-113140).
*** Incorporated by reference to IMG Resort and Casino's Annual Report on Form 10-K filed with the SEC on July 29, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, on the Reservation of the Mescalero Apache Tribe, State of New Mexico, on July 28, 2005.
INN OF THE MOUNTAIN GODS RESORT AND CASINO
By /s/ Brian D. Parrish ------------------------------------ Brian D. Parrish Its: Chief Operating Officer and Management Board Member
Each person whose signature appears below constitutes and appoints Brian Parrish and Richard Williams, and each of them, as his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES UNINCORPORATED BUSINESS ENTERPRISES OF THE MESCALERO APACHE TRIBE
PAGE ---- Report of Independent Registered Public Accounting Firms.......... Audited Financial Statements Consolidated Balance Sheets as of April 30, 2004 and 2005....... Consolidated Statements of Income for the Years ended April 30, 2003, 2004 and 2005................................ Consolidated Statements of Changes in Equity for the Years ended April 30, 2003, 2004 and 2005.......................... Consolidated Statements of Cash Flows for the Years ended April 30, 2003, 2004 and 2005................................ Notes to Consolidated Financial Statements......................
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Management Board Inn of the Mountain Gods Resort and Casino and subsidiaries Mescalero, New Mexico
We have audited the accompanying consolidated balance sheet of Inn of the Mountain Gods Resort and Casino and subsidiaries (the "Company"), an unincorporated enterprise of the Mescalero Apache Tribe, as of April 30, 2005, and the related statements of income, changes in equity, and cash flows for the year ended April 30, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Inn of the Mountain Gods Resort and Casino and subsidiaries as of April 30, 2005 and the results of its operations and its cash flows for the year ended April 30, 2005, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
Los Angeles, California
July 1, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Management Board Inn of the Mountain Gods Resort and Casino and subsidiaries Mescalero, New Mexico
We have audited the accompanying consolidated balance sheets of the Inn of the Mountain Gods Resort and Casino and subsidiaries, an unincorporated enterprise of the Mescalero Apache Tribe, as of April 30, 2004 and the related consolidated statements of income, changes in equity, and cash flows for each of the two years in the period ended April 30, 2004. These financial statements are the responsibility of the Inn of the Mountain Gods Resort and Casino and subsidiaries management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Inn of the Mountain Gods Resort and Casino and subsidiaries, as of April 30, 2004 and the results of their operations and their cash flows for the each of the two years in the period ended April 30, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Albuquerque, New Mexico June 25, 2004
The accompanying notes are an integral part of these statements.
These accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements
INN OF THE MOUNTAIN GODS RESORT AND CASINO AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2003, 2004 AND 2005
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY AND OPERATIONS
The Inn of the Mountain Gods Resort and Casino (the "IMG Resort and Casino"), an unincorporated enterprise of the Mescalero Apache Tribe (the "Tribe"), was established on April 30, 2003 for the purpose of managing all resort enterprises of the Tribe including activities of IMG Resort and Casino and its wholly owned subsidiaries: Casino Apache, Casino Apache Travel Center, Inn of the Mountain Gods and Ski Apache (collectively the "Resorts"). Effective April 30, 2003, the Tribe contributed the Resorts to the IMG Resort and Casino. Prior to such contribution to IMG Resort and Casino, the Resorts operated as separate, unincorporated enterprises of the Tribe. Due to common control of the Resorts and IMG Resort and Casino, the contribution was accounted for as a reorganization of entities under common control. The Tribe is the sole owner of the IMG Resort and Casino. The IMG Resort and Casino is a separate legal entity from the Tribe and is managed by a separate management board.
Inn of the Mountain Gods (the "Casino") offers Class III gaming as defined by the Indian Gaming Regulatory Act, on the tribal land in Mescalero, New Mexico. The Casino Apache Travel Center (the "Travel Center"), which opened for business on May 22, 2003, also offers Class III gaming as defined by the Indian Gaming Regulatory Act, on tribal land in Mescalero. The Inn of the Mountain Gods (the "Inn") operated a 253-room resort hotel located on the Tribe's reservation in Mescalero. The resort hotel has been demolished as of April 30, 2003 and the construction of a new resort hotel and casino (the "Resort Project") on the same site was opened for commercial business on March 15, 2005. Ski Apache operates a ski resort within the Tribe's reservation in Mescalero and on the U.S. Forest Service land. The IMG Resort and Casino's activities primarily support the development and management efforts related to the new resorts.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the IMG Resort and Casino and its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation. These consolidated financial statements present only the consolidated financial position, results of operations and cash flows of the IMG Resort and Casino and subsidiaries and are not intended to present fairly the financial position of the Tribe and the results of its operations and cash flows.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates included in the accompanying financial statements relate to the liability associated with the unredeemed Apache Spirit Club points and the estimated lives of depreciable assets and pension cost. Actual results could differ from those estimates.
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash includes cash on hand for change drawers and in the vault for daily casino activities and cash on deposit with financial institutions in demand accounts, savings accounts and short-term certificates of deposit. For purposes of the statement of cash flows all cash accounts that are not subject to withdrawal restrictions or penalties and all highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents includes cash on deposit with financial institutions in demand accounts, savings accounts and short-term certificates of deposit that are subject to withdrawal restrictions (see Note 3).
ACCOUNTS RECEIVABLE
Accounts receivable consists primarily of hotel and other non-gaming receivables. The IMG Resort and Casino maintains an allowance for doubtful accounts which is based on management's estimate of the amount expected to be uncollectible considering historical experience and the information management obtains regarding the creditworthiness of the non-gaming customer. The collectibility of these receivables could be affected by future business or economic trends.
INVENTORIES
Inventories consist of food and beverage items, fuel, retail merchandise in the golf and pro shop, ski shop, gift shops and other miscellaneous items, parts and supplies. All inventories are stated at the lower of cost or market. Casino and Ski Apache inventories are determined using the first-in, first-out method. The Inn's inventories are determined using the average cost method.
DEFERRED FINANCING COSTS
Debt issuance costs incurred in connection with the issuance of the Project financing are capitalized and amortized to interest expense using the straight-line method over the stated maturity of the debt, which approximates the effective interest method. Unamortized deferred financing costs totaled $11,029,493 as of April 30, 2004 and $9,321,141 as of April 30, 2005. The amortization related to this deferred financing cost was $791,812 and $1,708,352 for the years ended April 30, 2004 and 2005, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are presented at historical cost, less accumulated depreciation and amortization. Expenditures for additions, improvements and replacements, including interest incurred during construction of new facilities, are capitalized while maintenance and repairs, which do not improve or extend the service lives of the respective assets, are expensed as incurred. Interest incurred during the construction period is capitalized at the borrowing rate for the related loan and is amortized over the life of the related asset. Equipment sold, or otherwise disposed of, is removed from the accounts with gains or losses on disposal recorded in the statements of income.
Depreciation and amortization is provided over the estimated service lives of the respective assets, using the straight-line method based on the following useful lives:
IMPAIRMENT OF LONG LIVED ASSETS
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. In August 2001, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"), which established the approach to be used in the determination of impairment.
During the year ended April 30, 2003, the Inn demolished a substantial portion of the existing hotel building and began construction of a new resort hotel and casino facility. Under the provisions of SFAS 144, a long-lived asset to be abandoned is disposed of when it ceases to be used. If an entity commits to a plan to abandon a long-lived asset before the end of its previously estimated useful life, depreciation estimates shall be revised to reflect the use of the asset over its shortened useful life. As a result of the demolition of the hotel, the adoption of SFAS 144 for the year ended April 30, 2003 resulted in an impairment of the demolished portion of the Inn's hotel related property, plant and equipment of approximately $5,391,000, which was recorded as depreciation expense in the accompanying consolidated statements of income during fiscal 2003 (see Note 5).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, bank financing facilities and capital lease obligations approximate fair value. The IMG Resort and Casino's senior notes was $216.0 million at April 30, 2005, based on quoted market prices.
CONTRIBUTED CAPITAL
Contributed capital represents contributions from the Tribe and consists of (i) cash to fund certain construction and development of the Resort Project, (ii) forgiveness of debt from the Inn to the Tribe and (iii) allocated pension costs related to the Mescalero Apache Tribe Defined Benefit Plan (see Note 8).
REVENUES
In accordance with gaming industry practice, the Casino recognizes casino revenue as the net win from gaming activities, which is the difference between gaming wins and losses. Gaming revenues are net of accruals for anticipated payouts of progressive slot jackpots and table games. Such anticipated jackpot payments are reflected as current liabilities in the accompanying consolidated balance sheets.
Revenues from food and beverage, rooms, recreation and other are recognized at the time the related service or sale is completed. Revenues include the retail value of food and beverages and other items which are provided to customers on a reward basis.
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROMOTIONAL ALLOWANCES
The Casino periodically rewards rooms and other promotions, including Apache Spirit Club points and gift certificates, to their customers. The retail value of these promotional allowances are recognized by the Casino as a reduction from gross revenue. The total promotional allowances recognized by the Casino were approximately $931,000, $1,437,000 and $1,770,000 for the years ended April 30, 2003, 2004 and 2005, respectively.
The Casino's Apache Spirit Club allows customers to earn "points" based on the volume of their gaming activity. These points are redeemable for certain complimentary services or merchandise. Points are accrued based upon their historical redemption rate multiplied by the cash value or the cost of providing the applicable complimentary services. The players club points liability is included in accrued expenses and totaled approximately $380,000 and $931,000 at April 30, 2004 and 2005, respectively.
Emerging Issues Task Force ("EITF") Issue No. 00-14, ACCOUNTING FOR CERTAIN SALES INCENTIVES requires that discounts which result in a reduction in or refund of the selling price of a product or service in a single exchange transaction be recorded as a reduction of revenues. The Resorts adopted EITF 00-14 on April 30, 2001. The Casino's accounting policy related to free or discounted food and beverage and other services already complies with EITF 00-14, and those free or discounted services are generally deducted from gross revenues as "promotional allowances."
In January 2001, the EITF reached a consensus on certain issues related to Issue No. 00-22, ACCOUNTING FOR "POINTS" AND CERTAIN OTHER TIME-BASED OR VOLUME-BASED SALES INCENTIVE OFFERS, AND OFFERS FOR PREPRODUCTS, OR SERVICES TO BE DELIVERED IN THE FUTURE. On October 1, 2001, the Resorts adopted EITF 00-22, which requires that cash or equivalent amounts provided or returned to customers as part of a transaction not be shown as an expense, but instead as an offset to the related revenue. The Resorts offer cash equivalent rewards in certain circumstances and has reflected approximately $837,000, $1,288,000 and $641,000 for the fiscal years ended April 30, 2003, 2004 and 2005, respectively, in the promotional allowance as an offset to gaming revenues for these incentives.
The estimated cost of providing such complimentary allowances, as they relate to the Casino, was included in casino expenses as follows:
COMPENSATED ABSENCES
Compensated absences are included in accrued expenses. The personnel policies allow the workforce to accrue annual leave as follows:
o One week of annual leave after one year of employment. o Two weeks of annual leave after two years of employment.
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
o Three weeks of annual leave after three years of employment. o Four weeks of annual leave after fifteen years of employment.
Except for personnel at Ski Apache, annual leave may be accumulated by all personnel up to a maximum of 120 hours or 160 hours for fifteen-year employees. Any annual leave accrued above these limits is forfeited. Due to the seasonality of the Ski Apache's business, Ski Apache's policy requires all accrued annual leave to be taken by the end of the Tribe's fiscal year-end, or it is forfeited. Personnel may be compensated for accrued annual leave only upon termination.
Sick leave is accrued at 2.1 hours per pay period after 90 days of employment and 3.1 hours after three years of employment. Personnel are not compensated for accrued sick leave on termination. Accordingly, the compensated absence accrual does not include a provision for sick leave.
PRE-OPENING COSTS AND EXPENSES
Pre-opening costs and expenses consist principally of direct incremental personnel costs, training costs and payroll costs for retaining the employees of the Inn during the fiscal year 2005 and 2004 construction period. In accordance with the American Institute of Certified Public Accountants' Statement of Position 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES, pre-opening costs and expenses are expensed as incurred.
ADVERTISING COSTS
The IMG Resort and Casino's advertising costs are expensed as incurred and are included as general and administrative expenses in the accompanying consolidated statements of income. Advertising costs for the years ended April 30, 2003, 2004 and 2005 were approximately $696,000, $1,426,000 and $3,171,000 respectively.
TRIBAL TAXES
The Resorts are subject to tribal taxes as long as the enterprises are not subject to New Mexico Gross Receipts Tax. Ski Apache is subject to New Mexico Gross Receipts Tax. A tribal tax charge of 10.75% of room revenue, 6.75% of food and beverage revenue, and 6.5% of other revenue is accrued monthly and is payable to the Tribe. The Tribe uses these funds to reimburse the Inn for advertising costs. The Resorts have recorded approximately $200,000 and $200,000 for tax payable to the Tribe as of April 30, 2004 and 2005. The amounts are recorded as an accrued expense in the accompanying consolidated balance sheets. The Tribe re-classified approximately $2,553,000 of tax payable from the Inn to equity contribution to the Inn as of April 30, 2003 to reflect the forgiveness of the tax payable.
INCOME TAXES
As an unincorporated enterprise of the Tribe, the IMG Resort and Casino and the Resorts are exempt from federal and state income taxes.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 151, "Inventory Costs," ("SFAS 151"), an amendment of Accounting Research Bulletin No. 43, Chapter 4. SFAS No. 151 is the result of a broader effort by the FASB working with the International Accounting Standards Board to reduce differences between United States and international
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting standards. SFAS No. 151 eliminates the "so abnormal" criterion in ARB 43 and companies will no longer be permitted to capitalize inventory costs on their balance sheets when the production defect rate varies significantly from the expected rate. It also makes clear that fixed overhead should be allocated based on "normal capacity." SFAS 151 is effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a material effect on our results of operations or consolidated financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS 153"). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange have commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 153 will have a material effect on our results of operations or consolidated financial position.
In May 2005, the Financial Accounting Standards Board, issued Statement of Financial Accounting Standards SFAS No. 154, "Accounting Changes and Error Corrections"("SFAS 154"). SFAS 154 replaces APB No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements" and establishes retrospective application as the required method for reporting a change in accounting principle. SFAS 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of SFAS 154 will have a material effect on our results of operations or consolidated financial position
NOTE 2 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Resorts maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments, which results in bad debt expense. The Resorts determine the adequacy of this allowance by periodically evaluating individual non-gaming customer receivables and considering the Resorts' non-gaming customers financial condition, credit history and current economic conditions. If the financial condition of non-gaming customers were to deteriorate, resulting in an impairment of their ability to make payments, the Resorts may increase the allowance.
The allowance for doubtful accounts and bad debt expense is as follows at April 30:
2004 2005 ------------ ----------- Allowance, beginning of year $ 3,448 $ 3,448 Bad debt expense - - Write-offs - - Allowance, end of year ------------ ----------- $ 3,448 $ 3,448 ============ ===========
NOTE 3 - RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash consists of the following at April 30:
2004 2005 -------------- ---------------- Interest reserve $ 36,630,866 $ 11,919,101 Construction reserve 53,763,014 15,628,691 Construction retainage 7,481,741 8,238,351 Construction funding 34,888,108 84,543 Gamblers Fund 533,514 - -------------- ----------------- Total restricted cash $ 133,297,243 $ 35,870,686 ============== =================
NOTE 4 - INVENTORIES
Inventories consist of the following at April 30:
2004 2005 -------------- ----------------
Food and beverage $ 219,628 $ 370,924 Golf and pro shop 132,936 547,802 Gift shops, fuel and other 616,021 510,780 -------------- ---------------- Total inventories $ 968,585 $ 1,429,506 ============== =================
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows at April 30:
2004 2005 --------------- ----------------
Land $ 538,894 $ 538,894 Buildings, lifts and snowmaking equipment 39,287,564 221,150,464 Non-gaming equipment, furniture and other 25,498,837 42,975,371 Gaming equipment 11,370,236 14,490,064 Leasehold and land improvements, lake and golf course 6,480,058 6,163,235 --------------- ---------------- Subtotal 83,175,589 285,318,028
Less accumulated depreciation and amortization 46,281,098 53,641,404 Property, plant and equipment, net 36,894,491 231,676,624
Construction in progress 113,435,012 44,450 --------------- ---------------- $ 150,329,503 $ 231,721,074
The IMG Resort and Casino capitalized $7,892,314 and $14,348,017 of interest cost related to construction of the Travel Center and the Resort Project during fiscal years 2004 and 2005, respectively.
NOTE 6 - LONG-TERM DEBT
On November 3, 2003, IMG Resort and Casino issued $200.0 million of its 12% Senior Notes (the "Notes"). IMG Resort and Casino is using the proceeds of these Notes to pay, in part, construction cost
of the Resort Project, to repay a $19.0 million revolving credit agreement with Citicorp North America, Inc. and to pay the costs of the offering. The Notes bear interest at 12% per year, payable on May 15 and November 15 of each year, beginning on May 15, 2004. The Notes will mature on November 15, 2010. The Notes may be redeemed at any time on or after November 15, 2007 at fixed redemption prices plus accrued and unpaid interest, if any. If a change in control occurs, holders of the notes will have the right to require the repurchase of their Notes at a price equal at 101% of the principal amount thereof, plus accrued and unpaid interest, if any. The Notes are guaranteed by the Resorts.
Until the issuance of a final certificate of completion of the Resort Project, the Notes and guarantees are secured by a first priority security interest in certain collateral accounts and bank accounts of IMG Resort and the guarantors, which had an aggregate balance of approximately $35 million at April 30, 2005. The Notes will, after issuance of a final certificate of completion of the Resort Project, be the general unsecured obligations of IMG Resort and Casino and will rank equal in rights of payment to all of its existing future and senior unsecured obligations and senior in right of payment to any obligations that are by their terms subordinated to the Notes and are effectively subordinated to its secured obligations to the extent of the assets securing those obligations.
The indenture governing the Notes contains covenants that limit, among other things, IMG Resort and Casino and the guarantors' ability to pay dividends and make distributions to the Tribe; make investments; incur additional debt or types of debt; create liens; sell equity interests in subsidiaries; enter into transactions with affiliates; enter into sale and leaseback transactions; engage in other businesses; transfer or sell assets; and merge or consolidate with or into other entities. For the fiscal years 2004 and 2005 the IMG Resort and Casino was in compliance with all covenants required in the Notes.
Long-term debt is summarized as of April 30 as follows:
The maturities of long-term debt as of April 30, 2005 are as follows:
Total interest costs were $167,968, 13,144,001, and $25,891,877 for the years ended April 30, 2003, 2004 and 2005, respectively, of which $167,968, $7,892,314 and $14,348,017 was capitalized as of April 30, 2003, 2004 and 2005, respectively.
On June 15, 2004, the IMG Resort and Casino entered into a $15.0 million credit facility with Key Equipment Finance, a Division of Key Corporate Capital Inc., one of the nation's largest financial services firms. The fixed rate loan is fully amortizable over five years and bears an interest rate indexed off the 3-year Treasury Interest Rate Swaps. During May and June 2005, the IMG Resort and Casino drew approximately $14.9 million from the loan and used the funds to fund furniture, fixtures and equipment purchased for the Project.
NOTE 7 - GAMING REVENUES SHARING AND REGULATORY FEES
The Tribe regulates the IMG Resort and Casino's gaming activities through the Mescalero Apache Tribe Gaming Regulatory Commission, an agency of the Tribe (the "Commission"). The Commission reports directly to the Tribal Council. A regulatory fee is paid to the Tribe as reimbursement for the cost of regulating the gaming activities. The Casino also pays a federal regulatory fee. All tribal and federal regulatory fees have been paid when due.
On August 29, 1997, the Tribe and the State of New Mexico (the "State") entered into a Tribal-State Compact (the "Compact") to govern gaming on the Mescalero Apache Reservation. The terms of the Compact subject the Casino to various regulatory fees and revenues sharing payable to the State. Among the provisions of the Compact are requirements for quarterly revenues sharing payments consisting of 16% of the net win from video gaming and quarterly regulatory fees assessed on the number of gaming facilities, the number of gaming machines and the number of gaming tables and other devices. The Tribe has challenged the legality of these fee arrangements, claiming them to be an illegal tax on Indian gaming under the Indian Gaming Regulatory Act.
On April 20, 2004, the Tribe and the State of New Mexico entered into a settlement agreement which resolved all of their disputes regarding the 1997 Compact. Under the settlement agreement, the State of New Mexico and the Tribe agreed that they would enter into a new gaming compact, the 2001 Compact, and that the Tribe would pay the State of New Mexico $25.0 million in full settlement of all revenue sharing and regulatory fees payable under the 1997 Compact as well as all revenue sharing fees payable under the 2001 Compact through March 2005. On April 20, 2004, the IMG Resort and Casino paid an initial payment of $2.0 million pursuant to the terms of the settlement agreement.
The 2001 Compact provides for a revenue sharing amount equal to 8% of "net win" from gaming machines, payable no later than 25 days after the last day of each calendar quarter and an annual regulatory fee of $100,000, paid in quarterly installments of $25,000 on the first day of each calendar quarter. Pursuant to the terms of the settlement agreement, the IMG Resort and Casino began incurring revenue sharing payments to the State of New Mexico at the rate of 8% of "net win" pursuant to the 2001 Compact in March 2005, with the first revenue sharing payment under the 2001 Compact due in July 2005. In addition, pursuant to the terms of the settlement agreement, the IMG Resort and Casino began incurring regulatory fees, at the rate of $100,000 per year, from the date the approval of the 2001 Compact is published in the Federal Register with the first payment for regulatory fees under the 2001 Compact due on the first day of the first full calendar quarter thereafter. On June 1, 2004, the Tribe and the State of New Mexico entered into the 2001 Compact. On July 22, 2004, the Department of Interior approved the 2001 Compact. The IMG Resort and Casino made the remaining $23.0 million payment required under the settlement agreement in August 2004. As a result of the settlement with the State, expense and the liability for accrued revenue sharing and regulatory fees has been reduced by $27,136,255 for the year ended and as of April 30, 2004.
NOTE 8 - PENSION PLAN
IMG Resort and Casino and the Resorts employees participated in the Mescalero Apache Tribe Defined Benefit Plan (the "Plan"), a defined benefit pension plan that also covers substantially all full-time employees of the Tribe. Although the IMG Resort and Casino employees participate in the Plan, they are not employees of the Tribe and were not employees of the Tribe for all periods during which they participated in the Plan. The Tribe is the Plan sponsor and handles all administration and funding of the Plan. Changes to the Plan provisions and contribution requirements must be approved by the Tribal Council. The Plan provides retirement, disability and death benefits to plan members and beneficiaries.
NOTE 8 - PENSION PLAN (CONTINUED)
The Tribe upon advice from legal counsel, has determined that the Plan is a "governmental plan" as described in Section 414(d) of the Internal Revenue Code ("IRC"). As such, the Plan is exempt from many of the requirements placed on qualified plans, including (but not limited to) the reporting and disclosure requirements of ERISA, coverage under the Pension Benefit Guaranty Corporation ("PBGC") and minimum and maximum funding requirements of IRC Sections 412 404.
Under the terms of an agreement with the Tribe executed in 2003, the IMG Resort and Casino paid a fixed amount of 9.75% of salaries and wages as a fixed contribution to the retirement Plan. The total pension expenses recorded under this agreement were $1,289,615 and $1,886,333 for the fiscal years ended April 30, 2005 and 2004.
The Tribe curtailed the Plan as of November 30, 2004, and will pay benefits in the future only on the services that had been rendered by that date. The IMG Resort and Casino has made contributions to the Plan for employee services through November 30, 2004, and the IMG Resort and Casino will be required to make no further payments to the Plan in the future. No gain or loss was recorded because there was no pension assets or liability related to the Plan recorded on the financial statements of the IMG Resort and Casino and no future payments will be made or credits received by the IMG Resort and Casino. The IMG Resort and Casino has not instituted any other pension arrangement with its employees and the Tribe has not established and alternative pension plan.
NOTE 9 - RISK MANAGEMENT
The IMG Resort and Casino manages the exposure to the risk of most losses through various commercial insurance policies. There have been no reductions in insurance coverage. Settlement amounts have not exceeded insurance coverage for 2003, 2004 and 2005, respectively.
The Tribe is self-insured for employee health and accident insurance. The IMG Resort and Casino's employees are covered by this plan and remit amounts to the Tribe for their share of the self-insurance costs. The total amounts reimbursed to the Tribe were approximately $647,000, $902,000 and $1,408,000 for 2003, 2004 and 2005, respectively.
The Tribe maintains worker's compensation insurance coverage under a retrospective rated policy whereby premiums are accrued based on the loss experience of the Tribe and its various enterprises. The IMG Resort and Casino's and the Resorts' employees are covered under this plan. Under this policy, premiums may be adjusted at the end of the coverage period based on loss experience for the coverage period. Management of the Tribe, the IMG Resort and Casino and the Resorts have not provided an estimate for losses that may result in premium adjustments at the end of the coverage period.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
The IMG Resort and Casino and the Resorts are involved in various legal actions incident to their operations that, in the opinion of management, will not materially affect the IMG Resort and Casino's financial position or the results of its operations.
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OCCUPANCY FEE
A special use permit was obtained from the United States Department of Agriculture Forest Service for Ski Apache's use of 80 acres of land in Lincoln National Forest. The permit is dated April 23, 1985, and has a term of 30 years with a quarterly occupancy fee based on revenue and gross fixed assets. Occupancy fee for the years ended April 30, 2003, 2004 and 2005 totaled approximately $121,000, $130,000 and $137,200 respective1y.
CONSTRUCTION AGREEMENT
In February 2002, the Tribe entered into a construction agreement for the development of the Travel Center and the new resort on behalf of the IMG Resort and Casino. Construction cost under the contract was approximately $149,720,000. In March 2005, the contractor issued a certificate of substantial completion and the IMG Resort and Casino started commercial operation on March 15, 2005. A final certificate of completion and acceptance will be issued following the successful completion of identified incomplete items. At April 30, 2005 a total of $8.1 million in retainage remains outstanding in a reserve cash account with the trustee and will be disbursed following the issuance of the final completion certificate.
NOTE 11 - RELATED-PARTY TRANSACTIONS
The Tribe operates other entities and enterprises in various industries, including telecommunication, timber and forest products, gas and convenience store; in addition, the Tribe has a housing authority, school and nursing facility. Financial results of the Tribe and its other enterprises and entities are not included in these consolidated financial statements.
The IMG Resort and Casino uses Mescalero Apache Telecommunications for some its telecommunications related services. The IMG Resort and Casino paid Mescalero Apache Telecommunications approximately $152,200, $289,000 and $231,000 for the years ended April 30, 2003, 2004 and 2005, respectively, for such services.
In addition to the amounts due to the Casino from the Tribe in connection with revenues sharing and regulatory fees (see Note 7), there were no amounts due to the Tribe from the Resorts at April 30, 2004 and 2005. The Tribe reclassified $6,890,716 due from the Resorts as an equity contribution and $1,193,833 due to Ski Apache from the Tribe as an equity distribution as of April 30, 2003, in connection with the reorganization (see Note 1).
NOTE 12 - OPERATING SEGMENTS
The IMG Resort and Casino has five operating segments. Gaming, Hotel, Ski , Resort Management and Travel Center. The Gaming segment information includes the activities of the Casino. The Hotel segment information includes the activities of the Inn, hunting, golf, fishing and horseback riding. The Ski Apache segment includes the activities of Ski Apache. Resort/Holding Company Operations includes the activities of the IMG Resort and Casino and the pre-opening activities of the Casino and the Inn. The Travel Center which opened in May 2003 includes the pre-opening activities. These operating segments represent distinct business activities, which are managed separately.
NOTE 13 - CONSOLIDATING INFORMATION
In connection with IMG Resort and Casino's issuance in November 2003 of $200,000,000 of 12% senior notes, IMG Resort and Casino and the Resorts (the "wholly-owned Guarantors") have, jointly and severally, fully and unconditionally guaranteed the 12% senior notes. These guarantees are secured only until the completion of the Resort Project and thereafter unsecured and subordinated in right of payment to all existing and future indebtedness outstanding and any other indebtedness permitted to be incurred by IMG Resort and Casino under the terms of the indenture agreement for the 12% senior subordinated notes. A final certificate of completion and acceptance has not been issued pending the successful completion of identified incomplete items
Pursuant to Rule 3-10 of Regulation S-X, the following consolidating information is for IMG Resort and Casino and the wholly owned Guarantors of the 12% senior notes. This consolidating financial information has been prepared from the books and records maintained by IMG Resort and Casino and the wholly-owned Guarantors. The consolidating financial information may not necessarily be indicative of results of operations or financial position had the wholly owned Guarantors operated as independent entities. The separate financial statements of the wholly-owned Guarantors are not presented because management has determined they would not be material to investors. The Resorts are wholly owned subsidiaries of IMG Resort and Casino.
CONSOLIDATING BALANCE SHEETS
AS OF APRIL 30, 2004
CONSOLIDATING BALANCE SHEETS
AS OF APRIL 30, 2003