A revealing look at Form 10-Q

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What exactly is Form 10-Q? Sorry Mom, it is not a template for a "thank-you" note. Rather, it is a quarterly report that all U.S. businesses that have issued publicly held stock or notes must file with the Securities and Exchange Commission. Many Indian gaming operations are relatively small in size and do not issue shares of stock or debt for purchase by the general public; such operations are not required to file disclosures of any type with the SEC, or with any one else for that matter. Some of the larger gaming tribes, however, have issued debt to raise capital for a variety of uses, which generally include the construction of new facilities or the expansion and upgrade of existing ones.

Form 10-Q is the vehicle through which businesses disclose the financial aspects of their operations and explain their general financial condition and outlook. While a strong knowledge of accounting can be quite helpful in interpreting the numerical data presented, the form also contains considerable explanatory text. A look beyond the raw numbers can be revealing.

Two of the larger and more successful economic operations in Indian country belong to the Mohegan Tribe of Indians of Connecticut and the Mississippi Band of Choctaw Indians. Both of these tribes are turning their casinos into more extensive resorts and have used profits from gaming to fund other business ventures. Both have also issued debt in the form of senior notes and/or senior subordinated notes to finance their business operations, thus requiring them to file with the SEC. Such notes guarantee a specified interest rate over a period of time, usually several years, and may be purchased by individual or institutional investors.

The Mohegan Tribal Gaming Authority, which filed its Form 10-Q for the fiscal quarter ended March 31 on May 2, was established in 1995 as the tribe's regulatory arm; it is comprised of the same nine members that make up the Tribal Council. The Authority oversees all gaming activity at the tribe's Mohegan Sun casino in Uncasville, Conn.

The Authority reported its earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter ended March 31 to be $68.2 million, a 6.3 percent increase over the corresponding year-ago quarter. Gross revenues for the quarter came to $249.1 million, a 22.4 percent increase over the year-ago period.

Under terms of its 1995 gaming compact with the state of Connecticut, the Mohegans pay a "slot win contribution" to the state. The annual amount is either: (a) the lesser of 30 percent of gross revenues from slot machines; or (b) the greater of 25 percent of gross slot revenue or $80 million. For the fiscal quarter ended on March 31, the tribe's contribution was $41.2 million, up from $33.8 million for the corresponding year-ago quarter. For the six-month period that ended on March 31, the Mohegans paid $84.2 million, versus $66.8 million for the year-ago period.

The increased contribution is undoubtedly the result of the tribe's Project Sunburst, a major expansion initiative which added some 3,200 slot machines and 90 table games to Mohegan Sun. Other completed (or nearly complete) components of the project include a 10,000-seat arena, a group of 30 retail shops, several restaurants, an expansion of the Mohegan Sun Hotel to 1,200 rooms and a 1,700-space parking garage.

Phases of the Project not yet complete include a second parking garage with a capacity of 2,700 spaces, for which the Authority budgeted $65 million. The casino is dependent upon drive-in traffic; its present parking set-up is insufficient to accommodate large crowds. The Authority believes "that its ability to host events in the Mohegan Sun Arena on weekends and to otherwise accommodate guests during peak periods will be limited until the parking enhancements are completed." Thus, the Authority expects "operating revenues and margins ? to be negatively impacted until the fourth quarter of fiscal 2002." Mohegan Sun's fiscal year begins Oct. 1.

For the remainder of the fiscal year, according to the filing, the Authority expects $91.8 million in capital expenditures to be disbursed as follows: $18.1 million on maintenance capital expenditures; $48.8 million for the completion of Project Sunburst; $18.2 million on the Indian Summer parking garage; and $6.7 million on the 1,700-car capacity Thames garage. The Authority said it also "expects revenues to increase and operating expenses to decrease as a percentage of revenues as the facility matures and as the remaining amenities are opened."

For the quarter ended March 31, the Authority distributed $9.7 million to the tribe, versus $10.0 million for the year-ago quarter. For the six month period ended March 31, the Authority sent $16.7 million to the tribe, compared to $20.0 million for the corresponding year-ago period.

The Authority believes that, absent any unforeseen circumstances, "existing cash balances, financing arrangements and operating cash flow will provide [it] with sufficient resources to meet existing debt obligations, relinquishment payments, distributions to the tribe and foreseeable capital expenditure requirements with respect to current operations ? for at least the next 12 months."

The Choctaw Resort Development Enterprise (CRDE) filed its Form 10-Q for the March 31 quarter on May 7. The Enterprise was created in October 1999 to manage tribal gaming and resort operations.

The Choctaws reported EBITDA of $34.3 million for the quarter, down 3.9 percent or $1.4 million from the year-ago quarter. Because the calculations behind EBITDA are not governed by generally accepted accounting principles (GAAP), the Enterprise noted that "All companies do not calculate EBITDA in the same manner. As a result, EBITDA ? may not be comparable to a similarly titled measure presented by other companies."

Net revenues for the March 31 quarter were $63.1 million, $1.0 million less than the year-ago quarter. This decline was attributed to "a decrease in gaming revenue," which in turn was affected by a "decrease in table game drop combined with a lower hold percentage." CRDE reported a 2.0 percent decline in casino revenue to $59.1 million for the quarter ended March 31, versus $60.3 million for the year-ago period. Slot revenues, however, rose 2.2 percent to $51.0 million for the March 31 quarter, compared with $49.9 million for the year-ago quarter.

Revenue from the Enterprise's Dancing Rabbit Golf Club dropped 11.7 percent for the March 31 quarter, which CRDE attributed "to a decrease in golf rounds as well as a decline in merchandise sales." Yet an increase in rounds played during the first quarter (which ended Dec. 31, 2001) drove golf operating expenses for the six months ended March 31 up by 11.1 percent.

CRDE reported net distributions to the Tribe of $23.6 million and $28.4 million for the quarters ended March 31, 2002 and 2001, respectively. For the six-month periods ended on those dates, net distributions to the Tribe totaled $43.2 million and $42.2 million, respectively. Subsequent to the quarter covered by this filing, the Enterprise made two further distributions; on April 24 of $9.3 million and on May 1 of $2.1 million.

A seven-percent sales tax is collected on all customer payments for rooms, food and beverages, and entertainment revenue; this tax is then remitted to the tribe. For the quarter ended March 31, just under $184,000 was paid to the tribe, compared with over $189,000 for the year-ago quarter. For the six months ended March 31, the tribe received slightly under $392,000 versus slightly under $394,000 for the corresponding year-ago period.

The Choctaws are in the process of constructing a new casino, called Golden Moon, adjacent to their Silver Star facility. Through March 31, CRDE reported that "$148.5 million of the budgeted $290.6 million Golden Moon construction has been completed though proceeds from [the tribe's] $200.0 million note offering, and contributions of cash, property and equipment from the Tribe. We anticipate the remaining $142.1 million of budgeted expenditures to be financed from cash on hand and short-term investments, which includes the balance of the proceeds from the $200.0 million note offering and the [Authority's] $125.0 million revolving credit facility."

[A credit facility acts much the same as a credit card. It is basically a line of credit granted to a business, or in this case the CRDE, by a bank, against which it can charge expenses and for which payments are remitted to the creditor.]

As tribal-based economic enterprises continue to multiply and expand, it is almost inevitable that we'll see more Indian-owned business entities filing 10-Qs and other types of disclosures with the SEC. While such forms can be tedious to wade through and understand, they certainly confirm the level of complexity and diversity reached by some of the more successful tribal business entities. The forms' degree of detail and thoroughness are also proof of the business prowess of their preparers and should remove any doubt about the ability of Indian-owned economic operations to compete and succeed in the realm of American business.