10-Q 1 a4701221.txt CHOCTAW RESORT DEVELOPMENT -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended: June 30, 2004 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ________________________to _____________________ Commission File Number 333-63348 CHOCTAW RESORT DEVELOPMENT ENTERPRISE (Exact name of registrant as specified in its charter) Mississippi Band of Choctaw Indians 64-0345731 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) PO Box 6260, Choctaw Branch, Choctaw, MS 39350 (Address of principal executive offices) (Zip code) (601) 663-0226 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes _X_ No ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes___ No _X_ CHOCTAW RESORT DEVELOPMENT ENTERPRISE INDEX TO QUARTERLY REPORT -------------------------------------------------------------------------------- PART I -- FINANCIAL INFORMATION Item 1 -- Financial Statements (unaudited) Consolidated Balance Sheets as of June 30, 2004 and September 30, 2003.............................................3 Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended June 30, 2004 and 2003.........4 Consolidated Statement of Owner's Equity for the Nine Months Ended June 30, 2004................................................5 Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2004 and 2003.............................................6 Notes to Consolidated Financial Statements ........................7 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................16 Item 3 -- Quantitative and Qualitative Disclosure of Market Risk............27 Item 4 -- Controls and Procedures...........................................28 PART II -- OTHER INFORMATION...............................................29 Signatures - ..............................................................30 PART I. Financial Information Item 1 Financial Statements CHOCTAW RESORT DEVELOPMENT ENTERPRISE CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, 2004 and September 30, 2003 -------------------------------------------------------------------------------

3 CHOCTAW RESORT DEVELOPMENT ENTERPRISE CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) For the Three and Nine Months Ended June 30, 2004 and 2003 --------------------------------------------------------------------------------

4 CHOCTAW RESORT DEVELOPMENT ENTERPRISE CONSOLIDATED STATEMENT OF OWNER'S EQUITY (UNAUDITED) For the Nine Months Ended June 30, 2004 --------------------------------------------------------------------------------

5 CHOCTAW RESORT DEVELOPMENT ENTERPRISE CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended June 30, 2004 and 2003 --------------------------------------------------------------------------------

6 CHOCTAW RESORT DEVELOPMENT ENTERPRISE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- Note 1--Summary of Significant Accounting Policies Description of Operations The Choctaw Resort Development Enterprise (the "Enterprise") is an enterprise of the Mississippi Band of Choctaw Indians (the "Tribe"). The Enterprise was established on October 12, 1999 by the Tribe for the purpose of managing the existing and future Tribal gaming and other resort operations at the Tribe's Pearl River Community. The operations of the Enterprise are collectively referred to as the Pearl River Resort. Prior to July 1, 2001, the Silver Star Hotel and Casino (the "Silver Star") was the sole operating entity of the Enterprise. The Silver Star commenced operations of a gaming, hotel, conference center and restaurant complex near Philadelphia, Mississippi on trust lands of the Tribe on July 1, 1994. In addition, the Enterprise has opened the Golden Moon Hotel and Casino (the "Golden Moon") which commenced operations on August 26, 2002. The Golden Moon operates a gaming, hotel and restaurant complex directly across the highway from Silver Star. The Enterprise also operates the Dancing Rabbit Golf Club ("Dancing Rabbit"), which opened April 1, 1997, Geyser Falls Water Theme Park ("Geyser Falls"), which opened July 8, 2002, and the Choctaw Hospitality Institute, which opened November 9, 2001, for the training of Pearl River Resort employees. The Dancing Rabbit, Geyser Falls and the Choctaw Hospitality Institute were contributed to the Enterprise at the Tribe's historical cost. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three and nine month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended September 30, 2004. The interim financial statements and notes thereto should be read in conjunction with the Enterprise's audited financial statements and notes thereto for the year ended September 30, 2003. The consolidated financial statements include the accounts of the Enterprise, the Silver Star, the Golden Moon, Geyser Falls, the Dancing Rabbit and the Choctaw Hospitality Institute. All necessary eliminating entries have been recorded. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and on deposit with banks and other financial institutions. The Enterprise considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories Inventories, consisting primarily of food, beverage, and gift shop merchandise, are stated at the lower of cost or market. Cost is determined using the first-in, first-out inventory method. 7 CHOCTAW RESORT DEVELOPMENT ENTERPRISE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) ------------------------------------------------------------------------------- Property and Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Costs of major construction, including interest incurred during construction of new facilities, are capitalized; costs of normal repairs and maintenance are charged to expense as incurred. Gains or losses on disposals of assets are recognized as incurred. The Enterprise periodically reviews the carrying value of property and equipment to determine if circumstances exist indicating impairment in carrying value of the property and equipment. If impairment is indicated, an adjustment will be made to the carrying value of the property and equipment. Deferred Loan Costs Deferred loan costs consist of costs incurred in the issuance of long-term debt. Amortization of deferred loan costs is computed using the interest method over the stated maturity of long-term debt. Accumulated amortization of the deferred loan costs is $3,469,399 and $2,643,829 at June 30, 2004 and September 30, 2003, respectively. Accounting for Derivative Instruments and Hedging Activities On October 1, 2000, the Enterprise adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities", as amended by Statement of Financial Accounting Standards No. 138. See Note 3. Contributed Capital Contributed capital consists of (i) equipment and facilities related primarily to various construction and expansion projects since the Silver Star opened which have been funded by the Tribe and contributed upon their completion at the Tribe's cost, (ii) certain development costs for the Golden Moon, also funded by the Tribe and contributed at the Tribe's cost, (iii) cash to fund Golden Moon construction and development and (iv) cash to fund construction and development of Geyser Falls. Contributed capital is presented net of distributions when distributions exceed retained earnings. Casino and Other Revenue Casino revenue is net win from gaming activities, which is the difference between gaming wins and losses. Gross revenues include the estimated retail value of rooms, food and beverage, and other goods and services provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. 8 CHOCTAW RESORT DEVELOPMENT ENTERPRISE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- The estimated cost of providing these promotional allowances is charged to the casino department in the following amounts:

Income Taxes The Enterprise is an unincorporated business enterprise owned by the Tribe, a federally recognized Indian tribe located on reservation land held in trust by the United States of America; therefore, the Enterprise was not subject to federal or state income taxes for the three or nine months ended June 30, 2004 and 2003. Advertising Expense Advertising is expensed as incurred and is included in selling, general, and administrative expense and casino costs and expenses. Advertising expense was $1,921,650 and $3,017,966 for the three months ended June 30, 2004 and 2003, respectively, and $4,130,679 and $7,227,583 for the nine months ended June 30, 2004 and 2003, respectively. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Enterprise include the estimated useful lives of depreciable assets and the estimated allowance for doubtful accounts receivable. Actual results could differ from those estimates. 9 CHOCTAW RESORT DEVELOPMENT ENTERPRISE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- Note 2--Property and Equipment Property and equipment consists of the following:

On March 15, 2004 the Enterprise sold its 2000 model King Air aircraft to an unrelated third party for net sale proceeds of $2,778,508. A loss on disposal in the amount of $944,090 representing the difference between net sale proceeds received and the net book value of the aircraft was recorded and is included in selling, general and administrative expense for the nine months ended June 30, 2004. Note 3--Long-Term Debt In March 2001, the Enterprise issued unsecured senior notes (the "Notes") in the amount of $200,000,000. The proceeds of the offering were used to retire a $75 million term loan (the "Loan") and to finance the construction of the Golden Moon. The Notes bear interest at 9.25% and require semiannual payments of interest beginning with the first payment on October 1, 2001 with the Notes maturing on April 1, 2009. The indenture governing the Notes (the "Indenture") contains certain financial covenants which restrict the Enterprise's ability to borrow money, pay dividends or make distributions, make investments, create liens, enter into certain transactions with affiliates and sell specific assets or merge with or into another entity. Under specific circumstances, the covenant limiting our ability to make certain payments, distributions and investments will be suspended. After April 1, 2005, the Enterprise may redeem all or part of the Notes at specified redemption prices plus accrued and unpaid interest on the redemption date. The Notes are subject to redemption requirements imposed by certain gaming laws and regulations. On December 29, 2000, the Enterprise entered into a $125 million reducing revolving credit facility (the "Facility"). The Facility was used by the Enterprise to (i) finance the construction of the Golden Moon, (ii) provide working capital, (iii) finance permitted capital expenditures, and (iv) for general purposes of the Enterprise. As of June 30, 2004, a total of $81,250,000 is drawn and outstanding on the Facility. The Enterprise pays commitment fees based on 0.5% of the available balance of the Facility. For the three months ended June 30, 2004 and 2003, the Enterprise paid commitment fees totaling $729 and $127,667, respectively, on the Facility. The Enterprise paid commitment fees totaling $9,649 and $271,208 for the nine months ended June 30, 2004 and 2003, respectively, on the Facility. Outstanding advances on the Facility at June 30, 2004 bear interest at LIBOR plus a margin rate of 2.75%. At June 30, 2004, outstanding advances on the Facility bore LIBOR interest at rates ranging from 1.14% to 1.87%. During 10 CHOCTAW RESORT DEVELOPMENT ENTERPRISE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- the three and nine months ended June 30, 2004, the Enterprise recorded interest expense totaling $936,834 and $3,017,358, respectively, on the outstanding balance of the Facility. During the three and nine months ended June 30, 2003, the Enterprise recorded interest expense totaling $1,181,948 and $3,361,392, respectively, on the outstanding balance of the Facility. The Facility is collateralized by the personal property of and the revenue generated by the Silver Star and the Golden Moon. The Facility has a maturity date of December 28, 2005. Borrowings available under the Facility began reducing quarterly beginning on December 31, 2002, in the amount of $6.25 million per quarter, until the amount of the Facility has been reduced to $40 million. Accordingly, borrowing capacity available under the Facility has been reduced to $81,250,000, all of which was outstanding at June 30, 2004. The Facility contains certain affirmative and negative covenants, including limiting the Enterprise's Total Leverage Ratio and Fixed Charge Coverage Ratio, as defined, during the term of the agreement. During the three months ended December 31, 2002, the Enterprise violated covenants related to the Fixed Charge Coverage Ratio and the Total Leverage Ratio under the Facility. The Enterprise received a waiver for such covenant violations from the Facility lender. The Enterprise is required to meet these covenants each quarter. Accordingly the Enterprise entered negotiations relating to modification of these covenants with the Facility lender in order to ensure future compliance. On March 25, 2003 the Enterprise successfully completed these negotiations, which resulted in modification of terms of the credit facility. Based on the amended terms of the credit facility, the Enterprise is in compliance with the Fixed Charge Coverage Ratio and the Total Leverage Ratio at June 30, 2004 and management believes the Enterprise will achieve compliance with both the Fixed Charge Coverage Ratio and the Total Leverage Ratio going forward. As of June 30, 2004, management believes that the Enterprise is in compliance with all other debt covenants under the Notes and the Facility. Maturities of long-tem debt are as follows: Fiscal years ending September 30, 2004 $ 6,250,000 2005 25,000,000 2006 50,000,000 2007 - 2008 - Thereafter 200,000,000 --------------------- Total $ 281,250,000 --------------------- The Enterprise entered into an interest rate swap agreement with a major financial institution for the purpose of fixing interest rates on a term loan, thus reducing exposure to interest rate fluctuations. At June 30, 2004, the Enterprise's interest rate swap had a notional amount of $-0- as the interest swap agreement terminated January 31, 2004. This agreement effectively fixed the interest rate on the term loan at 8.25%. The notional amount did not represent amounts exchanged by the parties, and thus was not a measure of exposure to the Enterprise. The amount exchanged was based on the notional amount. The term loan was repaid on April 24, 2001, however, the Enterprise did not concurrently settle the interest rate swap agreement. The differences to be paid or received by the Enterprise under the terms of the interest rate swap agreement were recognized as an adjustment to interest expense. 11 CHOCTAW RESORT DEVELOPMENT ENTERPRISE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- Effective October 1, 2000, the Enterprise adopted SFAS 133. The interest rate swap agreement described above is defined as a derivative instrument under SFAS 133. In accordance with the transition provisions of SFAS 133, the Enterprise recorded a cumulative-effect-type transition adjustment of $541,847 in other comprehensive loss and in accrued expenses and other liabilities to recognize the fair value of the Enterprise's liability under this swap agreement on October 1, 2000. Although the Enterprise had designated this swap agreement as a hedge since its inception on February 1, 2000, the Enterprise did not elect to seek hedge accounting for this agreement upon adoption of SFAS 133. Accordingly, during the period from October 1, 2003 through June 30, 2004, the Enterprise recognized other income of $56,259 and a related decrease in accrued expenses and other liabilities representing the effect during this period of interest rate changes. Reclassifications to other comprehensive income during the period from October 1, 2003 through June 30, 2004 are $60,755. During the period October 1, 2002 through June 30, 2003, the Enterprise recognized other income of $667,690 and a related decrease in accrued expenses and other liabilities representing the effect during this period of interest rate changes. Reclassifications to other comprehensive income during the period from October 1, 2002 through June 30, 2003 were $128,690. Note 4--Fair Value of Financial Instruments The carrying values of the Enterprise's cash and cash equivalents, accounts receivable, note payable, and accounts payable approximate fair value because of the short maturity of those instruments. Estimated fair value of the Notes is $215,000,000 at June 30, 2004 based on quoted market prices on or about June 30, 2004. At June 30, 2004, the fair value of the Facility approximates its carrying value because of the Facility's variable interest rate. Note 5 - Enterprise Licensing and Regulation The Tribe, by vote of the Tribal members, authorized casino gaming on Tribal lands located in Mississippi. In accordance with the Indian Gaming Regulatory Act, the Tribe signed a Tribal-State Compact with the State of Mississippi on December 4, 1992 and enacted ordinances authorizing bingo (Class II) and casino-type (Class III) gaming. The Tribal Council created the Choctaw Gaming Commission and authorized it as the regulatory agency responsible for the licensing of the Casino and the on-site regulation of the gaming operations. The Choctaw Gaming Commission has promulgated regulations that govern the gaming operations. Note 6 - Related Party Transactions Distributions to the Tribe were $16,745,000 and $13,865,000 for the three months ended June 30, 2004 and 2003, respectively and $48,052,000 and $62,729,288 for the nine months ended June 30, 2004 and 2003, respectively. Subsequent to January 31, 2000, the Enterprise makes distributions to the Tribe at the Tribe's discretion subject to the distribution restrictions under the Notes described in Note 3. The Indenture prescribes that the Enterprise may make an annual distribution to the Tribe (the "Annual Service Payment") in the amount of $55 million per year (payable in equal monthly installments), which amount is increased annually on each September 30, commencing with September 30, 2001, by 5% per annum. Any distributions to the Tribe are made at the Tribe's discretion, but distributions other than the Annual Service Payment (referred to as "Restricted Payments") are limited by the covenants of the indenture. The most significant of such covenants limit Restricted Payments such that the cumulative Restricted Payments from inception of the Indenture shall not exceed 50% of the Enterprise's cumulative net income (with measurement commencing on January 1, 2001) plus $75 million. Restricted Payments are further limited by the Indenture's requirement for the Enterprise to maintain a minimum Fixed Charge Coverage Ratio (as defined) of 2.5 to 1 (increasing to 3.0 to 1 after December 31, 2001), and thus limiting the Enterprise's ability to incur additional debt to make Restricted Payments. 12 CHOCTAW RESORT DEVELOPMENT ENTERPRISE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- Future Annual Service payments under the Indenture are as follows: Fiscal years ending September 30, 2004 63,669,375 2005 66,852,844 2006 70,195,486 2007 73,705,260 2008 77,390,523 ----------------- Total $351,813,488 ----------------- Employees of the Enterprise are provided health and life insurance coverage through the Tribe's health and life insurance plans. The Enterprise paid $2,405,599 and $2,300,478 to the Tribe under this arrangement for the three months ended June 30, 2004 and 2003, respectively and $7,225,460 and $7,718,261 for the nine months ended June 30, 2004 and 2003, respectively. The Enterprise collects and remits to the Tribe a 7% sales tax to the Tribe on rooms, food, beverage, sundry and entertainment revenue. The total sales tax paid was $447,394 and $385,494 for the three months ended June 30, 2004 and 2003, respectively. The Enterprise paid sales tax of $1,211,787 and $1,055,374 for the nine months ended June 30, 2004 and 2003, respectively. During the three and nine months ended June 30, 2004, the Enterprise paid rent for office space and purchased certain goods and services from the Tribe and its businesses in the amount of $2,099,313 and $5,794,471, respectively. During the three and nine months ended June 30, 2003, the Enterprise paid rent for office space and purchased certain goods and services from the Tribe and its businesses in the amount of $1,144,854 and $4,060,097, respectively. The Enterprise purchases coarse paper and janitorial supplies from Choctaw Paper Company, Inc. in the ordinary course of business. Choctaw Paper Company, Inc. is majority owned by a member of the Enterprises' board of directors. During the three and nine months ended June 30, 2004, the Enterprise made purchases of $399,968 and $1,205,807 respectively, from Choctaw Paper Company, Inc. During the three and nine months ended June 30, 2003, the Enterprise made purchases of $387,687 and $1,116,534, respectively from Choctaw Paper Company, Inc. The Enterprise paid $62,500 to the Tribal/State Tourism Fund for the promotion of tourism in Mississippi for each of the three-month periods ended June 30, 2004 and 2003, as required under the Tribal-State Compact. The Choctaw Gaming Commission was paid $734,402 and $720,781 for the three months ended June 30, 2004 and 2003, respectively, and $2,114,452 and $2,019,506 for the nine months ended June 30, 2004 and 2003, respectively, for fees assessed at 1% of gaming revenues per the Tribal Code and employee licensing fees. Amounts paid to the Choctaw Gaming Commission along with amounts paid to the Tribal/State Tourism fund are included in selling, general and administrative expense for the three and nine-month periods ended June 30, 2004 and 2003. 13 CHOCTAW RESORT DEVELOPMENT ENTERPRISE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- The Enterprise paid $-0- and $310,980 to the Choctaw Development Enterprise, a wholly owned enterprise of the Tribe, for construction services related to development of the beach club and sand beach adjacent to Geyser Falls during the three and nine months ended June 30, 2004. The Choctaw Development Enterprise was paid $1,111,216 for the three and nine months ended June 30, 2003 for the construction services related to development of the beach club and sand beach lagoon adjacent to Geyser Falls. During the three months and nine months ended June 30, 2004 the Tribe contributed $-0- and $890,875 in cash, respectively to fund construction and development of Geyser Falls. During the three and nine months ended June 30, 2003 the Tribe contributed $50,000 and $743,387 in cash, respectively to fund construction and development of Geyser Falls. During the three and nine months ended June 30, 2003, the Tribe contributed property and equipment to the Enterprise at the Tribe's cost of $6,941,034 and $7,927,196, respectively. Note 7--Employee Benefit Plans Employees of the Enterprise are eligible to participate in the Tribe's 401(k) plan. The Enterprise expensed contributions of $529,389 and $472,724 for the three months ended June 30, 2004 and 2003, respectively and $1,668,438 and $1,528,043 for the nine months ended June 30, 2004 and 2003, respectively. The Enterprise has no formal commitments to provide post-retirement health care benefits to retirees. Note 8 --Contingencies The Enterprise is subject to various claims and litigation in the normal course of business. In the opinion of management, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse impact on the Enterprise's financial position, results of operations or cash flows. Note 9--Subsequent Events On August 2, 2004 the Enterprise distributed $2,700,000 to the Tribe. Note 10--Recently Issued Accounting Pronouncements In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." This interpretation addresses the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interests. The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation outlines disclosure requirements for VIEs created after January 31, 2003. The Enterprise has reviewed its major relationships and its overall economic interests with other companies consisting of related parties and other suppliers to determine the extent of its variable economic interest in theses parties. The Enterprise adopted FIN 46 effective December 31, 2003. Adoption of FIN 46 did not have any impact on the financial statements of the Enterprise. 14 CHOCTAW RESORT DEVELOPMENT ENTERPRISE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) -------------------------------------------------------------------------------- In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Since the Enterprise has no publicly traded equity securities, it is a nonpublic entity as defined by SFAS 150. Nonpublic entities are subject to the provisions of SFAS 150 for the first fiscal period beginning after December 15, 2003. The Enterprise adopted the provisions of SFAS 150 effective March 31, 2004, which had no impact on our financial position, results of operations or cash flows as the Enterprise does not have any such financial instruments. 15 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 -------------------------------------------------------------------------------- The following business overview, discussion and analysis of the financial condition and results of operations is a summary and should be read together with the consolidated financial statements and notes thereto and the Enterprises prior filings. Overview. The Enterprise is a business enterprise of the Tribe that was created on October 12, 1999 to operate the Silver Star and to develop and operate the Golden Moon and related businesses. Effective July 1, 2001, the Tribe contributed the Dancing Rabbit to the Enterprise and effective July 8, 2002, the Tribe contributed the Geyser Falls to the Enterprise. No consideration was or is intended to be given to the Tribe for such contributions. Choctaw Hospitality Institute ("CHI") officially opened November 9, 2001. CHI and its staff provide classroom and hands-on training for gaming, hospitality and professional employees of the Enterprise. The Enterprise's primary focus is casino operations. The other properties are used as amenities to promote and make more attractive the casinos to new and existing patrons. The Enterprise's primary business focus is the maximization of casino revenue growth while minimizing operating expenses. The Enterprise seeks to achieve these goals through aggressive promotion of its properties. The Enterprise markets the Silver Star, Golden Moon, Dancing Rabbit and Geyser Falls under the Pearl River Resort trade name and intends to continue to promote these collective properties as a premier regional entertainment and destination resort. The Silver Star Hotel and Casino The Silver Star is a full service gaming and entertainment complex located on a 32-acre site on the Tribe's reservation. The Silver Star, along with the Golden Moon, are currently the only land-based casinos in the state. The Silver Star opened in July 1994 and is an approximately 518,000 square foot facility that, as of June 30, 2004, featured: a 12-story hotel with 496 rooms; approximately 82,500 square feet of gaming space with 2,826 slot machines, 45 table games and 11 poker tables; approximately 30,000 square feet of meeting and convention space, which also serves as a 2,000 seat live entertainment and sports venue with sky boxes; six restaurants; three lounges; three retail outlets; an arcade; an outdoor swimming pool; a full-service spa; fitness facilities; and guest access to the adjacent Dancing Rabbit Golf Club and Geyser Falls. The Golden Moon Hotel & Casino The Golden Moon is a full service gaming and entertainment complex located on a 15 acre site that opened on August 26, 2002. The Golden Moon, located directly across from the Silver Star, is connected to the Silver Star via an enclosed walkway bridge that spans the highway separating the two casinos. The bridge is enclosed and climate controlled and features moving ramps to ease movement from one casino to the other. The Golden Moon is an approximately 843,000 square foot facility that, as of June 30, 2004, featured: a 28-story hotel with 571 rooms; approximately 90,000 square feet of gaming and related circulation area space with 1,867 slot machines and 40 table games; approximately 11,600 square feet of meeting space; six restaurants; five lounges; approximately 8,000 square feet of retail space; a 315-foot tower topped by an 80-foot geodesic sphere housing a restaurant and lounge; an aqua-scape, including fountains and other water effects; an indoor/outdoor swimming pool; fitness facilities; and guest access to the nearby Dancing Rabbit Golf Club and Geyser Falls. 16 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 -------------------------------------------------------------------------------- Non GAAP Financial Measures Management of the Enterprise uses EBITDA as one measure of financial performance and operational efficiency. EBITDA means earnings before interest, taxes, depreciation, amortization, certain non-cash expenses and certain non-recurring items. During the nine months ended June 30, 2004, the only non-recurring item was the loss on disposal of the Enterprise's aircraft. See further discussion at Note 2 to the consolidated financial statements. EBITDA is presented because management believes it is widely used as a measure of operating performance in the gaming industry. EBITDA is not a measure under generally accepted accounting principles ("GAAP") and should not be construed as an alternative to operating income (as determined in accordance with GAAP) as an indicator of cash flows or a measure of liquidity. All companies do not calculate EBITDA in the same manner. As a result, EBITDA as presented here may not be comparable to a similarly titled measure presented by other companies. EBITDA for the three and nine months ended June 30, 2004 was $28.0 million and $90.0 million, respectively compared to $27.5 million and $77.7 million, respectively for the three and nine months ended June 30, 2003, an increase of $0.5 million and $12.3 million or 1.8% and 15.8%, respectively. As a percentage of net revenue, EBITDA was 38.3% and 40.1% for the three and nine months ended June 30, 2004, respectively, compared to 37.1% and 35.6% for the three and nine months ended June 30, 2003, respectively. The accompanying table reconciles EBITDA to net income for the three and nine months ended June 30, 2004 and 2003:

17 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 -------------------------------------------------------------------------------- Net Revenues. Net revenues were $73.1 million for the quarter ended June 30, 2004 compared to $74.3 million for the quarter ended June 30, 2003. The $1.2 million, or 1.6% decrease in net revenue was primarily due to decreases in gaming revenue offset somewhat by increases in room, food and other revenue. Net revenues were $224.8 million for the nine months ended June 30, 2004 compared to $218.5 million for the nine months ended June 30, 2003. The $6.3 million, or 2.8% increase in net revenue was primarily due to increases in gaming, room and food revenue attributable to improved operations of the Golden Moon, offset by a slight decrease in other revenue. Complimentary revenues are included in gross revenues but are deducted as a promotional allowance to arrive at net revenues. Casino. Casino revenues decreased $2.0 million, or 3.0%, to $63.6 million for the quarter ended June 30, 2004 from $65.6 million for the quarter ended June 30, 2003. Casino revenues were $202.5 million for the nine months ended June 30, 2004 compared to $197.6 million for the nine months ended June 30, 2003, an increase of $4.9 million, or 2.5%. In early April 2004, management reduced the number of casino table games from 127 to 86 in an effort to better match our table game offerings with current customer demand and to increase departmental operating efficiencies. Accordingly, table game activity has decreased as reflected in table games drop. The table game drop was $41.7 million for the quarter ended June 30, 2004 compared to table game drop of $55.7 million for the quarter ended June 30, 2003. This reflects a decrease in table activity of $14.0 million or 25.1% over the corresponding period in 2003. Table game revenue was $8.4 million for the quarter ended June 30, 2004 compared to $8.6 million for the quarter ended June 30, 2003, a decrease of $0.2 million, or 2.3%. The decrease in revenue is primarily due to the decreased table game drop offset somewhat by a higher table game hold percentage. Table game hold percentage was 20.1% for the quarter ended June 30, 2004 compared to 15.4% for the quarter ended June 30, 2003. The table game drop was $146.9 million for the nine months ended June 30, 2004 compared to table game drop of $159.1 million for the nine months ended June 30, 2003. This reflects a decrease in table activity of $12.2 million or 7.7% over the corresponding period in 2003. Table game revenue was $27.0 million for the nine months ended June 30, 2004 compared to $26.9 million for the nine months ended June 30, 2003, an increase of $0.1 million, or 0.4%. The slight increase in revenue is primarily due to a higher table game hold percentage for the nine months ended June 30, 2004 when compared to the nine months ended June 30, 2004. Table game hold percentage was 18.4% for the nine months ended June 30, 2004 compared to 16.9% for the nine months ended June 30, 2003. Table game hold percentage is reasonably predictable over the long-term, but can fluctuate significantly from quarter to quarter, affecting table games revenue. Slot revenues were $54.6 million for the quarter ended June 30, 2004 compared to $56.6 million for the quarter ended June 30, 2003, a decrease of $2.0 million or 3.5%. The decrease is due to a decrease in coin in for the quarter ended June 30, 2004 compared to the quarter ended June 30, 2003. Slot revenues were $173.6 million for the nine months ended June 30, 2004 compared to $169.4 million for the nine months ended June 30, 2003, an increase of $4.2 million or 2.5%. The increase is primarily due to an increase in coin-in for the nine months ended June 30, 2004, compared to the same period in the prior year. The increase in coin in during the nine months ended June 30, 2004 is primarily attributable to improved operations of the Golden Moon. 18 Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 (Continued) -------------------------------------------------------------------------------- Food and Beverage. For the quarter ended June 30, 2004, food and beverage revenues were $8.3 million, an increase of approximately $0.4 million, or 5.1%, from $7.9 million for the quarter ended June 30, 2003. During the quarter ended June 30, 2004, the Silver Star and Golden Moon turned 562,000 covers with an average revenue per cover of $11.02. For the quarter ended June 30, 2003, the Silver Star and Golden Moon turned 523,000 covers with an average revenue per cover of $11.46. For the nine months ended June 30, 2004, food and beverage revenues were $24.7 million, an increase of approximately $1.1 million, or 4.7%, from $23.6 million for the nine months ended June 30, 2003. During the nine months ended June 30, 2003, the Silver Star and Golden Moon turned 1,636,000 covers with an average revenue per cover of $10.96 compared to 1,490,000 covers with an average revenue per cover of $11.78 during the nine months ended June 30, 2003. Rooms. Room revenues were $4.6 million for the quarter ended June 30, 2004 compared to $4.4 million for the quarter ended June 30, 2003. There was a decrease in the average daily room rate to $52.70 for the quarter ended June 30, 2004 from $57.82 for the quarter ended June 30, 2003. Our occupancy rate was 90.7% for the quarter ended June 30, 2004 compared to 80.0% for the quarter ended June 30, 2003. During the quarter ended June 30, 2004, 52.7% of our hotel revenue was attributable to rooms occupied by Silver Star and Golden Moon customers on a complimentary basis compared to 60.5% for the quarter ended June 30, 2003. Room revenues were $12.6 million and $11.9 million for the nine months ended June 30, 2004 and 2003, respectively. Other. Other revenues increased $0.3 million to $5.5 million for the quarter ended June 30, 2004 from $5.2 million for the quarter ended June 30, 2003. Other revenues are comprised primarily of revenue from the casino's various retail outlets, the convention center, fees earned from cash advances to customers, other miscellaneous items, Dancing Rabbit, Geyser Falls and the Choctaw Hospitality Institute. The increase in other revenue is primarily attributable to an increase in water park revenue offset by decreases in retail and golf revenues. Retail revenues were down $0.1 million or 8.3% to $1.1 million for the quarter ended June 30, 2004 compared to $1.2 million for the quarter ended June 30, 2003. For the quarter ended June 30, 2004 golf revenues from the Dancing Rabbit Golf Club were $1.3 million, down $0.4 million or 23.5% from $1.7 million for the quarter ended June 30, 2003. The decrease in golf revenue for the quarter is attributable to decreased golf rounds as a result of inclement weather as well as a decrease in merchandise sales. Revenue generated by Geyser Falls was $1.9 million for the quarter ended June 30, 2004 compared to $1.3 million for quarter ended June 30, 2003, and increase of $0.6 million or 46.2%. Revenue generated by the Choctaw Hospitality Institute were unchanged at $0.2 million for both the quarters ended June 30, 2004 and 2003. Convention center revenues for the quarter ended June 30, 2004 were unchanged at $0.4 million for both the quarters ended June 30, 2004 and 2003. Other revenue including telephone, spa charges and miscellaneous items was unchanged at $0.4 million for both the quarters ended June 30, 2004 and 2003. For the nine months ended June 30, 2004 other revenues were $11.6 million compared to $12.2 million for the nine months ended June 30, 2003, a $0.6 million or 4.9% decrease. The decrease in other revenue is primarily attributable to a decrease in revenue generated by the Choctaw Hospitality Institute and a decrease in retail and golf revenue offset somewhat by increases in convention center and water park revenue. Retail revenues were $3.4 million for the nine months ended June 30, 2004 compared to $3.6 million for the nine months ended June 30, 2003, a $0.2 million or 5.6% decrease. Golf revenues from the Dancing Rabbit Golf Club were $2.7 million for the nine months ended June 30, 2004 compared to $3.1 million for the nine months ended June 30, 2003, a $0.4 million or 12.9% decrease. Revenues generated 19 Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 (Continued) -------------------------------------------------------------------------------- by Geyser Falls were $1.9 million for the nine months ended June 30, 2004 compared to $1.3 million for the nine months ended June 30, 2003. Revenue generated by the Choctaw Hospitality Institute was $0.4 million for the nine months ended June 30, 2004 compared to $1.3 million for the nine months ended June 30, 2003. Convention center revenues for the nine months ended June 30, 2004 were up $0.2 million to $1.6 million from $1.4 million for the nine months ended June 30, 2003. Other revenue including telephone, spa charges and miscellaneous items were unchanged at $1.3 million for both the nine months ended June 30, 2004 and 2003. Promotional Allowances. Promotional allowances totaled $8.9 million for the quarter ended June 30, 2004, unchanged from promotional allowances of $8.9 million for the quarter ended June 30, 2003. Promotional allowances as a percent of casino revenues were 14.0% for the three months ended June 30, 2004 compared to 13.6% for the three months ended June 30, 2003. Promotional allowances were $26.7 million for the nine months ended June 30, 2003, unchanged from promotional allowances of $26.7 for the nine months ended June 30, 2003. During the nine months ended June 30, 2004, promotional allowances decreased to 13.2% of casino revenues from 13.5% during the nine months ended June 30, 2003. Promotional allowances are used to reward existing guests and generate visits from new customers in our outer markets in an effort to increase revenues and market share. Costs and Expenses. Total costs and expenses were $53.0 million for the quarter ended June 30, 2004 compared to $54.6 million for the quarter ended June 30, 2003, a decrease of $1.6 million or 2.9%. Total costs and expenses were $159.5 million for the nine months ended June 30, 2004 compared to $163.5 million for the nine months ended June 30, 2003, a decrease of $4.0 million or 2.4%. The decrease for both periods is primarily attributable to increased operating efficiencies and cost control measures instituted by management. Casino. Casino costs and expenses were $17.9 million for the quarter ended June 30, 2004, compared to $19.4 million for the quarter ended June 30, 2003, a decrease of $1.5 million or 7.7%. Casino costs and expenses were $57.4 million for the nine months ended June 30, 2004, compared to $62.5 million for the nine months ended June 30, 2003, a decrease of $5.1 million or 8.2%. The decrease for both the quarter and nine-month period is primarily attributable to increased operating efficiencies, consolidation of certain casino functions and other cost control measures instituted by management. Food and Beverage. Food and beverage costs were $2.9 million for the quarter ended June 30, 2004 compared to $3.6 million for the quarter ended June 30, 2003, a decrease of $0.7 million or 19.4%. Food and beverage costs were $8.8 million for the nine months ended June 30, 2004 compared to $10.2 million for the nine months ended June 30, 2003. The decrease for both the quarter and nine-month period is primarily attributable to increased operating efficiencies, reduced employee headcount and food cost control efforts instituted by management. Rooms. Room costs and expenses were $0.8 million for the quarter ended June 30, 2004 compared to $1.2 million for the quarter ended June 30, 2003, a decrease of $0.4 million or 33.3%. Room costs and expenses were $2.4 million for the nine months ended June 30, 2004 compared to $3.3 million for the nine months ended June 30, 2003, a decrease of $0.9 million or 27.3%. The decrease for both the quarter and nine-month period is primarily attributable to management's allocation to casino expense, a portion of room costs associated with complementary rooms provided casino patrons. To a lesser extent, the decrease in expense is also attributable to increased operating efficiencies, reduced employee headcount and room cost control efforts instituted by management. 20 Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 (Continued) -------------------------------------------------------------------------------- Other. Other costs and expenses were $3.2 million for both the three-month periods ended June 30, 2004 and 2003. Other costs and expenses were $7.7 million for the nine months ended June 30, 2004, compared to $7.9 million for the nine months ended June 30, 2003, a decrease of $0.2 million, or 2.5%. Other expenses are comprised of the costs related to the operation of retail outlets, the convention center, the Dancing Rabbit and Geyser Falls. Golf operating expenses were $1.2 million the three months ended June 30, 2004 compared to $1.3 million for the three months ended June 30, 2003. Golf operating expenses were $3.5 million for both the nine-month periods ended June 30, 2004 and 2003. Geyser Falls operating expenses were $1.2 million and $2.0 million, respectively for the three and nine month periods ended June 30, 2004 compared to $1.2 million and $1.9 million respectively for the comparable periods of the prior year. Selling, General and Administrative. Selling, general and administrative costs and expenses were $17.5 million for the quarter ended June 30, 2004 compared to $17.1 million for the quarter ended June 30, 2003, an increase of $0.4 million or 2.3%. Selling, general and administrative costs and expenses were $52.0 million for the nine months ended June 30, 2004 compared to $50.1 million for the nine months ended June 30, 2003, an increase of $1.9 million or 3.8%. The increase in selling, general and administrative expense for both the quarter and nine months ended June 30, 2004 is primarily attributable to increased direct casino patron marketing efforts as well as other administrative costs associated with the operation of the Golden Moon and Silver Star and the loss on disposal related to the sale of the Enterprise's aircraft. See Note 2 to the consolidated financial statements. Depreciation. Depreciation expense was $7.9 million for the quarter ended June 30, 2004 compared to $7.8 million for the quarter ended June 30, 2003. Depreciation expense was $23.8 million for the nine months ended June 30, 2004 compared to $22.7 million for the nine months ended June 30, 2003. The increase for both the quarter and nine months ended are primarily attributable to additional depreciation related to property and equipment and construction costs incurred for Golden Moon and Geyser Falls. Operating Income (loss). Operating income was $20.1 million for the quarter ended June 30, 2004 compared to $19.7 million for the quarter ended June 30, 2003, an increase of $0.4 million, or 2.0%. Operating income was $65.3 million for the nine months ended June 30, 2004 compared to $55.0 million for the nine months ended June 30, 2003, an increase of $10.3 million, or 18.7%. The increase is primarily attributable to increased casino revenue, the operational efficiencies and cost control measures instituted by management and to a lesser extent, the revenue and expense variations previously discussed. Other Income (Expense). Other income (expense) is comprised of interest income minus interest expense and other expense. Other expense was $5.8 million for the quarter ended June 30, 2004 compared to other expense of $6.1 million for the quarter ended June 30, 2003, representing a decrease in expense of $0.3 million which is primarily attributed to a decrease in interest expense of approximately $0.5 million and a $0.2 million decrease in other income related to the effect of interest rate changes on the interest swap agreement. The decrease in interest expense for the quarter ended June 30, 2004 is primarily the result of reduced commitment fees related to the revolving credit facility and decreased interest expense in connection with the interest rate swap agreement. Other expense was $17.7 million for the nine months ended June 30, 2004 compared to other expense of approximately $18.0 million for the nine months ended June 30, 2003, representing a decrease in expense of $0.3 million which is attributed to a decrease in interest expense of approximately $1.0 million, and a $0.6 million decrease in other income related to the effect of interest rate changes on the interest swap agreement. 21 Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 (Continued) -------------------------------------------------------------------------------- Effective October 1, 2000, the Enterprise adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133") "Accounting for Derivative Instruments and Hedging Activities", as amended by Statement of Financial Accounting Standards No. 138. The interest rate swap agreement referred to above is defined as a derivative instrument under SFAS 133. Although the Enterprise had designated this interest rate swap agreement as a hedge since its inception on February 1, 2000, the Enterprise did not elect to seek hedge accounting for this agreement upon adoption of SFAS 133. Accordingly, during the three months ended June 30, 2004 and 2003, the Enterprise recognized other income of $-0- and $200,000 respectively, attributed to the effect of interest rate changes on the interest rate swap agreement. During the nine months ended June 30, 2004 and 2003, the Enterprise recognized other income of $56,000 and $700,000, respectively, attributed to the effect of interest rate changes on the interest rate swap agreement. Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the recorded amount of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Significant accounting policies employed by the Enterprise, including the use of estimates and assumptions are presented in the Notes to the Consolidated Financial Statements. Management bases its estimates on its historical experience, together with other relevant factors, in order to form the basis for making judgments which will affect the carrying value of assets and liabilities. On an ongoing basis, management evaluates its estimates and makes changes to carrying values as deemed necessary and appropriate. The Enterprise believes that estimates related to the following areas involve a high degree of judgment and/or complexity; the allowance for doubtful accounts receivable, estimated accruals for slot jackpots and slot club bonus points, self insurance related to employee health plans and contingencies related to customer claims in the ordinary course of business. The Enterprise maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, which results in bad debt expense. The Enterprise determines the adequacy of this allowance by periodically evaluating individual customer receivables and considering the customer's financial condition, credit history and current economic conditions. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, the Enterprise may increase the allowance. The Enterprise maintains accruals for health and workers compensation self-insurance, slot jackpots and slot club point redemption, which are classified as accrued liabilities in the balance sheets. The Enterprise determines the adequacy of these accruals by periodically evaluating the historical experience and projected trends related to these accruals. If such information indicates that these accruals are overstated or understated, the Enterprise will adjust the assumptions utilized in the methodologies and reduce or provide for additional accruals as appropriate. 22 Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 (Continued) -------------------------------------------------------------------------------- The Enterprise is subject to various claims and legal actions in the ordinary course of business. Some of these matters include personal injuries to customers and damage to customers' personal assets. The Enterprise estimates guest claims and accrues for such liability based on historical experience in accrued liabilities in the balance sheets. Liquidity and Capital Resources As of June 30, 2004, the Enterprise held cash and cash equivalents of $52.8 million. Our principal sources of liquidity have consisted of cash provided by operating activities and debt financing. Cash provided by operating activities was $68.5 million in the nine months ended June 30, 2004 compared to $50.9 million in the nine months ended June 30, 2003. The increase of $17.6 million was due primarily to the increase in net income to $47.6 million in the nine months ended June 30, 2004 from $37.0 million in the nine months ended June 30, 2003. Cash used in investing activities in the nine months ended June 30, 2004 totaled $4.4 million of which $7.2 million was for capital expenditures primarily related to upgrades and maintenance of the Silver Star and Golden Moon. The Enterprise received net sales proceeds of $2.8 million related to disposal of its 2000 model King Air aircraft as discussed in Note 2 to the consolidated financial statements. Cash used in investing activities in the nine months ended June 30, 2003 totaled $37.5 million of which $40.1 million was for capital expenditures primarily related to construction activities for Golden Moon and Geyser Falls. During the nine months ended June 30, 2003 cash provided by investing activities totaled $2.6 million and was the result of changes in restricted cash. The Enterprise's outstanding revolving credit facility restricts our ability to make capital expenditures. The Enterprise may not spend more than $10 million on capital expenditures and improvements in any fiscal year for each of the Silver Star and Golden Moon (following its opening). In addition, we are limited to a maximum construction expenditure, exclusive of the Golden Moon project, which includes the parking garage adjacent to the Silver Star, of $25 million during the term of this loan. In the ordinary course of business, we will continue to maintain and improve the Silver Star and Golden Moon as necessary to continue to provide a competitive and attractive facility to our customers. We intend to make capital expenditures up to the amounts permitted under our credit facilities to maintain the property. Cash used in financing activities was $60.9 million in the nine months ended June 30, 2004 compared to $37.2 million cash used in the nine months ended June 30, 2003. The primary use of cash in each period was distributions to the Tribe of $48.1 million and $62.7 million in the nine months ended June 30, 2004 and 2003, respectively. Additionally, during the nine months ended June 30, 2004 the Enterprise made repayments of long-term debt totaling $13.8 million on the revolving credit facility. The primary source of funds provided by financing activities during the nine months ended June 30, 2003 was $25.0 million drawn on the revolving credit facility. In addition, during the nine months ended June 30, 2004 and 2003 the Tribe contributed cash of $0.9 million and $0.7 million, respectively, to the Enterprise related to construction and development of Geyser Falls. During the nine months ended June 30, 2003 the Enterprise paid $225,000 in loan fees related the credit facility. This amount, net of amortization, is included in Deferred loan costs at June 30, 2004 and 2003. On August 2, 2004, the Enterprise distributed $2,700,000 to the Tribe. 23 Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 (Continued) -------------------------------------------------------------------------------- On December 19, 2000, the Enterprise entered into a $125.0 million reducing senior secured revolving credit facility. The Facility has a maturity date of December 28, 2005. Borrowings available under the Facility reduce quarterly beginning on December 31, 2002, in the amount of $6.25 million per quarter, until the amount of the facility has been reduced to $40 million. Accordingly, borrowing capacity available under Facility has been reduced to $81,250,000, all of which was outstanding at June 30, 2004. The interest rate on the facility varies based upon the Enterprise's total recourse debt to gaming EBITDA ratio, as defined. The Facility contains certain affirmative and negative covenants, including limiting the Enterprise's Total Leverage Ratio and Fixed Charge Coverage Ratio, as defined, during the term of the agreement. The terms of the notes and the revolving credit facility restrict the Enterprise's ability to sell or dispose of assets, incur additional debt or contingent obligations, extend credit, make investments, commingle our assets with the assets of other Tribal business enterprises, require us to maintain certain financial ratios, limit our ability to make distributions to the Tribe and limit the amount of capital expenditures we may incur related to the Silver Star and Golden Moon. The notes contain certain covenants that restrict our ability to borrow additional money, pay dividends or make other distributions, make investments, create liens, enter into certain transactions with affiliates, and sell certain assets or merge with or into another person. Under specific circumstances, the covenant limiting our ability to make certain payments, distributions and investments will be suspended. The Indenture prescribes that the Enterprise may make an annual distribution to the Tribe (the "Annual Service Payment") in the amount of $55 million per year (payable in equal monthly installments), which amount is increased annually on each September 30, commencing with September 30, 2001, by 5% per annum. Any distributions to the Tribe are made at the Tribe's discretion, but distributions other than the Annual Service Payment (referred to as "Restricted Payments") are limited by the covenants of the Indenture. The most significant of such covenants limit Restricted Payments such that the cumulative Restricted Payments from inception of the Indenture shall not exceed 50% of the Enterprise's cumulative net income (with measurement commencing on January 1, 2001) plus $75 million. Restricted Payments are further limited by the Indenture's requirement for the Enterprise to maintain a minimum Fixed Charge Coverage Ratio (as defined) of 2.5 to 1 (increasing to 3.0 to 1 after December 31, 2001), and thus limiting the Enterprise's ability to incur additional debt to make Restricted Payments. During the three months ended December 31, 2002, the Enterprise violated covenants related to the Fixed Charge Coverage Ratio and the Total Leverage Ratio under the Facility. The Enterprise received a waiver for such covenant violations from the Facility lender. The Enterprise is required to meet these covenants each quarter. Accordingly the Enterprise entered negotiations relating to modification of this covenant with the Facility lender in order to ensure future compliance. On March 25, 2003 the Enterprise successfully completed these negotiations, which resulted in modification of terms of the credit facility. Based on the amended terms of the credit facility, the Enterprise is in compliance with the Fixed Charge Coverage Ratio and the Total Leverage Ratio at June 30, 2004 and management believes the Enterprise will achieve compliance with both the Fixed Charge Coverage Ratio and the Total Leverage Ratio going forward. As of June 30, 2004, management believes that the Enterprise is in compliance with all other debt covenants under the Notes and the Facility. 24 Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 (Continued) -------------------------------------------------------------------------------- As of June 30, 2004 and September 30, 2003 the Tribe had outstanding liabilities of $1.5 million and $1.9 million, respectively, under credit facilities with $1.7 million and $2.4 million, respectively, available in borrowings, which did not preclude recourse to assets held by the Enterprise. The Enterprise believes that existing cash balances, operating cash flow and anticipated borrowings under the credit facilities and the offering of the Notes will provide sufficient resources to fund operations and to meet our debt payment obligations and expected distributions to the Tribe and foreseeable capital expenditure requirements at the Silver Star and Golden Moon. Presently, the Enterprise has fully drawn on the Facility and does not have other existing lines of credit available for use. The Enterprise does not anticipate the need for further credit availability in the short-term. However in the event that short-term credit is desired, the Enterprise believes that it could obtain such financing on favorable terms from commercial lending institutions. The following table presents the long-term debt maturities and future minimum lease payments under non-cancellable leases at June 30, 2004.

Additionally and in accordance with the Tribal law, the Enterprise is required to remit to the Choctaw Gaming Commission a monthly fee equal to 1% of gaming revenues. Also, and in accordance with the Tribal-State Compact the Enterprise is required to provide $250,000 annually to the Tribal-State Tourism Fund to be used for advertising and tourism promotional activities. Recently Issued Accounting Pronouncements In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." This interpretation addresses the requirements for business enterprises to consolidate related entities in which they are determined to be the primary economic beneficiary as a result of their variable economic interests. The interpretation is intended to provide guidance in judging multiple economic interests in an entity and in determining the primary beneficiary. The interpretation outlines disclosure requirements for VIEs created after January 31, 2003. The Enterprise has reviewed its major relationships and its overall economic interests with other companies consisting of related parties and other suppliers to determine the extent of its variable economic interest in theses parties. The Enterprise adopted FIN 46 effective December 31, 2003. Adoption of FIN 46 did not have any impact on the financial statements of the Enterprise. 25 Management's Discussion And Analysis Of Financial Condition And Results Of Operations Three and Nine Months Ended June 30, 2004 Compared to Three and Nine Months Ended June 30, 2003 (Continued) -------------------------------------------------------------------------------- In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Since the Enterprise has no publicly traded equity securities, it is a nonpublic entity as defined by SFAS 150. Nonpublic entities are subject to the provisions of SFAS 150 for the first fiscal period beginning after December 15, 2003. The Enterprise adopted the provisions of SFAS 150 effective March 31, 2004, which had no impact on our financial position, results of operations or cash flows as the Enterprise does not have any such financial instruments. Impact of Inflation Absent changes in competitive and economic conditions or in specific prices affecting the industry, we do not expect that inflation will have a significant impact on our operations. Changes in specific prices, such as fuel and transportation prices, relative to the general rate of inflation may have a material adverse effect on the hotel and casino industry in general. Regulation and Taxes The Silver Star and Golden Moon are subject to extensive regulation by the Choctaw Gaming Commission. Changes in applicable laws or regulations could have a significant impact on our operations. The Enterprise is owned by the Tribe, a federally recognized Indian Tribe located on reservation land held in trust by the United States of America; therefore, the Enterprise was not subject to federal or state income taxes for the three or nine month periods ended June 30, 2004 or 2003, nor is it anticipated that the Enterprise will be subject to such taxes in the future. Various efforts have been made in the United States Congress over the past several years to enact legislation that would subject the income of tribal business entities, such as the Enterprise, to federal income tax. Although no such legislation has been enacted, similar legislation could be passed in the future. A change in our non-taxable status could have a material adverse affect on our cash flows from operations. Disclosure Regarding Forward-Looking Statements Certain information included in this Quarterly report and other materials filed or to be filed by the Enterprise with the Securities and Exchange Commission contains forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements include information relating to plans for future expansion and other business development activities as well as other capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Enterprise. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, leverage and debt service, domestic or global economic conditions, pending litigation, changes in federal tax laws or the administration of such laws and changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions). 26 Item 3. Quantitative and Qualitative Disclosure About Market Risk -------------------------------------------------------------------------------- Market Risk Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. The Enterprise's primary exposure to market risk is interest rate risk associated with our long-term debt. The Enterprise had previously entered into an interest rate swap agreement to fix the interest rate on our term loan at 8.25%. Pursuant to the Indenture dated March 30, 2001, we used a portion of the proceeds from the offering of the notes to repay the remaining outstanding balance under the Loan. Upon the prepayment of the related installment note agreement, the Enterprise did not settle the existing interest rate swap agreement. At June 30, 2004, the interest rate swap agreement had a notional amount of $-0- as the interest rate swap agreement terminated January 31, 2004. The notional amount did not represent amounts exchanged by the parties, and thus was not a measure of exposure to the Enterprise. The amount exchanged was based on the notional amount. The fair value liability of our interest rate swap was based on the cash termination value of the agreement using quotes from our counter-party and was $-0- at June 30, 2004. If the floating rate had increased 25 basis points, interest expense under the swap agreement for the three and nine months ended June 30, 2004 would have been lower by $-0- and $3,375, respectively. Additionally, current borrowings under the revolving credit facility bear interest at the LIBOR base rate plus a margin rate of 2.75%. If the LIBOR base rate had increased 25 basis points, interest expense under the revolving credit facility would been higher by $54,991 and $174,514 during the three and nine months ended June 30, 2004, respectively. 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. 27 Item 4. Controls and Procedures -------------------------------------------------------------------------------- The Enterprise maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Enterprise's reports pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Enterprise's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management's control objectives. As of the end of the period covered by this Form 10-Q, the Enterprise carried out an evaluation, under the supervision and with the participation of the Enterprise management, including the Enterprise's Chief Executive Officer along with the Enterprise's Chief Financial Officer, of the effectiveness of the design and operation of the Enterprise's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d - 15(e). Based upon the foregoing, the Enterprise's Chief Executive Officer along with the Enterprise's Chief Financial Officer concluded that the Enterprise's disclosure controls and procedures provide reasonable assurance that information required to be disclosed by the Enterprise in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There have been no significant changes in the Enterprise's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Enterprise carried out its evaluation. 28 PART II Other Information -------------------------------------------------------------------------------- Item 1. Legal Proceedings. The Enterprise is subject to various claims and litigation in the normal course of business. In the opinion of management, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse impact on the Enterprise's financial position, results of operations or cash flows. Item 2. Changes in Securities. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. Not applicable Note 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits. None (b) Reports on Form 8-K. None 29 SIGNATURES ------------------------------------------------------------------------------- Pursuant to the requirements of the Indenture, the Enterprise has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 13, 2004 Choctaw Resort Development Enterprise By: /s/ Jay Dorris --------------------- Jay Dorris President Choctaw Resort Development Enterprise By: /s/ Michael A. Donald ---------------------- Michael A. Donald Vice President of Resort Finance Choctaw Resort Development Enterprise (Principal Financial and Accounting Officer) 30 SIGNATURES ------------------------------------------------------------------------------- CERTIFICATION OF PRESIDENT I, Jay Dorris, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Choctaw Resort Development Enterprise; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. August 13, 2004 /s/ Jay Dorris -------------- Jay Dorris President (Principal Executive Officer) 31 SIGNATURES ------------------------------------------------------------------------------- CERTIFICATION OF VICE PRESIDENT OF RESORT FINANCE I, Michael A. Donald, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Choctaw Resort Development Enterprise; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. August 13, 2004 /s/ Michael A. Donald ---------------------- Michael A. Donald Vice President of Resort Finance (Principal Financial and Accounting Officer) 32

CHOCTAW RESORT DEVELOPMENT ENTERPRISE 10-Q