UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_____________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 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: 333-115186
RIVER ROCK ENTERTAINMENT AUTHORITY
(Exact name of registrant as specified in its charter)
| Not Applicable | 68-0490898 | |
| (State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
3250 Highway 128 East
Geyserville, California 95441
(707) 857-2777
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
______________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange On Which Registered |
|
| NONE | NONE |
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
NONE
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 No
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K:
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No
RIVER ROCK ENTERTAINMENT AUTHORITY
INDEX TO FORM 10-K
Signatures
Supplemental Information
Index to Financial Statements
CAUTIONARY STATEMENT
Except for the historical financial information contained herein, the matters discussed in this report on Form 10-K (as well as documents incorporated herein by reference) may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based upon current expectations that involve risks and uncertainties and include declarations regarding the intent, belief or current expectations of us and our management and may be signified by the words “believes”, “anticipates”, “plans”, “expects”, “intends” and similar expressions. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Risk Factors” and elsewhere in this report. All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements, whether as a result of new information, future events, or otherwise. All discussion in this report should be read in conjunction with our financial statements and the accompanying notes contained in this report.
References in this Form 10-K to the “Authority” and the “Tribe” are to the River Rock Entertainment Authority and the Dry Creek Rancheria Band of Pomo Indians, respectively. The terms “we,” "us” and “our” refer to the Authority.
PART I
Item 1. Business.
OVERVIEW
River Rock Entertainment Authority (“we”, “us”, “our” or the “Authority”) is a governmental instrumentality of the Dry Creek Rancheria Band of Pomo Indians of California (the “Tribe”). The Tribe is a federally recognized Indian tribe with 867 enrolled members, with an approximately 75-acre reservation in Sonoma County, California. We were formed in 2003 as an unincorporated governmental instrumentality of the Tribe to own and operate the River Rock Casino in Sonoma County, California. River Rock Casino had previously operated as a wholly-owned governmental operating property of the Tribe.
The Indian Gaming Regulatory Act of 1988, as amended (“IGRA”), permits federally recognized Indian tribes to conduct casino gaming operations on certain Indian lands, subject to, among other things, the negotiation of a compact with the affected state. The Tribe and the State of California entered into a compact (the “Compact”) in September, 1999 which became legally effective when it was approved by the U.S. Department of the Interior and notice of approval was published in the Federal Register in May, 2000. The Compact authorizes certain forms of Class III casino gaming, including slot machines and house-banked card games.
Our mailing address is 3250 Highway 128 East, Geyserville, California 95441 and our telephone number is (707) 857-2777.
Our River Rock Casino
We own and operate the River Rock Casino, a gaming and entertainment facility located on the Tribe’s reservation approximately 75 miles north of San Francisco, California. Our 62,000 square-foot gaming and entertainment facility, which is located in the Alexander Valley, has views of the surrounding countryside, is open 24 hours a day, seven days a week, and currently features:
| • | 35,500 square feet of gaming space containing 1,600 slot and video poker gaming machines and 16 table games featuring blackjack, three card poker and pai gow poker. We offer state-of-the-art gaming devices including video poker, video keno, progressive slots and guest favorites, such as Wheel of Fortune, Millionaire Sevens, Quarter Mania and Megabucks; | |
| • | both smoking and non-smoking gaming rooms in order to satisfy customer preferences; | |
| • | The Player’s Club, a player tracking system which offers our guests incentives for additional play; |
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| • | two full-service restaurants, the Quail Run Restaurant and the Wine Creek Room, offering 24-hour menu dining and lunch, dinner and Sunday brunch buffets, with 152 indoor seats and 96 outdoor seats overlooking the Alexander Valley wine region and the Russian River; two lounges, two bars, a gift shop and a historic and contemporary Pomo basketry and art display, including the Wine Creek Room*, which has a lounge that features a small course menu from a wood-fired oven and features a grand piano and nightly light piano jazz; and the Oak Bar, which offers “bar top” video poker games in an elegant setting; | |
| • | three new parking structures, which allow us to accommodate approximately 1735 customer vehicles or up to approximately 2100 customer vehicles when operated by a valet service during peak demand periods; | |
| • | an Arts and Crafts California Bungalow-style design and furnishings, incorporating Native American elements that features a cultural arts collection focused on traditional and contemporary Pomo art, including historical basketry for which the Tribe is known. The interior of our gaming facility utilizes an extensive amount of wooden casework and natural rock to emphasize the architectural style found throughout California wine country. In keeping with this motif, our gaming facility’s counters are constructed of natural stone and wood, and oak wainscots grace the food and beverage facilities. The gaming facility is finished with Arts and Crafts and Mission style furniture and fabrics; and | |
| • | a location in the heart of the beautiful Alexander Valley with spectacular views of the surrounding countryside. Guests entering our gaming facility are treated to a large, open-beamed porte cochere that faces out toward sweeping vistas of Alexander Valley vineyards. Our gaming and entertainment facility was designed to capitalize on the setting with the food and beverage facilities strategically placed to feature the expansive views. |
In addition, to enhance the comfort of our guests, we have installed a state-of-the-art ventilation system that greatly reduces cigarette smoke and impurities, circulates air from the ground level and provides 100% fresh-air return. Our gaming facility also incorporates other environmentally sensitive engineering features including irrigation using surplus wastewater and non-intrusive lighting in the parking lot. Furthermore, our state-of-the-art back-up and redundant generators are designed to provide electricity in the event of a power failure.
We maintain a digital surveillance system that tracks the entire casino floor to secure our facility and operations. We employ a 75 officer security force.
Our Expansion Project
Prior to the opening of our three multi-level parking structures during 2004, we were only able to accommodate 350 customer-parked or 500 valet-parked vehicles on our surface parking lot. Our limited parking impeded our ability to satisfy existing demand for our gaming operations. We were regularly reaching our parking capacity on weekends and many weekdays. As a result, we had to turn away a significant number of potential guests during peak demand periods. The primary purpose of our expansion project was to increase our parking capacity by building three parking structures that contain an aggregate of approximately 1,360 parking spaces. To accelerate the completion of our expansion project, the parking structures were opened in two phases and were built using a combination of pre-cast and poured-in-place concrete. The first phase included a new parking structure with approximately 445 parking spaces, which partially opened for valet parking on July 26, 2004. The second phase included our second and third parking structures with approximately 445 and 470 parking spaces, respectively, and was completed in December, 2004. The three parking structures have increased our customer parking capacity to approximately 2,100 self and valet-parked customer vehicles.
Our expansion project also included additional infrastructure improvements. The most significant improvement involved the excavation and construction of a retaining wall located above the parking structures. The hillside adjacent to our gaming facility experienced two landslides following the facility’s opening in 2002. The excavation and retaining wall is designed to prevent any further slippage and to divert runoffs of excess surface waters. The excavation and retaining wall project involved the installation of a series of soldier piles and tiebacks designed to stabilize the slope of the hillside and to prevent future slides. In addition, this system is also designed to provide some seismic stabilization. The excavation and retaining wall project was completed in May 2004.
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We originally expected our expansion project to cost approximately $64.6 million, which was funded from a portion of the net proceeds from our sale of $200.0 million in principal amount of 9-3/4% Senior Notes due 2011 (the “Notes”) in November 2003. The original expansion project budget was comprised of $35.4 million for the three parking structures, $24.1 million for infrastructure improvements and a $5.1 million construction contingency. In addition, $10.0 million from the net proceeds of our Notes was placed in a construction escrow account that is available to fund construction contingencies related to the expansion project.
The final total expenditures for the expansion project were approximately $73.7 million. It was comprised of $39.4 million for the three parking structures and $34.3 million for infrastructure improvements. To meet our cost overruns of $9.1 million, we used a $5.1 million construction contingency account and funded the remaining $4.0 million from our working capital. In an effort to expedite construction of our expansion project, we commenced construction before all design documents were finalized, which resulted in inefficiencies and modifications that caused construction costs to exceed budgeted amounts. In addition, the infrastructure improvements portion of our expansion project resulted in higher than expected costs due to weather delays and to unforeseeable soil conditions, which required us to substantially increase the scope of the work and quantity of the construction material.
Our Market
Our gaming facility is accessible by car to nearly all the residents of the San Francisco Bay area, including those within Sonoma, Marin, Mendocino, Napa, San Mateo, Contra Costa, San Francisco, Alameda and Lake counties. Our primary market thus includes the major Bay area metropolitan cities of San Francisco and Oakland, and the smaller cities of San Rafael, Berkeley, Santa Rosa and Petaluma. According to the U.S. Census Bureau survey in 2000, the San Francisco Bay area had a population totaling approximately 4.8 million people. The 1999 median household income from those locales exceeded $59,000 per annum. According to The Innovation Group, a market assessment company, in 2002 there were approximately 7.6 million people living within 100 miles of our gaming facility.
We benefit from the large number of visitors to the world-renowned wineries of Sonoma and Napa counties. Sonoma County receives approximately 7.0 million tourists annually and approximately 4.9 million tourists visit Napa County annually.
Our gaming facility is conveniently located approximately three miles from Highway 101, a four-lane highway that serves as a main thoroughfare between Los Angeles and Oregon. Highway 101 travels directly through the San Francisco Bay area, through major cities in the area like San Francisco, Santa Rosa, San Rafael and Petaluma. Our gaming facility’s prominent location, on the eastern hillside of the Alexander Valley facing Highway 101, is visible to vehicles traveling in both directions on that highway. According to the California Department of Transportation, approximately 22 million vehicles passed our facility on Highway 101 in 2002.
Our Marketing Strategy
Through 2004 we have had, by industry standards, a very small marketing budget. This was due to our limited parking, which has restricted our ability to meet existing gaming demand. Through 2004, we focused our marketing efforts on our line and charter bus program to provide customer transportation to our gaming facility, and had an average of 24 buses per day in 2004. We believe that this program enabled us to maximize our number of guests while we experienced constraints due to our limited parking facilities.
Now that our expansion project has been completed, we have begun to adopt a more aggressive marketing strategy. The significantly broadened marketing program will include:
| • | more diverse print, broadcast, promotional and mail advertising programs, particularly in the San Francisco, San Jose and Oakland markets; |
| • | increased direct marketing campaigns, targeting households in Sonoma County and the San Francisco Bay area; |
| • | increased use of special events and promotions, including collaborations with area vineyards, local merchants and non-profit community programs; |
| • | billboard signage in downtown San Francisco, Oakland and along Highway 101; and |
| • | reduced reliance on the bus program as a primary mode of attracting guests to our gaming facility. With the additional parking, we can now try to shift a significant amount of the advertising focus from the bus program to the drive-up market. |
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Our Business Strengths
Strong Market Demographics. Our gaming facility is easily accessible by car for nearly all the approximately 4.8 million residents of the San Francisco Bay area market, including the major metropolitan cities of San Francisco and Oakland and the smaller cities of San Rafael, Berkeley, Santa Rosa and Petaluma. In 2002, there were approximately 7.6 million people living within 100 miles of our gaming facility. We also benefit from the approximately 7.0 million annual visitors to Sonoma County and the approximately 4.9 million annual visitors to Napa County and the world-renowned wineries and related amenities in our vicinity. Our gaming facility is conveniently located approximately three miles from Highway 101, a four-lane highway from Los Angeles to Oregon that travels directly through the nearby cities of San Francisco and Santa Rosa. According to the California Department of Transportation, approximately 22 million vehicles passed our facility on Highway 101 in 2002.
Limited Competitive Environment and High Barriers to Entry. Class III casino gaming may not be conducted in California other than on certain lands held for the benefit of federally recognized Indian tribes and pursuant to negotiated compacts with California and approved by the U.S. Secretary of the Interior. We believe these restrictions significantly limit potential future competition. We are not subject to any betting limits on Indian gaming activities.
High Quality Products and Amenities. Our gaming facility offers state-of-the-art gaming devices and table games in an upscale, relaxed gaming environment. Our gaming devices feature comprehensive, integrated cashless technology permitting faster wagering and payouts. In addition, our two restaurants offer premium food and beverages and are designed to capitalize on the spectacular views of the Alexander Valley. Our gaming and food and beverage facilities emphasize high level customer service, created and maintained through comprehensive employee training.
Emphasis on Gaming Devices. Our gaming facility emphasizes slot and video poker gaming devices, which we believe, based on industry studies, represents the most consistently profitable and lowest risk segment of the gaming business. We offer a wide variety of games not only to attract guests but also to encourage them to play for longer periods of time.
Significant Cash Flow From Operations. We currently generate significant cash flow from operations and expect that our cash flow will increase as a result of the completion of our expansion project. In addition, because there are governmental operations, they are not subject to any local, state or federal income taxes.
Experienced Management Team. Our senior management team is experienced in the design, development and operation of Indian gaming facilities. Our Chief Executive Officer and General Manager, Douglas Searle, was responsible for the development and opening of our gaming facility and, in conjunction with our Chief Operations Officer, Norman Runyan, has managed its operations since opening. Previously, Mr. Searle, Mr. Runyan and other key management team members were responsible for the design, development, opening and oversight of construction and operations of two Arizona casinos, Casino Arizona and the Apache Gold Casino and Resort.
Our Business Strategy
Our strategy is to grow our business by increasing the number and duration of visits to our gaming facility and by increasing the average revenue per visit by offering an upscale gaming and entertainment experience. Through 2004, we have not engaged in any significant marketing initiatives, such as extensive billboard, print, broadcast, promotional and mail advertising programs, because our limited parking capacity would not allow us to meet our potential demand. Despite our limited marketing initiatives, however, we often exceeded our parking capacity on weekends and many weekdays. With the completion of our expansion project, the major components of our business strategy are to:
Implement our Expanded Marketing Plan. In the first quarter of 2005, we plan to initiate a comprehensive marketing plan to promote our location as the closest and most accessible gaming facility to nearly all of the residents of the San Francisco Bay area and Sonoma, Napa and Lake counties. We also intend to more fully promote our amenities and encourage guests familiar with our gaming facility to visit more frequently and for longer durations. Our marketing mediums will include billboard signage in the San Francisco Bay area and along Highway 101, more diverse print, broadcast, promotional and mail advertising programs, and sponsorship of selected events, organizations and activities. We also intend to expand our cooperative marketing programs with local businesses, wineries, hotels and restaurants.
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Build Customer Loyalty. We have instituted programs to engender loyalty from our guests by rewarding frequent play. One such existing program is our Player’s Club, a slot club that qualifies guests for differing levels of cash and prizes based upon their level of play. Our comprehensive player tracking system allows us to track wagering levels and length of play, and to evaluate and identify our best customers in order to provide awards and other incentives to foster customer loyalty and more frequent and longer visits. Our database of players has grown to over 130,000 as of December 31, 2004, increasing by an average of approximately 4,500 players per month since the Player’s Club was started on April 1, 2003. We have promoted more frequent and longer visits and increased wagering at off-peak demand periods through promotions such as our “Hot Nights, Cool Cash” program. This promotion offers guests cash rewards on weekday nights and has resulted in increased net revenue whenever offered.
Capitalize on the Tourism Appeal of the Alexander Valley and Wine Country. The picturesque Alexander Valley region is a premier tourist destination. We intend to capitalize on the appeal of the region, including its reputation as one of California’s premier wine producing regions, to further expand our customer base. Our location benefits from the large number of annual visitors to the world renowned wineries of Sonoma and Napa counties. Sonoma County receives approximately 7.0 million tourists annually and approximately 4.9 million tourists visit Napa County annually.
Operate our Facility as an Upscale Gaming and Entertainment Experience. We operate our facility as an upscale gaming and integrated entertainment experience, featuring a friendly environment and quality service. Our premium food and beverage operations supplement our gaming experience, offering high quality dining 24 hours a day. Our other features and amenities, including our expansive views, gift shop and cultural exhibits complete our entertainment experience and create a lively, exciting environment for our guests.
Maintain our Bus Program. Through 2004, we focused our marketing efforts on our line and charter bus program to provide customer transportation to our gaming facility. We believe that this program enabled us to maximize our number of guests while we experienced constraints due to our limited parking facilities. Since we believe that our guests have appreciated the convenience offered by this program, we plan to maintain our bus services. We operated approximately twenty-four buses a day in 2004. Our bus programs primarily route patrons from San Francisco and North Bay area. Our bus guests pay between $7 to $10 to come and visit our casino. Upon arrival, they receive a $10 cash voucher to use on gaming in our Casino and a $5 “bounce back” coupon for use on a return visit. Our special charter bus guests also receive a complimentary meal in our facility.
COMPETITION
California law currently permits Class III casino gaming only on federally recognized tribal lands pursuant to compacts negotiated with the State of California and approved by the U.S. Secretary of the Interior. Class II gaming is permitted only on federally recognized tribal lands. There are currently 52 tribes operating 53 compacted gaming facilities in the State of California. The closest existing competitors are the Hopland Sho-Ka-Wah casino, located approximately 35 miles north of the Tribe’s reservation, the Konocti Vista Casino, located approximately 45 miles northeast of the Tribe’s reservation, and Cache Creek Indian Casino and Bingo, located approximately 40 miles east of the Tribe’s reservation. Several potential competitors are attempting to develop and open casinos near our facility. In April 2003, the Federated Indians of the Graton Rancheria, also known as the Coast Miwoks, announced plans to purchase land in Sonoma County near Highway 37 and Lakeville Highway, approximately 20 miles south of our gaming facility and closer to San Francisco than our facility. The announced plans include construction of a casino-hotel complex that will be managed by Station Casinos, Inc. based in Las Vegas, Nevada. As a result of environmental opposition to the development of a former alternative location, which was also south of us, the Federated Indians of the Graton Rancheria announced plans to move the planned casino-hotel complex to a site near Rohnert Park, California. The Rohnert Park City Council has approved an agreement with the Federated Indians of the Graton Rancheria to share with Rohnert Park and various community groups approximately $200.0 million over 10 years to offset the impact of the proposed project. The Lytton Band of Pomo Indians have also announced plans to convert the San Pablo Card Room, located in the City of San Pablo near Oakland, California, on land that was placed in trust for the Tribe through congressional legislation, into a tribal casino. The Lytton Band has signed a compact with Governor Arnold Schwarzenegger for operating casino gaming on the San Pablo site, but the state legislature has withheld its approval. Such approval would be required to conduct Class III gaming. The Lytton Band of Pomo Indians could develop and operate a Class II gaming facility on that site under its present status. The Lower Lake Rancheria Koi Nation, a landless tribe, recently proposed plans to build a 35-acre entertainment facility with 2,000 slot machines, 140 game tables and a seven-story hotel and spa near Oakland International Airport. The project faces numerous obstacles including negotiation and approval of a compact with the State of California, Bureau of Indian Affairs approval to put the land on which the project would be located into federal trust of behalf of the tribe and certain environmental approvals. In addition, there are a number of other Indian tribes, including the Scotts Valley Band of Pomo Indians and the Guidiville Band of Pomo Indians that have announced preliminary plans to develop gaming projects in the San Francisco Bay area in the future. We also compete with other forms of gaming such as statewide lotteries, live and simulcast pari-mutuel wagering and card rooms.
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Many of our competitors serve alcoholic beverages on the premises. We have not yet obtained a liquor license for our Casino. We had initially applied for a liquor license for our Casino in 2002. On September 15, 2004, the California Department of Alcohol Beverage Control (the “ABC”) decided to recommend the denial of our alcohol license application based upon a finding by the California State Fire Marshal that although the Casino was in compliance with applicable building codes, if alcohol were served in the Casino, it would fall out of compliance. We believe that we are in compliance with all applicable safety codes required to obtain an alcohol license for the Casino. We have been granted a hearing before an administrative law judge in May 2005 to contest the ABC’s denial.
EMPLOYEE AND LABOR RELATIONS
As of December 31, 2004, we had 582 full-time employees and 50 seasonal and part-time employees. Our employees are not covered by any collective bargaining agreements. We believe that our relations with our employees are good. Provisions in a labor ordinance the Tribe was required to adopt as part of the 1999 compact agreement permit opportunities for unions to attempt to organize our labor force. In addition, a recent decision of the National Labor Relations Board, reversing 30 years of precedent, holds that the National Labor Relations Act is applicable to tribal casinos. The latter decision is being challenged by another tribe. The Tribe is not a party to that proceeding.
REGULATION
General
We are subject to special federal and tribal laws applicable to commercial relationships with tribes and the management and financing of casinos owned by an Indian tribe. In addition, we are regulated by certain federal laws applicable to the gaming industry generally, with respect to the use of certain gaming equipment, and specifically applicable to the Indian gaming market. We are also regulated by the provisions of the Compact, which have been ratified under state law and are based in part on the California constitution and other state laws and policies. The following description of the regulatory environment in which Indian gaming takes place and in which we operate our gaming facility is only a summary and not a complete recitation of all applicable law. Moreover, our regulatory environment is more susceptible to changes in public policy considerations than others. Changes in these laws could have a material adverse impact on our operations.
Applicability of Federal Law
Federally recognized Indian tribes are independent governments, subordinate to the United States, with sovereign powers, except as those powers may have been limited by treaty by Congress, or in certain instances, by the public policy of the state in which the tribe’s lands are located. The power of Indian tribes to enact their own laws to regulate gaming derives from their sovereign right to govern and regulate their own affairs, particularly where it is consistent with federal law and the state’s public policy. Indian tribes maintain their own governmental systems and often their own judicial systems. Indian tribes have the right to tax persons and businesses conducting business on Indian lands and also have the right to require licenses and to impose other forms of regulations and regulatory fees on persons and businesses operating on their lands.
The Indian Gaming Regulatory Act of 1988
Regulatory Authority. Since 1988, the sovereign right of tribes to operate and regulate gaming on their lands has been subjected to the provisions of the Indian Gaming Regulatory Act of 1988 (“IGRA”). IGRA is administered by the National Indian Gaming Commission (“NIGC”), an independent agency within the U.S. Department of Interior that exercises certain regulatory responsibilities in connection with Indian gaming on behalf of the United States. The NIGC has authority to issue regulations governing tribal gaming activities, approve tribal ordinances for regulating Class II and Class III gaming (as described below), approve management agreements for gaming facilities, conduct investigations and generally monitor tribal gaming. The Bureau of Indian Affairs, which is a bureau of the U.S. Department of the Interior, retains certain responsibilities under IGRA, such as the approval of per capita distribution plans of gaming revenues to individual tribal members and the approval of transfers of lands into trust status for gaming. The Bureau of Indian Affairs also has responsibility to review and approve land leases and other agreements relating to Indian lands. Criminal enforcement is a shared responsibility of the U.S. Department of Justice, and, depending on the terms of a tribal-state compact that is in effect, the state in which the tribe is located, and the tribe.
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The NIGC is empowered to inspect and audit all Indian gaming facilities, conduct background checks on certain persons associated with Indian gaming, hold hearings, issue subpoenas, take depositions, adopt regulations, assess fees and impose civil penalties for violations of IGRA. IGRA also provides for federal criminal penalties for illegal gaming on Indian land and for theft from Indian gaming facilities. The NIGC has adopted rules implementing certain provisions of IGRA. These rules govern, among other things, the submission and approval of tribal gaming ordinances or resolutions and the maintenance of minimum internal control standards for the operation of gambling games and equipment. IGRA and the NIGC regulations require an Indian tribe to have the sole proprietary interest in, and to maintain a high level of responsibility for, the conduct of any gaming on its lands. Tribes are required to issue gaming licenses under articulated standards, conduct or commission financial audits of their gaming enterprises, perform or commission background investigations for primary management officials and key employees and maintain facilities in a manner that adequately protects the environment and the public health and safety. These rules also set out review and reporting procedures for tribal licensing and backgrounding activities.
Classes of Gaming. IGRA classifies gaming that may be conducted on Indian lands into three categories. Class I gaming includes social games solely for prizes of minimal value or traditional forms of Indian gaming engaged in by individuals as part of, or in connection with, tribal ceremonies or celebrations. Class II gaming includes bingo and pulltabs, lotto, punch boards, tip jars, instant bingo and other games similar to bingo if those games are played at the same location as bingo is played, and non-banked card games (such as poker) if permitted within the state. Class III gaming includes all other forms of gaming, such as slot machines, table games, lotteries, sports betting and pari-mutuel wagering.
Class I gaming on Indian lands is within the exclusive jurisdiction of Indian tribes and is not subject to federal regulation under IGRA. Class II gaming is permitted on Indian lands if:
| • | the state in which the Indian lands lie permits that gaming for any purpose by any person, organization or entity; |
| • | the gaming is not otherwise specifically prohibited on Indian lands by federal law; |
| • | the gaming is conducted in accordance with a tribal ordinance or resolution that has been approved by the NIGC; |
| • | an Indian tribe has sole proprietary interest and responsibility for the conduct of gaming; |
| • | the primary management officials and key employees are tribally licensed; and |
| • | several other requirements are met. |
Class III gaming is permitted on Indian lands if the conditions applicable to Class II gaming are met and, in addition, the gaming is conducted in conformity with the terms of a tribal-state compact (a written agreement between a tribe and the government of the state within whose boundaries the tribe’s lands lie).
Tribal-State Compacts. IGRA requires Indian tribes to enter into tribal-state compacts in order to conduct Class III gaming. These tribal-state compacts may include provisions for the allocation of criminal and civil jurisdiction between the state and the Indian tribe necessary for the enforcement of these laws and regulations, taxation by the Indian tribe of the Class III gaming activity, remedies for breach, standards for the operation of the Class III gaming activity and maintenance of the gaming facility, including licensing, and certain other subjects that are directly related to the operation of gaming activities. 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 gaming devices, entitle the state to inspect casinos, require background investigations and licensing of casino employees, and require the tribe to pay a portion of the state’s expenses for establishing and maintaining agencies that participate in the regulatory process provided in the compact. Some tribal-state compacts are for set terms, while others are for indefinite duration.
The Tribe entered into a compact with the State of California in September 1999, which became effective in May 2000, that permits the Tribe to engage in some forms of Class III gaming. The Compact will expire on December 31, 2020. For additional information see “Part I. Item 1. Business—Description of Material Agreements—The Compact.”
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Tribal Ordinances. Under IGRA, except to the extent otherwise provided in a tribal-state compact as described below, and subject to certain oversight and enforcement authority by the NIGC, Indian tribal governments have primary regulatory authority over gaming on land within a tribe’s jurisdiction. Therefore, our gaming operations and persons engaged in gaming activities, are subject to the provisions of the Tribe’s ordinances and regulations regarding gaming. The Tribe maintains a fully staffed tribal gaming agency (“TGA”), known as the Dry Creek Gaming Commission, to carry out the Tribe’s regulatory responsibilities under IGRA, its ordinance, and the compact.
IGRA requires that the NIGC review tribal gaming ordinances and authorizes the NIGC to approve these ordinances only if they meet requirements relating to:
| • | the ownership, security, personnel background, recordkeeping and auditing of a tribe’s gaming enterprises; |
| • | the use of the revenues from that gaming; and |
| • | the protection of the environment and the public health and safety. |
Licensing and Registration Requirements of the Compact and State Regulation
Compact. The Compact requires that any person who directly or indirectly extends financing to the Tribe’s gaming facility or gaming operation must be licensed as a “financial source” by the TGA. However, as permitted by the Compact the TGA has exempted federally and state regulated banks and savings and loan associations, as well as persons who hold less than 10% of our Notes. For an applicant who is a non-exempt business entity, these licensing provisions also apply to the entity’s officers, directors, principal management employees, owners (if an unincorporated entity), partners and greater than 10% shareholders. Under the Compact, a permanent license cannot be issued unless the TGA has conducted an investigation as to the suitability of the applicant. Any application for a gaming license may be denied, and any license issued may be revoked, if the TGA determines the applicant to be unsuitable or otherwise unqualified for a gaming license. Each license is subject to review for compliance at least every two years.
Prior to receiving a license, an applicant must apply to the California Gambling Control Commission (“CGCC”) for a determination of suitability. If the TGA receives notice that the CGCC has determined that a person is unsuitable, the Compact requires that the TGA revoke any license it has issued to such person.
The Compact states that any agreement between the Tribe and a “financial source” terminates upon revocation or non-renewal of the financial source’s license because of a determination of unsuitability by the CGCC. Upon such a termination, the Tribe’s only liability is for repayment of all outstanding sums owed as of the termination date, exclusive of unpaid accrued interest. Further, the Tribe is not permitted to enter into, or continue to make payments under, any financing agreement with anyone whose application to the CGCC for a determination of suitability has been denied or has expired without renewal.
State and Tribal Regulation. The CGCC and the TGA, pursuant to the authority created in a tribal-state joint powers board known as the “Association,” have both adopted regulations that simplify the licensing and registration process for certain large institutional investors, both in the initial distribution of certain debt securities and the secondary market.
Under these regulations, certain regulated financial institutions with at least $100.0 million invested in non-affiliated securities may take advantage of an abbreviated licensing and certification process. The regulations do not require any licensing or registration for persons purchasing debt securities in the secondary market. However, unless a holder of debt securities is licensed or exempt from licensing, neither the holder nor the Trustee on the holder’s behalf will have any right to enforce any payment obligation relating to the debt securities. In addition, neither the Trustee nor the Tribe may make any payment of principal or interest on the debt securities as a result of any enforcement action or default acceleration of debt security payments, except to a person who is licensed or exempt from licensing.
Gaming Device Licenses
Under the Compact and the other similar Class III compacts entered into between the State of California and California tribes, each tribe is allowed to operate up to 2,000 Class III gaming devices (slot machines), provided that licenses for at least 1650 of those devices are held by the tribe. There is also a limitation on the total number of Class III gaming device licenses that are available within the state. The Compact permits the Tribe to operate up to 350 gaming devices without licenses.
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From March 2000 through December 2001, the Tribe obtained 1,250 gaming device licenses through a process conducted by a public accounting firm retained by a number of tribes under the Compact, thus permitting the Tribe to operate up to a total of 1,600 gaming devices. Following the allocation, the California Attorney General opined that only the CGCC has the authority to issue gaming device licenses under the compacts and the Governor of California ordered the CGCC to control and monitor the gaming device licensing process. In June, 2002, the CGCC ratified all gaming device license issued to the Tribe and the other tribes in the earlier process.
In accordance with the Compact and California law, the Tribe is obligated to remit certain fees to the CGCC on a quarterly basis for inclusion in a Revenue Sharing Trust Fund ("RSTF”) maintained by the State of California. The RSTF is for the benefit of tribes that have no or limited gaming. The RSTF fees are fixed amounts per device, calculated on an annual basis and paid quarterly. We pay these fees on behalf of the Tribe. RSTF fees for the years ended December 31, 2004 and 2003 were $1.3 million for each year.
The U.S. Secretary of the Interior recently approved amendments to or approval of 10 gaming compacts between the State of California and some Indian tribes in California. The amended compacts were negotiated in June, 2004. The new compact amendments allow the tribes who agreed to the amendment to have additional slot machines while imposing additional significant annual payments to the State of California and requiring extensive mitigation and compensation to impacted local communities and provisions affecting customers and employees. The Tribe did not seek or enter into an amendment.
Application for Liquor License
We had initially applied for a liquor license for our Casino in 2002. On September 15, 2004, the ABC decided to recommend the denial of our alcohol license application based upon a finding by the California State Fire Marshal that, although the Casino was in compliance with applicable building codes, if alcohol were served in the Casino, it would fall out of compliance. We believe that we are in compliance with all applicable safety codes required to obtain an alcohol license for the Casino. We have been granted a hearing before an administrative law judge in May 2005 to contest the ABC’s denial.
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 the Tribe could conduct gaming, and may have an adverse effect on our results of operations or financial condition or impose additional regulatory or operational burdens.
DRY CREEK RANCHERIA BAND OF POMO INDIANS
Tribal Administration
The Dry Creek Rancheria Band of Pomo Indians is a federally recognized, self-governing Indian tribe with 867 enrolled members. The reservation was established in 1915 under the authority of an Executive Order dated January 12, 1891. Pursuant to the Tribe’s Articles of Association, the Tribe is governed by a Tribal Council composed of all voting members. Certain authority is delegated to elected tribal officers who comprise the Board of Directors, consisting of a Chairperson, a Vice Chairperson, a Secretary/Treasurer and two members-at-large. The members of the Board of Directors of the Tribe are, and will continue, to serve in identical capacities as our Board of Directors.
The Tribal Gaming Commission
The Tribe enacted a tribal gaming ordinance in April 1997, which was approved by the NIGC in September 1997. Among other matters, the gaming ordinance created and established the TGA as a governmental subdivision of the Tribe. The TGA consists of three commissioners and supporting staff and is vested with the authority to regulate all gaming activity conducted on the Tribe’s lands.
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Each TGA Gaming Commissioner is appointed by the Tribal Council to serve a three-year term. The tribal gaming ordinance and the Compact require that each Commissioner undergo a comprehensive background check prior to his or her assuming office. Pursuant to the tribal gaming ordinance, the TGA is responsible for, among other matters, inspection of all gaming operations within the Tribe’s reservation boundaries, enforcement of all provisions of the tribal gaming ordinance,investigation of all allegations of violations of the tribal gaming ordinance, conducting or arranging for background investigations of all applicants for tribal gaming licenses and issuing gaming licenses in accordance with the tribal gaming ordinance and the Compact. Under law, our casino cannot operate without TGA regulation. Therefore, the costs of such regulation, including the cost of operating the TGA have, since commencement of operations of the River Rock Casino, been paid by us and will continue to be paid by us.
DESCRIPTION OF MATERIAL AGREEMENTS
The following is a summary of the material terms of our material agreements and material agreements of the Tribe relating to our Casino. This summary does not restate these agreements in their entirety. We urge you to read these agreements because they, and not these summaries, define our rights and obligations, and the rights and obligations of the Tribe, contained in the agreements. Copies of these agreements are included as exhibits to this Form 10-K.
The Compact
In September 1999, the State of California and the Tribe entered into the Compact. Under its terms, the Compact was not effective until ratified by statute and a supporting state constitutional amendment was passed by the California voters. On March 7, 2000, the California voters amended the state constitution and enacted the Indian Self-Reliance Amendment. The Amendment permits federally recognized Indian tribes to conduct Class III gaming in California in accordance with compacts between such tribes and the State of California, subject to approval by the Secretary of the Interior. In May 2000, the Secretary of the Interior approved the Compact, and that approval became effective when it was published in the Federal Register on May 16, 2000.
Under the Compact, the gaming activities that may be offered by the Tribe include up to 2,000 Class III gaming devices, banked and percentage card games, and any devices or games that are authorized by the California State Lottery, provided that the Tribe does not offer such games through use of the Internet unless others in California are permitted to do so.
The Compact establishes limitations on Class III gaming that may restrict our gaming activities. Among those which are of importance to our gaming facility are those that require the Tribe to adopt and comply with California laws prohibiting cashing any check drawn against any public fund, free or reduced price alcoholic beverages, food or lodging as an incentive, the extension of credit for gaming activities, and persons under 18 (or under 21 if alcohol may be consumed) to be present in any room where Class III gaming is offered, other than simply to pass through the room.
The Compact requires the State of California and the Tribe to establish a method for licensing all key employees of a gaming entity and issuing work permits for other service employees. While the Tribe, as a sovereign governmental entity, is not required to be licensed, the California Gambling Control Act applies to all others associated with Class III gaming at our gaming facility. To facilitate that licensing and comply with all other provisions of IGRA, in 1997 the Tribe adopted a tribal gaming ordinance establishing the TGA. The Chairman of the NIGC approved the Tribe’s gaming ordinance in 1997.
Under the Compact, all persons connected with our gaming facility are required to be licensed or to submit to a background investigation under IGRA. All “Gaming Employees” and “Gaming Resource Suppliers” (as defined in the Compact) and certain other persons must be licensed by the TGA. Licenses granted by the TGA are subject to review and renewal every two years. Holders of licenses granted by the TGA must, except in limited circumstances, also be determined suitable by the CGCC to be employed by us.
The Compact requires the Tribe to adopt and enforce regulations to ensure the physical safety of casino patrons, to prevent illegal activity, to maintain the regularity and integrity of gaming operations, and to require an annual audit conducted by an independent certified public accountant.
The Compact requires the Tribe to carry public liability insurance with initial limits of at least $5.0 million for personal injury and property damage claims. The Tribe is required to waive its sovereign immunity to the extent of the $5.0 million liability insurance limits.
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The Compact also requires the Tribe to adopt and comply with standards no less stringent than federal workplace and occupational health and safety standards, and to adopt and comply with standards no less stringent than federal and state laws prohibiting employment discrimination. However, our tribal gaming ordinance permits us to give preference to Indians in employment matters.
The Compact also mandates that the Tribe must follow certain procedures to assess the off-reservation environmental impact of any reservation construction expansion projects. The procedures require the Tribe to give notice of a covered project, to determine whether a project will have any significant adverse environmental impact, to accept and respond to comments, to consult with the county board of supervisors, and to hold a public meeting. The Tribe took all these actions with respect to our expansion project.
The Notes and the Indenture
On November 7, 2003, we issued and sold $200.0 million in aggregate principal amount of our Notes in a private placement to certain “qualified institutional buyers” pursuant to Regulation 144A of the Securities Act of 1933, as amended (the “Notes Offering”). On June 21, 2004, pursuant to a registration rights agreement entered into in connection with the issuance of the Notes, we consummated an offer to exchange all of the Notes for $200.0 million in aggregate principal amount of 9-3/4% senior notes due 2011 (the “Outstanding Notes”) registered with the Securities and Exchange Commission. The terms of the Outstanding Notes are substantially identical to the terms of the Notes, except that the transfer restrictions and registration rights applicable to the Notes do not apply to the Outstanding Notes. We did not receive any additional proceeds from the exchange offer. The Outstanding Notes and the Notes were issued under an indenture, dated as of November 7, 2003 (the “Indenture”), among us, the Tribe and U.S. Bank National Association, as trustee. The terms of the Outstanding Notes include those stated in the Indenture, as well as those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended.
The net proceeds from the Notes Offering were used to repay a majority of our outstanding indebtedness, to fund the completion of three parking structures and related infrastructure improvements, to fund the settlement of litigation involving the Tribe, to fund the acquisition of real property adjacent to the Tribe’s reservation, to build an additional access road to the Tribe’s reservation through such property, and to repay outstanding indebtedness of the Tribe.
The Outstanding Notes bear interest at a fixed rate of 9-3/4% per year, and mature on November 1, 2011. The Outstanding Notes are secured by a first priority pledge of our revenues and substantially all of our existing and future tangible and intangible personal property. The Outstanding Notes are senior debt and accordingly, rank equal to our other senior indebtedness and rank senior to our subordinated indebtedness. As further described in the Indenture, the Outstanding Notes are subject to optional and mandatory redemption, and in some cases, holders of the Outstanding Notes may be required to surrender them for redemption by us (or to otherwise dispose of the Outstanding Notes) if certain gaming regulations are not satisfied.
The Indenture includes affirmative and negative covenants that limit our ability to borrow money, create liens, sell assets, engage in transactions with affiliates, engage in other businesses, open other gaming facilities, engage in certain mergers and consolidations, make certain investments, make certain accelerated payments on our indebtedness that is subordinated to the Outstanding Notes, and make payments to the Tribe.
Cash Collateral and Disbursement Agreement
Pursuant to the Cash Collateral and Disbursement Agreement among U.S. Bank National Association and Wells Fargo Bank, N.A. as disbursement agents, U.S. Bank National Association, as the trustee for the holders of the Outstanding Notes, Merrit & Harris, our independent construction consultant, the Tribe and us, a portion of the net proceeds of the Notes Offering was placed into a construction disbursement account, a construction escrow account, the Dugan Property improvements account, and an operating account, all to be disbursed by the disbursement agents pursuant to the Cash Collateral and Disbursement Agreement.
Construction Disbursement Account. Approximately $61.1 million of the net proceeds of the Notes Offering was deposited into a construction disbursement account and was used to fund the design and construction of our expansion project. All funds in the construction disbursement account are pledged to the trustee for the benefit of itself and the holders of the Outstanding Notes until disbursed by U.S. Bank National Association in accordance with the Cash Collateral and Disbursement Agreement. Approximately $3.5 million from the proceeds from the Notes Offering will be used to reimburse the Tribe for payments made to Swinerton Builders prior to the sale of the Notes. We have agreed to reimburse those costs to the Tribe. Through December 31, 2004, we reimbursed $0.8 million of this amount and plan to reimburse the balance to the Tribe. The construction disbursement account had $1.4 million remaining as of December 31, 2004.
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Construction Escrow Account. $10.0 million of the net proceeds of the Notes Offering was deposited into a construction escrow account. All such funds will be held in the construction escrow account and pledged to the trustee for the benefit of itself and the holders of the Outstanding Notes until disbursed by U.S. Bank National Association in accordance with the Cash Collateral and Disbursement Agreement.
Subject to the terms set forth in the Cash Collateral and Disbursement Agreement, U.S. Bank National Association as the disbursement agent will disburse the appropriate funds where either all funds in the construction disbursement account have been disbursed, yet additional construction costs remain, or we or the Tribe may incur certain extraordinary costs unrelated to the construction, provided that we certify as to our reasonable belief that we have adequate liquidity to meet our ordinary and reasonably foreseeable extraordinary expenses. In the case of qualifying construction cost overruns, $10.0 million in the construction escrow account is available. Up to $10.0 million may be disbursed from the construction escrow account to repay our subordinated indebtedness, as provided in the Intercreditor Agreement. The construction escrow account had $10.1 million remaining as of December 31, 2004. We intend to use $10.0 million of the balance in the Account to pay off the Subordinated Note (as herein defined). See “ Part I. Item 1. Business-Development and Loan Agreement.”
Dugan Property Improvements Account. $5.0 million of the net proceeds of the Notes Offering was deposited into the Dugan Property improvements account and will be used to build an additional access road to the Tribe’s reservation through the Dugan Property and related improvements to the Dugan Property. All such funds will be held in the Dugan Property improvements account and pledged to the trustee for the benefit of itself and the holders of the Outstanding Notes until disbursed by U.S. Bank National Association in accordance with the Cash Collateral and Disbursement Agreement. Subject to certain exceptions, U.S. Bank National Association, as the disbursement agent, will disburse funds from the Dugan Property improvements account only upon certification by us that we have adequate funds to complete the road project and upon the satisfaction of the other disbursement conditions set forth in the Cash Collateral and Disbursement Agreement. If there are funds in the Dugan Property improvements account after the road project is completed, such balance may be transferred to the operating account. The Dugan Property improvements account had $4.7 million remaining as of December 31, 2004. We have completed the initial planning for the road from the Dugan Property to the Tribe’s reservation.
Operating Account. We deposit all of our cash and cash equivalents in excess of $5.0 million into the operating account on a daily basis. All such funds are held in the operating account and pledged to the trustee for the benefit of itself and the holders of the Outstanding Notes until disbursed in accordance with the terms of the Cash Collateral and Disbursement Agreement. Funds may generally be disbursed by Wells Fargo Bank, N.A. from the operating account for all purposes permitted by the Indenture.
Investments; Pledge of Accounts. Each disbursement agent is required to invest any money held by it in the collateral accounts established pursuant to the Cash Collateral and Disbursement Agreement in cash equivalents and such government securities as may be directed in writing by us from time to time. Any income or gain realized as a result of such investment is required to be held as part of the applicable account and reinvested as provided in the Cash Collateral and Disbursement Agreement. All funds, securities and other assets in the collateral accounts established pursuant to the Cash Collateral and Disbursement Agreement are pledged to the trustee for the benefit of the holders of the Outstanding Notes.
Construction Contracts
In April 2004, we entered into a guaranteed maximum price contract which includes work performed and cost related thereto from October 2003 with Swinerton Builders as general contractor for the parking structures portion of our expansion project, and as the design- builder of the electrical and mechanical systems of the expansion project. The guaranteed maximum price of the parking structures contract is approximately $37.1 million. While the guaranteed maximum price contains a contractor contingency for certain cost overruns, the contractor will remain liable for all additional costs not resulting from scope changes requested by us or circumstances not within the contractor’s control. We have granted the contractor a limited waiver of our sovereign immunity from unconsented suits. Since this contract includes work performed and costs related thereto since October 2003, we and the Tribe have made payments to Swinerton Builders pursuant to this contract of approximately $29.7 million through December 31, 2004.
In October 2003, the Tribe entered into an agreement with FFKR Architects/Planners II, of Salt Lake City, Utah, for certain architectural and related services as set forth in that agreement, in connection with the parking structures portion of our expansion project. Pursuant to the contract, we have made payments to FFKR Architects/Planners II of approximately $2.3 million through December 31, 2004.
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In May 2003, the Tribe entered into a contract with FFKR Architects/Planners II to act as the Tribe’s representative to select and engage testing, engineering, design and certain construction subcontractors for our infrastructure project. This contract was assigned to us pursuant to the ordinance of the Tribe which established us.
Lease for Casino
In May 2002, the Tribe entered into a lease with Sprung Instant Structures, Inc. for two dome-shaped structures that house our gaming facility. The lease has a two-year term and requires monthly payments of $42,623. The lease agreement was assigned to us and was renewed through August 17, 2005. At the end of the lease term, at our option, 100% of the first four lease payments or, if all such payments have been timely made, 40% of the last 24 lease payments will be credited towards the $1.5 million purchase price, which would result in a purchase price of $1.1 million, assuming all 24 lease payments are timely made. The option may be exercised by payment of the full purchase price, less the applicable credit, on or before the expiration of the lease agreement. The lease payments were guaranteed by Dry Creek Casino, LLC, Nevada Gold & Casinos, Inc., Jenkins Entertainment Group, LLC and Wintun Lodge, LLC (the “Lease Guarantors”).
Development and Loan Agreement
The Tribe entered into a Development and Loan Agreement with Dry Creek Casino, LLC (“DCC”) in August 2001, which has been amended from time to time (as amended to date, the “Development Agreement”). The Development Agreement required DCC to use its best efforts to arrange for the Tribe to receive loan proceeds in the amount of $23.0 million for construction of the Casino, to advance specified amounts to the Tribe to fund tribal government relocation, housing and regulatory costs, and to fund additional advances to the Tribe to assist in the development of the Casino and cover other costs of construction not related to the loan. As of December 31, 2004, the outstanding debt related to the Development Agreement was $10.0 million, evidenced by a subordinated promissory note bearing an interest rate of 9.0% (“Subordinated Note”), payable to DCC.
In addition to its repayment obligations, in consideration of DCC providing credit enhancement and other services under the Development Agreement, the Tribe is obligated to pay to DCC 20% of the Casino’s net income before distributions to the Tribe plus depreciation and amortization plus an amount equal to annual interest on $25.0 million principal amount of the Outstanding Notes less revenues from sales of alcoholic beverages (the “Credit Enhancement Fee”). The Credit Enhancement Fee is required to be paid for a period of five years commencing on June 1, 2003. The Credit Enhancement Fee for the years ended December 31, 2004 and 2003 was $5.1 million and $2.2 million, respectively.
Until all fees and obligations due to the DCC are paid in full, and while any obligation to DCC remains outstanding, DCC is to be the exclusive provider of the construction and loan assistance services with respect to the construction of a casino and has the right of first refusal to be exclusive developer of any future projects.
The Development Agreement was amended in connection with the issuance of the Notes to make us a party thereto and to provide that distributions to the Tribe and payments to DCC are subject to the following priority: (1) operating expenses (as defined in the Development Agreement), which include interest on the Subordinated Note payable to DCC; (2) Permitted Payments (as defined in the Indenture); (3) monthly Credit Enhancement Fees; (4) Service Payments (as defined in the Indenture); and (5) payment of principal of the Subordinated Note pursuant to its terms and the terms of the Intercreditor Agreement.
We have the right to terminate the Development Agreement by exercising a buy-out option on or after June 1, 2006. If exercised, we are obligated to pay all amounts outstanding with respect to financing, including outstanding development advances and accrued interest plus an amount determined by multiplying the average monthly Credit Enhancement Fee earned during the 12-month period immediately preceding the month the buy-out option is exercised, by the number of months remaining in the five year term. The buy-out fee must be paid in equal monthly installments of principal plus interest at the rate of 12% per annum, on the 15th day of each month over a period equal to the remaining term of the Development Agreement.
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We owe $10.0 million to DCC for loans pursuant to the Development Agreement evidenced by the Subordinated Note. The Subordinated Note matures on the earlier of (1) September 1, 2007 or, provided that mandatory prepayments will be required to be made from distributions to the Tribe subject to certain priorities as described above or (2) as described under “Part I. Item 1. Business—Description of Material Agreements—Intercreditor Agreement.” We intend to use $10.0 million of the balance in the Construction Escrow Account to pay off the Subordinated Note.
Intercreditor Agreement
Pursuant to the Intercreditor Agreement among DCC, U.S. Bank National Association, as trustee for the holders of the Notes, the Tribe and us, the Subordinated Note, as well as the Credit Enhancement Fees payable pursuant to the Development Agreement are subordinated to our senior debt, including the Outstanding Notes. If all or any part of our assets, or the proceeds of our assets, are subject to any distribution, division or application to our creditors, then any payment shall be paid or delivered directly to the trustee for the Notes for application to senior debt. If any payment, distribution or security is received by DCC with respect to the Subordinated Note or the Credit Enhancement Fee in violation of the Intercreditor Agreement, DCC must deliver the same to the trustee for the benefit of the holders of our senior debt, including the Outstanding Notes.
We pay Credit Enhancement Fees only if we certify to the trustee as to our reasonable belief that we have adequate liquidity to meet our ordinary and reasonably foreseeable extraordinary expenses and will pay current installments of interest under the Subordinated Note out of the operating account under the Indenture. In addition, we will accrue any such payments during any period in which we are in default on the Outstanding Notes until such time as current interest payments on the Outstanding Notes have been paid in full.
All other payments that we make pursuant to our obligations under the Subordinated Note are subject to the terms of the Cash Collateral and Disbursement Agreement, which provides that so long as no default or event of default has occurred and is continuing, if no funds have been disbursed from the construction escrow account to fund construction cost overruns on or prior to the 45th day following substantial completion of the first parking structure, the disbursement agent will be required to disburse $5.0 million to the holder of the Subordinated Note for application against the outstanding principal balance. So long as no default or event of default has occurred and is continuing, if any funds remain in the construction escrow account on the 75th day following substantial completion of the expansion project, the disbursement agent will be required to disburse an amount equal to $10.0 million minus the aggregate amount of all prior disbursements made to DCC from the account, or made from the account in respect of cost overruns, to the holder of the Subordinated Note for application against the outstanding principal balance. In no event will the holder of the Subordinated Note be entitled to receive any amount in excess of the balance of the Subordinated Note. We intend to use $10.0 million of the balance in the Construction Escrow Account to pay off the Subordinated Note.
Item 2. Properties.
Our Casino is located on the Tribe’s 75-acre reservation near Geyserville, located in the heart of the Alexander Valley in Sonoma County, California. We do not own the land on which our gaming business is located. The use of tribal land is provided to us free of rent. The United States government holds all the real property underlying our facility in trust for the benefit of the Tribe.
We made a distribution to the Tribe from the net proceeds of the Notes Offering to enable the Tribe to acquire and develop an approximately 18-acre parcel of land adjacent to the reservation (the “Dugan Property”). Title to the parcel will initially be held by the Tribe, although we understand that the Tribe may seek to have the parcel taken into trust for the Tribe’s benefit. The Tribe has granted us access to any benefits the property may have for our Casino, including road access and water rights. As of December 31, 2004, we had $4.7 million remaining in an improvements account which was funded from proceeds from the Notes Offering to be used primarily to build an additional access road to the Tribe’s reservation through the Dugan Property. The Dugan Property may be subject to certain zoning, use, environmental and other restrictions, permits and processes under county and state law, including but not limited to certain agreements that have been made relative to the Dugan Property regarding agricultural use limitations and related property tax benefits. We have completed the initial planning on the road from the Dugan Property to the Tribe’s reservation.
Item 3. Legal Proceedings.
Sonoma County Fire Marshal Inspection Case
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On October 7, 2002, the Sonoma County Fire Chief filed an application in Sonoma County Superior Court for an inspection warrant to allow him to inspect the Tribe’s reservation, including the Casino. The Tribe removed the case to federal court. The Tribe has argued that there is no basis for the County Fire Chief to assert jurisdiction over the Tribe’s lands, which are owned in trust by the United States of America for the Tribe’s benefit, and are governed by tribal and federal law and the Compact.
On December 9, 2004, the Court entered an order granting in part and denying in part the Tribe’s motion to dismiss for failure to state a claim and denying the County’s motion for summary judgment. The order reaffirmed the Court’s prior ruling that Public Law 280 does not authorize the County Fire Chief to inspect the Tribe’s reservation or Casino. On March 1, 2005, the Court issued an Order granting in part and denying in part the Tribe’s motion to dismiss for failure to join necessary and indispensable parties, holding that United States of America is an indispensable party as to the road that provides ingress and egress to the Tribe’s reservation from the public highway. The Tribe has filed a summary judgment motion, presently set to be heard on April 8, 2005. If it is ultimately determined that the County Fire Chief has authority to inspect the Casino, we believe that he will require the construction of an additional access road to the Casino. We are in the early stages of planning for construction of a road to the Casino through the Dugan Property, but we have no current timetable for its completion. Construction of such a road may depend on County approvals or on the Dugan Property being made a part of the Tribe’s reservation.
We are involved in other litigation and disputes from time to time in the ordinary course of business with vendors and patrons. We believe that the aggregate liability, if any, arising from such litigation or disputes will not have a material adverse effect on our results of operations, financial condition or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
We have not issued or sold any equity securities.
Item 6. Selected Financial Data.
River Rock Casino has historically operated as a separate wholly owned operating property of the Tribe. We were formed as an unincorporated instrumentality of the Tribe to own and operate the River Rock Casino. Upon the issuance of our Notes, the Tribe reorganized so that its gaming business became owned and operated by us. This reorganization was accounted for as a reorganization of entities under common control. In accordance with Statement of Financial Accounting Standards 141 “Business Combinations,” the assets and liabilities of the Casino operating property are presented by us on a historical cost basis.
The following table presents summary historical statements of revenues and expenses, balance sheet and other data for the periods presented and should be read in conjunction with Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto, all included elsewhere in this Form 10-K. The historical financial data for the years ended December 31, 2004, 2003 and 2002 have been derived from our audited historical financial statements included elsewhere in this report. The following table sets forth our statement of operations for the years ended December 31, 2004, 2003 and 2002.
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Year Ended December 31, 2004 |
Year Ended December 31, 2003 (a) |
Year Ended December 31, 2002 (b) |
Year Ended December 31, 2001 (c) |
||||||||||
| Statement of Revenues and Expenses: | (dollars in thousands) | ||||||||||||
| Revenues: | |||||||||||||
Casino |
$ | 104,024 | $ | 67,127 | $ | 4,615 | $ | — | |||||
Food,
beverage and retail |
5,381 | 2,927 | — | — | |||||||||
Other |
575 | 380 | 21 | — | |||||||||
Gross
revenues |
109,980 | 70,434 | 4,636 | — | |||||||||
| Promotional allowance | (2,434 | ) | (1,141 | ) | — | — | |||||||
Net
revenues |
107,546 | 69,293 | 4,636 | — | |||||||||
| Operating expenses: | |||||||||||||
Casino |
19,499 | 12,753 | 657 | — | |||||||||
Food,
beverage and retail |
4,704 | 3,263 | 63 | — | |||||||||
Selling,
general and administrative |
39,268 | 28,046 | 3,147 | — | |||||||||
Depreciation |
6,390 | 4,391 | 219 | — | |||||||||
Pre-opening
costs |
— | — | 1,899 | 821 | |||||||||
Credit
enhancement fee |
5,112 | 2,249 | — | — | |||||||||
Gaming
commission expense |
1,780 | 1,435 | 422 | — | |||||||||
Compact
revenue sharing trust fund |
1,335 | 1,335 | 1,335 | — | |||||||||
Total
operating expenses |
78,088 | 53,472 | |||||||||||