Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless otherwise noted, transactions, trends and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. In addition, unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior year. Our MD&A is presented in seven sections:
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Overview
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Results of continuing operations
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Liquidity and capital resources
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Off-balance-sheet arrangements
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Seasonality
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Regulation and taxes
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Critical accounting estimates and policies
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Overview
We own, develop, manage, and/or invest in gaming-related enterprises. We continue to actively investigate, individually and with partners, new business opportunities and our long-term strategy is to transition to primarily an operating company and to drive revenues from owned operations rather than management fees.
Specifically, we own and operate the Rising Star Casino Resort in Rising Sun, Indiana (“Rising Star”), Stockman’s Casino (“Stockman’s”) in Fallon, Nevada and we lease and operate the Grand Lodge Casino (“Grand Lodge”) in Incline Village, Nevada. We also have a management agreement with the Pueblo of Pojoaque in Santa Fe, New Mexico, which became effective September 23, 2011. As of October 1, 2012, we acquired and now operate the Silver Slipper Casino in Bay St. Louis, Mississippi.
On April 1, 2011, we acquired all of the operating assets of Grand Victoria Casino & Resort, L.P. through Gaming Entertainment (Indiana) LLC, our wholly-owned subsidiary. In August 2011, the property was renamed Rising Star Casino Resort. In May 2011, we entered into a three-year agreement with the Pueblo of Pojoaque, which has been approved by the NIGC as a management contract, to advise on the operations of the Buffalo Thunder Casino and Resort in Santa Fe, New Mexico along with the Pueblo’s Cities of Gold and Sports Bar casino facilities. Our management and related agreements with the Buffalo Thunder Casino and Resort became effective on September 23, 2011. As of September 1, 2011, we own the operating assets of the Grand Lodge Casino, and have a 5-year lease with Hyatt Equities LLC for the casino space in the Hyatt Regency Resort, Spa and Casino in Incline Village, Nevada on the north shore of Lake Tahoe. Until August 31, 2011, we were a non-controlling 50%-investor in Gaming Entertainment (Delaware), LLC (“GED”), a joint venture with Harrington Raceway Inc. (“HRI”). GED had a 15-year management contract through August 2011 with Harrington Casino at the Delaware State Fairgrounds in Harrington, Delaware.
On March 30, 2012, we entered into a Membership Interest Purchase Agreement with Silver Slipper Casino Venture, LLC to acquire all of the outstanding membership interest of the entity operating the Silver Slipper Casino in Bay St. Louis, Mississippi. The purchase was closed on October 1, 2012, for a price of approximately $70.0 million and $6.7 million in cash, exclusive of net working capital balances, fees and expenses and other adjustments. We entered into the First Lien Credit Agreement (“First Lien Credit Agreement”) with Capital One on June 29, 2012 and the Second Lien Credit Agreement (“Second Lien Credit Agreement”) with ABC Funding, LLC on October 1, 2012, as discussed in Note 7 to the consolidated financial statements, and we used the debt to fund the approximately $70.0 million Silver Slipper (“Silver Slipper”) purchase price. We also paid approximately $6.7 million in cash for the property working capital and cash balances.
Management believes the acquisition of the Silver Slipper is consistent with our long-stated growth strategy and will create long-term shareholder value. The Silver Slipper, which opened in November 2006, is on the far west end of the Mississippi Gulf Coast (22 miles west of Gulfport, 34 miles from Biloxi) and is approximately one hour (56 miles) from New Orleans (versus 90mi/1.5hrs to the Beau Rivage). The property has over 37,000 square feet of gaming space, approximately 1,000 slot and video poker machines, 26 table games, a poker room and the only live keno game on the Gulf Coast. The property includes a fine dining restaurant, buffet, quick service restaurant and two casino bars. The property draws heavily from the New Orleans metropolitan area and other communities in southern Louisiana and southwestern Mississippi.
The Gulf Coast is one of the country’s largest gaming markets and its proximity to southern Louisiana, Alabama, Mississippi and the Florida Panhandle, as well as ample non-gaming amenities and a seasonal draw, make the market attractive.
Until March 30, 2012, we owned 50% of Gaming Entertainment (Michigan), LLC (“GEM”), a joint venture with RAM Entertainment, LLC (“RAM”), where we were the primary beneficiary and, therefore, consolidated GEM in our consolidated financial statements. On March 30, 2012, we, along with our 50% joint venture partner RAM, entered into an Equity Purchase Agreement (‘the GEM Sale Agreement”) and closed on the $97.5 million sale of our limited liability company interests in GEM and the FireKeepers management agreement to the FireKeepers Development Authority (“FDA”), $48.8 million to RAM and $48.8 million to us. The gross proceeds were paid, less a $0.2 million holdback amount which the FDA may use to satisfy any liabilities arising before the sale date which are paid subsequently, or to satisfy any indemnification obligations of us and RAM under the sale agreement. The holdback receivable, less any amounts used to satisfy such liabilities, will be paid to RAM and us on December 31, 2012 in equal amounts. The FDA paid $48.7 million to us and also $48.6 million to RAM, on March 30, 2012, which reflected the deduction of the hold back amount split between RAM and us and $0.03 million of buyer transaction expenses deducted from RAM’s portion. GEM had a 7-year management agreement with the Nottawaseppi Huron Band of Potawatomi Indians for the development and management of the FireKeepers Casino near Battle Creek, Michigan. The FireKeepers Casino opened on August 5, 2009, which triggered the commencement of the 7-year management agreement term.
In addition to the $97.5 million, the FDA paid RAM and us $1.2 million each, equal to the management fee that would have been earned under the management agreement for April 2012, which was defined as the ‘wind up fee’ less $0.3 million, which was split between RAM and us. The wind up fee was received in May 2012, and was $0.4 million more than estimated at March 31, 2012; therefore the gain on sale was increased from $40.8 million to $41.2 million during the second quarter. During the first quarter, we used a portion of the sale proceeds to pay-off our remaining outstanding debt of $25.3 million to Wells Fargo, which consisted of $24.8 million of our existing long term debt and $0.5 million due on the interest rate swap agreement (“Swap”) related to the Credit Agreement with Wells Fargo, to extinguish the credit facility and related interest-rate hedge. The Wells Fargo Credit Agreement, which was scheduled to mature on June 30, 2016, was terminated without the incurrence of any early termination penalties or fees.
Our gain on the sale of joint venture, related to the sale of our interest in GEM, was $41.2 million and allocated as follows (in millions):
Gross proceeds, before $0.1 million holdback receivable
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$
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48.8
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Plus: April 2012 ‘Wind up’ fee received, net of $0.03 million deduction
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0.9
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49.7
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Less: Net basis of contract rights expensed
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(2.8
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Less: Our interest in joint venture
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(5.7
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Gain on sale of joint venture
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41.2
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Results of continuing operations
A significant portion of our revenue had been generated from our management agreements with the FireKeepers Casino in Michigan, the Harrington Casino in Delaware and Buffalo Thunder in New Mexico. The Delaware agreement expired on August 31, 2011. The FireKeepers management agreement ended March 30, 2012, with the sale of our interest in GEM and the New Mexico agreement ends in September 2014. There can be no assurance that the New Mexico management agreement will be extended. Additionally, our 2012 and 2011 results of continuing operation were significantly impacted by our newly acquired Rising Star on April 1, 2011 and Grand Lodge on September 1, 2011.
For the nine months ended September 30, 2012 and 2011, our revenues from the FireKeepers management agreement were $5.3 million and $18.3 million, respectively, which represent a significant amount of our total annual operating income. Management fees represented 6% and 25% of total revenues for the years ended September 30, 2012 and 2011, respectively, as we have executed our strategy to transition to primarily an operating company and drive revenue from owned operations rather than management fees. We funded the acquisition of the Silver Slipper with the First and Second Lien Credit Agreements totaling $70.0 million on October 1, 2012. We believe the impact of the lost revenues from the sale of our interest in GEM and the FireKeepers management agreement will be diminished with the acquisition of the Silver Slipper, as well as a full year of operations at the Rising Star and Grand Lodge.
Three Months Ended September 30, 2012, Compared to Three Months Ended September 30, 2011
Revenues.
For the three months ended September 30, 2012, total revenues decreased $3.3 million (10%) as compared to 2011, primarily due to a $5.6 million (93%) and $1.8 million (8%) decrease in our development / management and casino operations Mid-west segments, respectively, offset by a $4.1 million increase (123%) in our casino operations Nevada segment.
The $5.6 million decrease in revenues in our development / management segment is related to lower management fees, comprised mainly of a $6.0 million decrease and a $0.2 million increase in management fees related to FireKeepers and Buffalo Thunder, respectively. FireKeepers management fees were lower due to the sale of our interest in GEM and the FireKeepers management agreement which closed March 30, 2012. Buffalo Thunder management fees are higher in the current year as the management contract began in September 2011.
The $1.8 million decrease in revenues in our casino operations Mid-west segment is related to Rising Star operations. The lower Rising Star casino revenues were largely due to both lower slot and table games revenue caused by a decline in slot volume as well as lower table game win percentages in the current year period. Rising Star slot coin-in decreased approximately 7% over the prior year period. Rising Star table games volume increased 6%, however the hold percentage declined approximately 300 basis points year over year.
The primary reasons for the shortfalls against prior year are due to weakness in the Southeastern Indiana gaming market. The weakness is a result of increased competition from Scioto Downs Racino in Columbus, Ohio. This racino opened up in early June 2012 and has impacted the play from the Columbus, Ohio market. Other factors include a stagnant economy that has negatively affected most of the gaming properties across the Mid-west and the United States.
The $4.1 million increase in revenues in our casino operations Nevada segment was predominantly attributable to the lease of the Grand Lodge on September 1, 2011. For the three months ended September 30, 2012, Grand Lodge’s casino revenues increased $4.2 million over the prior year, as the prior year period only includes operations for the month of September 2011.
Operating costs and expenses.
For the three months ended September 30, 2012, total operating costs and expenses decreased $1.0 million (3%), as compared to 2011, primarily due to decreases in our casino operations Mid-west and development / management segments of $2.2 million (10%) and $.8 million (98%), respectively, offset by a $2.1 million (69%) increase in our casino operations Nevada segment.
The $2.2 million decrease in our casino operations Mid-west operating expenses were largely due to lower expenses at the Rising Star, mostly related to lower gaming taxes, marine operating costs and other employee related costs in the current year period. The decrease in our development / management operating costs was largely due to a $0.4 million (100%) decrease in amortization, related to the sale of the Michigan gaming rights on March 30, 2012.
The $2.1 million increase in our casino operations Nevada operating expenses was attributable to the lease of the Grand Lodge on September 1, 2011. For the three months ended September 30, 2012, Grand Lodge’s operating expenses increased $2.3 million, as the prior year period only includes operations for the month of September, offset by a $0.2 million (11%) decrease at Stockman’s Casino. The decrease at Stockman’s Casino was mostly related to a decrease in depreciation expense, as assets have become fully depreciated.
Project development and acquisition costs.
For the three months ended September 30, 2012, project development costs were flat as compared to 2011, and included $0.01 million of Silver Slipper acquisition costs, as compared to $0.04 million of Grand Lodge acquisition costs in the prior year period. Project development and acquisition costs are allocated to our development / management operations segment.
Selling, general and administrative expense.
For the three months ended September 30, 2012, selling, general and administrative expenses decreased $0.4 million (4%) as compared to 2011 primarily due to a $0.8 million (13%) decrease in our casino operations Mid-west segment and a $0.1 million (4%) decrease in our corporate operations segment, offset by a $0.6 million (70%) increase in our casino operations Nevada segment.
The a $0.8 million decrease in our casino operations Mid-west segment selling, general and administrative costs was predominantly attributable to lower Rising Star benefit expenses and marine operating costs in the current year period. The $0.6 million increase in our casino operations Nevada segment selling, general and administrative costs was related to the Grand Lodge, due to the lease and operation of the Grand Lodge effective September 1, 2011. The $0.1 million decrease in our corporate operation’s segment selling, general and administrative expenses was largely due to lower benefit expenses.
Operating gains (losses).
For the three months ended September 30, 2012, operating gains increased by $3.8 million (100%), due to $4.9 million of impairment losses recorded in the prior year period, related to a $4.5 million Stockman’s goodwill impairment and $0.4 million Nambé Pueblo note receivable impairment, and a $1.1 million decrease in equity in net income of unconsolidated joint venture. The GED management contract was terminated August 2011, as discussed in Note 3 to the consolidated financial statements. These operating gains (losses) are allocated to our development / management operations segment.
Other income (expense).
For the three months ended September 30, 2012, other expense decreased by $1.0 million (94%), primarily due to $0.9 million of interest expense and $0.2 million loss on derivative instrument in the prior year period. The interest expense and loss on derivative in the prior year period were related to long term debt which was funded March 31, 2011, when we borrowed $33.0 million on the term loan to fund our acquisition of the Rising Star. On March 30, 2012, we used a portion of the proceeds from the sale of our interest in GEM to pay off our remaining outstanding debt of $25.3 million, as discussed in note 7 to the consolidated financial statements. The interest expense in the current year period was related to Capital One Bank, N.A. commitment fees on the First Lien Credit Agreement. Interest expense and other income (expense) related to derivative instruments are allocated to our corporate operations segment.
Income taxes.
For the three months ended September 30, 2012, the estimated effective annual income tax rate applied for the current year period is approximately 29%, compared to a prior year benefit effective annual income tax rate of (205%) and compared to the prior quarter
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s estimated effective annual income tax rate of 49%. The prior year’s rate benefited from the impairment losses during the quarter, as well as a 2010 GEM state tax refund, as GEM’s filing status changed from filing as a stand-alone entity to filing unitarily with Full House Resorts, Inc. during the prior year period. Also, the current period
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s rate benefited from a change in estimates related to Indiana state taxes. There is no allowance on the current deferred tax asset of $0.7 million and the long-term deferred tax asset of $0.4 million as of September 30, 2012, and we believe the deferred tax assets are fully realizable.
Noncontrolling interest.
For the three months ended September 30, 2012, the net income attributable to non-controlling interest in consolidated joint venture decreased by $2.6 million (100%), as we no longer own the 50% interest in GEM, effective March 30, 2012.
Nine Months Ended September 30, 2012, Compared to Nine Months Ended September 30, 2011
Revenues.
For the nine months ended September 30, 2012, total revenues increased $18.4 million (25%) as compared to 2011, primarily due to a $20.0 million (42%) and $10.2 million (138%) increase in our casino operations Mid-west and Nevada segment’s revenues, respectively, offset by an $11.7 million decrease (64%) in our development / management segment revenues. The $20.0 million increase in revenues in our casino operations Mid-west segment was largely due to the acquisition of the Rising Star on April 1, 2011. The $10.2 million increase in revenues in our casino operations Nevada segment is related to the lease and operations of the Grand Lodge.
The $11.7 million decrease in our development / management segment revenues was predominantly attributable to the $12.9 million (71%) decrease in FireKeepers management fees, offset by a $1.1 million increase in Buffalo Thunder management fees. FireKeepers management fees were lower due to the sale of our interest in GEM and the FireKeepers management agreement which closed March 30, 2012. Our management agreement with the Buffalo Thunder Casino & Resort became effective September 2011.
Operating costs and expenses.
For the nine months ended September 30, 2012, total operating costs and expenses increased $25.0 million (43%), as compared to 2011, primarily due to a $17.9 million (40%) and $7.6 million (118%) increase in our casino operations Mid-west and Nevada segment’s operating costs, respectively, offset by an $1.9 million decrease (69%) in our development / management segment operating costs.
The $17.9 million and $7.6 million increases in our casino operations Mid-west and Nevada segment’s operating expenses, respectively, were largely due to the acquisition of the Rising Star and Grand Lodge. The $1.9 million decrease in our development / management segment
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s operating costs was attributable to the sale of our interest in GEM and the FireKeepers Management agreement which closed March 30, 2012.
Project development and acquisition costs.
For the nine months ended September 30, 2012, project development costs decreased $0.3 million (48%), as compared to 2011, primarily due to $0.5 million of acquisition expenses for the Rising Star in the prior year, offset by $0.1 million of acquisition expenses for the Silver Slipper in the current year. Project development and acquisition costs are allocated to our development / management operations segment.
Selling, general and administrative expense.
For the nine months ended September 30, 2012, selling, general and administrative expenses increased $7.3 million (43%) as compared to 2011 primarily due to a $3.7 million (33%) increase in our casino operations Mid-west segment and a $2.8 million increase in our casino operations Nevada segment, due to the acquisition of the Rising Star and the Grand Lodge, and a $1.1 million (30%) increase in our corporate operations segment. For the nine months ended September 30, 2012, the Rising Star’s and Grand Lodge’s selling, general and administrative expenses increased $3.7 million (33%) and $2.9 million, respectively.
Selling, general and administrative expenses increased at the corporate level by $1.1 million, mostly related to a $0.9 million increase in payroll and related costs, comprised principally of a $0.5 million increase in stock compensation expense related to the issuance of 660,000 shares of restricted stock as discussed in Note 2 to the consolidated financial statements and a $0.2 million increase in incentive compensation, related to the sale of our interest in GEM. Selling, general and administrative expenses also increased at the corporate level due to a $0.2 million increase in Delaware franchise taxes, related to a larger number of authorized shares.
Operating gains (losses).
For the nine months ended September 30, 2012, operating gains increased by $42.8 million consisting primarily of the gain on sale of the joint venture of $41.2 million, related to the sale of our interest in GEM, and the $4.9 million of impairment losses in the prior year period, related to a $4.5 million goodwill impairment and $0.4 million Nambé Pueblo note receivable impairment, offset by a $3.3 million (100%) decrease in equity in net income of unconsolidated joint venture. The GED management contract was terminated August 2011, as discussed in Note 3 to the consolidated financial statements.
These operating gains (losses) are allocated to our development / management operations segment.
Other income (expense).
For the nine months ended September 30, 2012, other expense decreased by $0.07 million (3%), primarily due to a $1.7 million loss on extinguishment of debt related to the write-off of the Wells Fargo loan costs, due to the payoff of the debt which is discussed in Note 7 to the consolidated financial statements, offset by a $1.2 million (60%) decrease in interest expense and a $0.6 million (102%) decrease in the loss on derivative instrument related to long term debt which was funded March 31, 2011, when we borrowed $33.0 million on the term loan to fund our acquisition of the Rising Star.
These other income (expense) items are allocated to our corporate operations segment.
Income taxes.
For the nine months ended September 30, 2012, the estimated effective annual income tax rate applied for the current year period is approximately 38%, compared to 16% for the same period in 2011. The lower tax rate in the prior year was primarily due to the tax benefit of the impairment losses during the prior year, as well as a 2010 GEM state tax refund, as GEM’s filing status changed from filing as a stand-alone entity to filing unitarily with Full House Resorts, Inc. during the third quarter of 2011. There is no allowance on the current deferred tax asset of $0.7 million and the long-term deferred tax asset of $0.4 million as of September 30, 2012, and we believe the deferred tax assets are fully realizable.
Noncontrolling interest.
For the nine months ended September 30, 2012, the net income attributable to non-controlling interest in consolidated joint venture decreased by $5.8 million (73%), as the current year non-controlling interest only represents the first quarter’s 50% interest in GEM. Our interest in GEM was sold on March 30, 2012.
Liquidity and capital resources
Economic conditions and related risks and uncertainties
The United States and the world has experienced a widespread and severe economic slowdown accompanied by, among other things, weakness in consumer spending including gaming activity and reduced credit and capital financing availability, all of which have far-reaching effects on economic conditions in the country for an indeterminate period. Our operations are currently concentrated in Indiana, northern Nevada, New Mexico
and the Gulf Coast. Accordingly, future operations could be affected by adverse economic conditions and increased competition particularly in those areas and their key feeder markets in neighboring states. Prior to March 30, 2012, our operations included the FireKeepers Casino in Michigan, and prior to September 1, 2011, our operations also included the Harrington Casino in Delaware. The effects and duration of these conditions and related risks and uncertainties on our future operations and cash flows, including our access to capital or credit financing, cannot be estimated at this time, but may be significant.
The Rising Star, Grand Lodge, Stockman’s and Silver Slipper operations and the Buffalo Thunder management agreement are currently our primary sources of recurring income and significant positive cash flow. Our management agreement for the Harrington Casino in Delaware ended on August 31, 2011 and our interest in GEM and the management agreement for the FireKeepers Casino was sold on March 30, 2012. There can be no assurance that the Buffalo Thunder management agreement ending in September 2014, will be extended beyond its term. Future cash flow is expected to be positively impacted by our acquisition on October 1, 2012 of the Silver Slipper.
The Rising Star is one of three riverboat casinos located on the Ohio River in southeastern Indiana. Its closest competitor is the Hollywood Casino, approximately a twenty minute drive, which is larger with 150,000 square feet of casino space, over 3,000 slot machines, 84 table games, poker room and five dining options. To the south is the Belterra Casino, approximately thirty minutes away, with 1,550 slot machines and 41 table games. Ohio has recently authorized legalized gambling and the new Scioto Downs Racino and Hollywood Casino opened in Columbus, Ohio in June and October 2012, respectively. The Scioto Downs Racino includes over 2,100 slots and live horse racing. The Ohio Hollywood Casino includes over 3,000 slots, 70 table games and a poker room. The Horseshoe Casino Cincinnati is currently being built and is expected to open in the spring of 2013 and will feature approximately 100,000 square feet of casino space, 2,000 slot machines, 85 table games and a poker room. There are also two proposed racinos nearby in the Cincinnati area. Each of these facilities is within the general market of Rising Star and is expected to provide competition to our Rising Star operation in 2014. While Kentucky has limited legal gaming, the cities of Lexington and Louisville are within the market of the Rising Star and there is a possibility that Kentucky will expand legalized gaming in the near future.
On a consolidated basis, cash provided by operations during the nine months ended September 30, 2012 decreased $21.4 million over the same prior year period, partially attributable to the approximately $11.6 million in taxes paid related to the gain on sale of our interest in GEM. The decrease in cash provided by operations was also attributable to a $14.4 million decrease in net income, exclusive of the $41.2 million gain on sale of our interst in GEM in the current year, primarily due to the sale of our interest in FireKeepers, offset by Rising Star and Grand Lodge operations. Cash provided by investing activities increased $58.1 million from the prior year period primarily due to the $49.7 million of proceeds from the sale of our interest in GEM and the $19.5 million of deposits and other costs of the Rising Star acquisition in the prior year, offset by $10.3 million in deposits and other costs related to the Silver Slipper acquisition. Cash used in financing activities increased $33.2 million from the prior year mostly due to the $26.9 million repayment of long term debt and the Swap liability. As of September 30, 2012, we had approximately $21.5 million in cash,
of which approximately $3.9 million will be used to satisfy our remaining GEM sale tax liability and $12.0 million is dedicated to on-going operations.
Our future cash requirements include selling, general and administrative expenses, project development costs, capital expenditures, taxes and possibly funding any negative cash flow of our casino operations as well as potential acquisitions.
In October 2011, the Rising Sun/Ohio County First, Inc. (RSOCF) and the Rising Sun Regional Foundation, Inc. teamed up to develop a new 100-room hotel on land currently owned by us at Rising Star. On June 13, 2012, the City of Rising Sun Advisory Plan Commission (
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Plan Commission
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) provided a favorable recommendation to the City Council of Rising Sun, Indiana, regarding a revised amendment to the plan of development, which was adopted by the City Council on July 5, 2012. On August 13, 2012, the Plan Commission approved the detailed plan of development. The parties entered into a real estate sale agreement dated May 2, 2012, for RSOCF to purchase approximately 3.0 acres of land on which the hotel will be developed for $30,000 per acre with a closing to follow the approval of final project documents by the parties. Construction is expected to commence in the fourth quarter of 2012, and the hotel is expected to open in late 2013 or early 2014. We believe that the added hotel room inventory in proximity to the casino facility will favorably impact revenues and visitor counts.
Subject to the effects of the economic uncertainties discussed above, we believe that adequate financial resources will be available to execute our current growth plan from a combination of operating cash flows and external debt and equity financing. However, continued downward pressure on cash flow from operations due to, among other reasons, the adverse effects on gaming activity of the current economic environment, increased competition and a generally tight credit environment, increases the uncertainty with respect to our development and growth plans.
Banking Relationships
On October 29, 2010, we, as borrower, entered into a Credit Agreement (the “Wells Fargo Credit Agreement”) with Wells Fargo Bank, N.A. On December 17, 2010, we entered into a Commitment Increase of the Wells Fargo Credit Agreement and a related Assignment Agreement increasing the loan commitment from $36.0 million to $38.0 million, consisting of a $33.0 million term loan and a revolving line of credit of $5.0 million.
The initial funding date of the Wells Fargo Credit Agreement occurred March 31, 2011 when we borrowed $33.0 million on the term loan which was used to fund our acquisition of the Rising Star. The purchase occurred on April 1, 2011. The Wells Fargo Credit Agreement was secured by substantially all of our assets. We paid off the remaining $25.3 million remaining debt related to the Wells Fargo Credit Agreement and extinguished the facility on March 30, 2012, which consisted of $24.8 million of our existing long term debt and $0.5 million due on the Swap, from proceeds from the sale of our interest in GEM and the FireKeepers management agreement.
As of September 30, 2012, we held $9.2 million in escrow related to the Silver Slipper acquisition, which is included in long-term deposits on our balance sheet. The Silver Slipper features approximately 1,000 slots, 26 tables, a poker room, three restaurants and two bars. The property draws heavily from the New Orleans metropolitan area and other communities in southern Louisiana and southwestern Mississippi.
On October 1, 2012, we closed on the acquisition of all of the equity membership interests in Silver Slipper Casino Venture LLC dba Silver Slipper Casino located in Bay St. Louis, Hancock County, Mississippi. The purchase price of approximately $70.0 million, exclusive of cash and working capital in the amount $6.7 million and $2.8 million, respectively, was funded by a $50.0 million first lien term loan provided by Capital One Bank, N.A. as administrative agent and the lenders identified in the First Lien Credit Agreement dated June 29, 2012 and a $20.0 million second lien term loan provided by ABC Funding LLC as administrative agent and the lenders identified in the Second Lien Credit Agreement dated October 1, 2012. The $5.0 million revolving loan under the First Lien Credit Agreement remains undrawn and available. The First and Second Lien Credit Agreements are secured by substantially all of our assets and therefore, our wholly-owned subsidiaries guarantee our obligation under the agreements. The Second Lien Credit Agreement is subject to the lien of the First Lien Credit agreement.
We have elected to pay interest on the First Lien Credit Agreement based on a one month LIBOR rate as set forth in the agreement. LIBOR rate means a rate per annum equal to the quotient (rounded upward if necessary to the nearest 1/16 of one percent) of (a) the greater of (1) 1.00% and (2) the rate per annum referenced to as the BBA (British Bankers Association) LIBOR divided by (b) one minus the reserve requirement set forth in the First Lien Credit Agreement for such loan in effect from time to time. We will pay interest on the Second Lien Credit Agreement at the rate of 13.25% per annum.
The First and Second Lien Credit Agreements contain customary negative covenants for transactions of this type, including, but not limited to, restrictions on our and our subsidiaries’ ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; make investments; make fundamental changes; dispose of assets; and change the nature of their business. The First and Second Lien Credit Agreements require that we maintain specified financial covenants, including a total leverage ratio, a first lien leverage ratio, a fixed charge coverage ratio and a capital expenditures ratio each as set forth in the agreements. The First and Second Lien Credit Agreements also include customary events of default, including, among other things: non-payment; breach of covenant; breach of representation or warranty; cross-default under certain other indebtedness or guarantees; commencement of insolvency proceedings; inability to pay debts; entry of certain material judgments against us or our subsidiaries; occurrence of certain ERISA events; re-purchase of our own stock and certain changes of control.
We are required to make prepayments under the First Lien Credit Agreement, under certain conditions defined in the agreement, in addition to the scheduled principal installments for any fiscal year ending December 31, 2012 and thereafter. Prepayment penalties will be assessed in the event that prepayments are made on the Second Lien Credit Agreement prior to the discharge of the First Lien Credit Agreement.
In September 2012, we opened Federal Deposit Insurance (“FDIC”) insured noninterest bearing accounts with Capital One Bank, NA (“Capital One”). As of September 30, 2012, we had $4.0 million in these insured noninterest bearing accounts. Bankrate.com’s Safe & Sound® service rated Capital One Bank (USA), NA in Virginia a “4 Star” as of June 30, 2012, which is defined as a “sound” ranking of relative financial strength and stability.
In March 2011, we opened FDIC insured noninterest bearing accounts with Wells Fargo. As of September 30, 2012, we had $6.0 million in these insured noninterest bearing accounts. Bankrate.com’s Safe & Sound® service rated Wells Fargo Financial, NA in Las Vegas, NV a “5 Star” as of June 30, 2012, which is the highest award rating and is defined as a “superior” ranking of relative financial strength and stability. As of September 30, 2012, we held $2.2 million in an FDIC insured noninterest bearing account with Nevada State Bank (NSB). NSB is a subsidiary of Zion’s Bancorporation.
FireKeepers Casino
GEM, our FireKeepers Casino joint venture through March 30, 2012, had the exclusive right to provide casino management services to the Michigan Tribe in exchange for a management fee, after certain other distributions were paid to the Tribe, of 26% of net revenues (defined effectively as net income before management fees) for seven years which commenced upon the opening of the FireKeepers Casino on August 5, 2009. On December 2, 2010, the FDA entered into a hotel consulting services agreement with GEM, as the consultant, related to the FireKeepers Casino phase II development project, which includes development of a hotel, multi-purpose/ballroom facility, surface parking and related ancillary support spaces and improvements. GEM was to perform hotel consulting services for a fixed fee of $12,500 per month, continuing through to the opening of the project, provided the total fee for services did not exceed $0.2 million in total. On May 22, 2012, we signed an amendment to the hotel consulting services agreement with the FDA stating we agree to assume the GEM agreement for a fixed monthly amount of $12,500 per month and specific reimbursable expenses for June through November, 2012.
On February 17, 2012, GEM signed a letter of intent with the FDA to propose terms of a potential sale of GEM’s management rights and responsibilities under the current management agreement and allow the FireKeepers casino to become self-managed by the FDA, in return for $97.5 million. The sale closed March 30, 2012 and effectively terminated the existing management agreement, which was scheduled to run through August 2016. We used a portion of the proceeds to pay-off our remaining outstanding debt. We received a $1.2 million wind-up fee equivalent to what our management fee would have been for the month of April 2012.
Other projects
Additional projects are considered based on their forecasted profitability, development period, regulatory and political environment and the ability to secure the funding necessary to complete the development, among other considerations.
Off-balance sheet arrangements
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Seasonality
We believe that our casino operations, management contracts and our estimates of completion for projects in development are affected by seasonal factors, including holidays, adverse weather and travel conditions. Accordingly, our results of operations may fluctuate during the year or from year to year and the results for any year may not be indicative of results for future years.
Regulation and taxes
We, and our casino operations, are subject to extensive regulation by state and tribal gaming authorities. We will also be subject to regulation, which may or may not be similar to current state regulations, by the appropriate authorities in any jurisdiction where we may conduct gaming activities in the future. Changes in applicable laws or regulations could have an adverse effect on us.
The gaming industry represents a significant source of tax revenues to state governments. From time to time, various federal or state legislators and officials have proposed changes in tax law, or in the administration of such law, affecting the gaming industry. It is not possible to determine the likelihood of possible changes in tax law or in the administration of such law. Such changes, if adopted, could have a material adverse effect on our future financial position, results of operations and cash flows.
Critical accounting estimates and policies
We describe our critical accounting estimates and policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2011. We also discuss our critical accounting estimates and policies in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the year ended December 31, 2011. There has been no significant change in our critical accounting estimates or policies since the end of 2011.
Safe harbor provision
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to our financial condition, profitability, liquidity, resources, business outlook, market forces, corporate strategies, contractual commitments, legal matters, capital requirements and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. We note that many factors could cause our actual results and experience to change significantly from the anticipated results or expectations expressed in our forward-looking statements. When words and expressions such as: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions are used in this Form 10-Q, as well as statements containing phrases such as “in our view,” “there can be no assurance,” “although no assurance can be given,” or “there is no way to anticipate with certainty,” forward-looking statements are being made.
Various risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to change significantly from those set forth in our forward-looking statements, including the following risks:
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our development and potential acquisition of new facilities;
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successful integration of acquisitions;
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risks related to development and construction activities; including weather, labor, supply and other unforeseen interruptions, including development of hotel or other amenities in conjunction with the Silver Slipper and Rising Star;
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anticipated trends in the gaming industries;
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general market and economic conditions;
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access to capital and credit, including our ability to finance future business requirements;
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the availability of adequate levels of insurance;
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changes in federal, state, and local laws and regulations, including environmental and gaming licenses or added types of gaming legislation, regulations and taxes;
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ability to obtain and maintain gaming and other governmental licenses;
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competitive environment, including increased competition from existing and new jurisdictions, such as Ohio, Illinois, California, Kentucky, Arkansas, Alabama, Florida, Louisiana and Mississippi and new forms of gaming such as internet gaming;
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risks, uncertainties and other factors described from time to time in this and our other SEC filings and reports.
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We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions. New risks emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecasted in any forward-looking statements.