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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
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 033-80655
MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of registrant as specified in its charter)
Connecticut 06-1436334
(State or other jurisdiction of (IRS employer
incorporation or organization) Identification No.)
One Mohegan Sun Boulevard, Uncasville, CT 06382
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860) 862-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No ________
-----
MOHEGAN TRIBAL GAMING AUTHORITY
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page
Number
------
Item 1. Financial Statements
Balance Sheets of Mohegan Tribal Gaming Authority as of June 30, 2002 (unaudited) and 1
September 30, 2001 (unaudited and restated).
Statements of Income of Mohegan Tribal Gaming Authority for the Quarters and Nine Months 2
Ended June 30, 2002 (unaudited) and 2001 (unaudited and restated).
Statements of Changes in Capital of Mohegan Tribal Gaming Authority for the Quarters and 3
Nine Months Ended June 30, 2002 (unaudited) and 2001 (unaudited and restated).
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the Nine Months Ended 4
June 30, 2002 (unaudited) and 2001 (unaudited and restated).
Notes to Financial Statements of Mohegan Tribal Gaming Authority. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 25
Operations.
Item 3. Quantitative and Qualitative Disclosure of Market Risk 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Changes in Securities and Use of Proceeds 46
Item 3. Defaults Upon Senior Securities 46
Item 4. Submission of Matters to a Vote of Security Holders 46
Item 5. Other Information 46
Item 6. Exhibits and Reports on Form 8-K 46
Signatures. Mohegan Tribal Gaming Authority 47
PREFATORY NOTE
The accompanying unaudited financial statements have been prepared in accordance
with the accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X, except that the financial information included
herein has not been reviewed by the Authority's independent accountants using
professional review standards and procedures, although that review is required
by Form 10-Q.
Mohegan Tribal Gaming Authority
Balance Sheets
(in thousands)
June 30, September 30,
2002 2001
----------------------- ----------------------
(unaudited) (unaudited and restated -
See Note 7)
ASSETS
------
Current assets:
Cash and cash equivalents $ 57,273 $ 74,284
Receivables, net 14,712 7,163
Inventories 15,513 11,455
Other current assets 16,798 12,706
---------------------- ----------------------
Total current assets 104,296 105,608
Non-current assets:
Property and equipment, net 1,409,583 935,016
Construction in process 18,944 280,832
Trademark, net 119,692 119,692
Other assets, net 27,371 24,766
---------------------- ---------------------
Total assets $ 1,679,886 $ 1,465,914
====================== =====================
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations $ - $ 1,514
Current portion of relinquishment liability 77,188 68,272
Accounts payable and accrued expenses 76,580 73,548
Construction payables 35,133 65,768
Accrued interest payable 34,876 13,062
---------------------- ---------------------
Total current liabilities 223,777 222,164
Non-current liabilities:
Long-term debt 1,120,000 908,000
Relinquishment liability 511,389 523,736
Other long-term liabilities 3,652 5,232
---------------------- ---------------------
Total liabilities 1,858,818 1,659,132
---------------------- ---------------------
Commitments and contingencies (Note 5)
Capital:
Retained deficit (175,411) (188,091)
Accumulated other comprehensive loss (3,521) (5,127)
---------------------- ---------------------
(178,932) (193,218)
---------------------- ---------------------
Total liabilities and capital $ 1,679,886 $ 1,465,914
====================== =====================
The accompanying notes to financial statements should be read
in conjunction with the financial statements
1
Mohegan Tribal Gaming Authority
Statements of Income
(in thousands)
For the For the For the For the
Quarter Ended Quarter Ended Nine Months Ended Nine Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
(unaudited) (unaudited and (unaudited) (unaudited and
restated - restated -
See Note 7) See Note 7)
Revenues:
Gaming $ 242,414 $ 192,053 $ 690,535 $ 547,616
Food and beverage 19,417 12,849 51,454 34,610
Hotel 6,785 - 6,785 -
Retail, entertainment and other 15,581 14,014 43,169 42,590
----------------- ------------------- -------------------- -------------------
Gross revenues 284,197 218,916 791,943 624,816
Less - Promotional allowances (20,454) (18,374) (52,042) (53,404)
----------------- ------------------- -------------------- -------------------
Net revenues 263,743 200,542 739,901 571,412
----------------- ------------------- -------------------- -------------------
Cost and expenses:
Gaming 131,787 97,601 386,518 278,023
Food and beverage 11,023 6,442 30,037 18,462
Hotel 1,392 - 1,392 -
Retail, entertainment and other 5,167 3,960 20,133 13,415
General and administration 39,068 24,415 108,007 77,959
Pre-opening costs 4,092 3,724 7,755 7,040
Depreciation and amortization 20,841 7,340 55,419 18,768
----------------- ------------------- -------------------- -------------------
Total costs and expenses 213,370 143,482 609,261 413,667
----------------- ------------------- -------------------- -------------------
Income from operations 50,373 57,060 130,640 157,745
----------------- ------------------- -------------------- -------------------
Other income (expense):
Accretion of relinquishment liability
discount (Note 6) (9,083) (8,958) (27,250) (26,874)
Interest and other income 95 648 335 2,390
Interest expense, net of capitalized
interest (Note 5) (23,395) (3,855) (63,014) (13,076)
Other non-operating expense (50) (114) (137) (114)
Change in fair value of derivative
instruments (Note 3) 23 (810) 18 (2,088)
----------------- ------------------- -------------------- -------------------
(32,410) (13,089) (90,048) (39,762)
----------------- ------------------- -------------------- -------------------
Income from continuing operations 17,963 43,971 40,592 117,983
Loss from discontinued operations - (64) - (591)
----------------- ------------------- -------------------- -------------------
Net income $ 17,963 $ 43,907 $ 40,592 $ 117,392
================= =================== ==================== ===================
The accompanying notes to financial statements should be read
in conjunction with the financial statements
2
Mohegan Tribal Gaming Authority
Statements of Changes in Capital
(in thousands)
For the Nine Months For the Nine Months
Ended June 30, 2002 Ended June 30, 2001
------------------------------ -----------------------------
(unaudited) (unaudited and restated -
See Note 7)
Comprehensive Comprehensive
Capital Income Capital Income
----------- --------------- ------------ ----------------
Balance September 30 (as restated-See Note 7) $(188,091) $(362,118)
Net income 40,592 $ 40,592 117,392 $ 117,392
--------------- --------------
Distributions to Tribe (27,912) (40,000)
----------- ------------
Balance June 30 (175,411) (284,726)
----------- ------------
Accumulated other comprehensive loss at September 30 (5,127) -
Unrealized gain (loss) on derivative instruments 1,606 (1,571)
--------------- --------------
Other comprehensive income (loss) 1,606 1,606 (1,571) (1,571)
----------- --------------- ------------ --------------
Comprehensive income $ 42,198 $ 115,821
=============== ==============
Accumulated other comprehensive loss at June 30 (3,521) (1,571)
----------- -----------
Balance June 30 $(178,932) $(286,297)
=========== ============
For the Quarter For the Quarter
Ended June 30, 2002 Ended June 30, 2001
------------------------------ -----------------------------
(unaudited) (unaudited and restated -
See Note 7)
Comprehensive Comprehensive
Capital Income Capital Income
----------- --------------- ------------ ----------------
Balance March 31 (as restated-See Note 7) $(182,153) $(308,633)
Net income 17,963 $ 17,963 43,907 $ 43,907
--------------- --------------
Distributions to Tribe (11,221) (20,000)
----------- ------------
Balance June 30 (175,411) (284,726)
----------- ------------
Accumulated other comprehensive loss at March 31 (3,669) (2,291)
Unrealized gain on derivative instruments 148 720
--------------- --------------
Other comprehensive income 148 148 720 720
----------- --------------- ------------ --------------
Comprehensive income $ 18,111 $ 44,627
=============== ==============
Accumulated other comprehensive loss at June 30 (3,521) (1,571)
----------- ------------
Balance June 30 $(178,932) $(286,297)
=========== ============
The accompanying notes to financial statements should be read
in conjunction with the financial statements
3
Mohegan Tribal Gaming Authority
Statements of Cash Flows
(in thousands)
For the Nine Months Ended For the Nine Months Ended
June 30, 2002 June 30, 2001
------------- -------------
(unaudited) (unaudited and
restated -
See Note 7)
Cash flows provided by operating activities:
Net income $ 40,592 $ 117,392
Adjustments to reconcile net income to net
cash flow provided by operating activities:
Depreciation and amortization 55,419 18,768
Loss on early extinguishment of debt 6 -
Loss on asset disposal 130 114
Provision for losses on receivables 633 288
Accretion of relinquishment liability discount 27,250 26,874
Cash paid for accretion of relinquishment liability discount (22,583) (19,200)
Change in fair value of derivative instruments (18) 2,088
Changes in operating assets and liabilities:
Increase in receivables and other assets (12,017) (27,024)
Increase in accounts payable and accrued expenses 24,845 17,827
------------ ------------
Net cash flows provided by operating activities 114,257 137,127
------------ ------------
Cash flows used in investing activities:
Purchase of property and equipment, net of change in construction (495,075) (28,524)
payables of $35,133 and $0 respectively
Decrease (increase) in construction in process, net of change in
construction payables of ($65,768) and
$15,473, respectively 196,120 (368,089)
Proceeds from asset sale 148 89
------------ ------------
Net cash flows used in investing activities (298,807) (396,524)
------------ ------------
Cash flows provided by financing activities:
Proceeds from issuance of long-term debt 250,000 -
Draw on Bank Credit Facility 205,000 274,000
Payment on Bank Credit Facility (243,000) -
Principal portion of relinquishment payments (8,098) (6,921)
Distributions to Tribe (27,912) (40,000)
Capitalized financing fees (6,975) (2,789)
Payment on capital leases (1,520) (4,430)
Increase in other long-term liabilities (note 3) 44 45
------------ -----------
Net cash flows provided by financing activities 167,539 219,905
------------ -----------
Net decrease in cash and cash equivalents (17,011) (39,492)
Cash and cash equivalents at beginning of period 74,284 115,731
------------ -----------
Cash and cash equivalents at end of period $ 57,273 $ 76,239
============= ===========
Supplemental disclosures:
Cash paid during the period for interest $ 38,995 $ 25,078
============= ===========
The accompanying notes to financial statements should be read
in conjunction with the financial statements
4
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Mohegan Tribe of Indians of Connecticut (the "Tribe") established the
Mohegan Tribal Gaming Authority (the "Authority") in July 1995 with the
exclusive power to conduct and regulate gaming activities for the Tribe on
Tribal lands. On October 12, 1996, the Authority opened a casino known as the
Mohegan Sun Casino ("Mohegan Sun"). The Authority is governed by a nine-member
Management Board, consisting of the same nine members as those of the Tribal
Council (the governing body of the Tribe). Any change in the composition of the
Tribal Council results in a corresponding change in the Authority's Management
Board. The General Manager and other senior officers of Mohegan Sun are hired by
the Management Board and are employees of the Authority.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in accordance
with the accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X, except that the financial information included
herein has not been reviewed by the Authority's independent accountants using
professional review standards and procedures, although that review is required
by Form 10-Q. In accordance with Rule 10-01, the unaudited financial statements
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals and adjustments) considered necessary for a fair
presentation have been included. Operating results for the quarter and nine
months ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending September 30, 2002. For further information,
refer to the financial statements and footnotes thereto included in the
Authority's annual report on Form 10-K for the year ended September 30, 2001
filed with the Securities and Exchange Commission (the "SEC").
New Accounting Pronouncements
In January 2001, the Emerging Issues Task Force ("EITF") reached a consensus on
certain issues within Issue No. EITF 00-22, "Accounting for Points and Certain
Other Time-Based or Volume-Based Sales Incentive Offers". In April 2002, the
Authority adopted EITF 00-22, which requires that cash or equivalent amounts
provided or returned to customers as part of a transaction not be shown as an
expense, but instead as an offset to the related revenue. The Authority offers
cash inducements in certain circumstances and has reflected $227,000 for the
three and nine months ended June 30, 2002 as an offset to gaming revenues for
these incentives.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") SFAS 144 modifies
the rules for accounting for the impairment or disposal of long-lived assets.
The new rules become effective for fiscal years beginning after December 15,
2001, with earlier application encouraged. The Authority has not adopted SFAS
144, and has not yet quantified the impact of implementing SFAS 144 on the
Authority's financial statements, but does not anticipate a negative effect on
the Authority's financial position, results of operations or cash flows upon
adoption of the standard.
The Authority adopted SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142") on October 1, 2001. Under SFAS 142, the Mohegan Sun trademark is no longer
subject to amortization over its estimated useful life as it has been deemed to
have an indefinite useful life. However, SFAS 142 requires the trademark to be
evaluated at least annually for impairment by applying a fair-value based test
and, if impairment occurs, the amount of impaired trademark must be written off
immediately. With the adoption of SFAS 142, the Authority no longer records
amortization of the trademark. For the quarter and nine months ended June 30,
2001, the Authority recorded $859,000 and $2.6 million, respectively, related to
the
5
amortization of the trademark. The Authority applied the initial fair value test
and determined that no impairment existed at March 31, 2002. Had SFAS 142 been
in effect in these periods, the Authority's results would have been as follows:
For the For the
Quarter Nine Months
For the Ended For the Ended
Quarter June 30, Nine Months June 30,
Ended 2001 Ended 2001
June 30, (unaudited and June 30, (unaudited) and
2002 restated - 2002 restated -
(unaudited) See Note 7) (unaudited) See Note 7)
------------- --------------- ---------------- ---------------
Net income $ 17,963 $ 43,907 $ 40,592 $ 117,392
Trademark amortization - 859 - 2,577
------------- --------------- ---------------- ---------------
As adjusted net income $ 17,963 $ 44,766 $ 40,592 $ 119,969
============= =============== ================ ===============
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements 4, 44,
and 64, Amendment of FASB Statement 13, and Technical Corrections as of April
2002" ("SFAS 145"). The key provision of SFAS 145 which will affect the
Authority rescinds the existing rule that all gains or losses from the
extinguishment of debt should be classified as extraordinary items. Instead,
such gains and losses must be analyzed to determine if they meet the criteria
for extraordinary item classification based on the event being both unusual and
infrequent. The Authority will adopt SFAS 145 beginning October 1, 2002. Prior
period gains and losses must be analyzed to determine if they meet the criteria
to be classified as extraordinary items. If they fail the criteria, prior period
gains and losses must be reclassified. The Authority has not yet quantified the
impact of implementing SFAS 145.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan, as
previously required under EITF Issue 94-3. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The Authority
will adopt SFAS 146 beginning January 1, 2003 and does not believe the adoption
will have a significant impact on results of operations, financial position or
cash flows.
Reclassifications
Certain amounts in the 2001 financial statements have been reclassified to
conform with the 2002 presentation. See Note 7.
NOTE 3 - FINANCING FACILITIES
Financing facilities, as described below, consisted of the following (in
thousands):
June 30, 2002 September 30, 2001
------------- ------------------
Bank Credit Facility $ 220,000 $258,000
$200M 8 1/8% Senior Notes 200,000 200,000
$300M 8 3/4% Senior Subordinated Notes 300,000 300,000
$150M 8 3/8% Senior Subordinated Notes 150,000 150,000
$250M 8% Senior Subordinated Notes 250,000 -
------------ --------
$ 1,120,000 $908,000
============ ========
6
Bank Credit Facility
As of June 30, 2002, the Authority had $220.0 million outstanding under a $400.0
million reducing, revolving, collateralized credit facility (the "Bank Credit
Facility") with a syndicate of lenders led by Bank of America N.A. (formerly
known as Bank of America National Trust and Savings Association). The Authority
draws on the Bank Credit Facility primarily in connection with the major
expansion of Mohegan Sun, known as Project Sunburst, and other capital
expenditure projects. The Bank Credit Facility is collateralized by a lien on
substantially all of the Authority's assets, by a leasehold mortgage on the land
and improvements which comprise Mohegan Sun, and by each of the Authority's cash
operating accounts.
At the Authority's option, each advance of loan proceeds accrues interest on the
basis of a base rate or on the basis of a one-month, two-month, three-month or
six-month London Inter-Bank Offered Rate ("LIBOR") plus, in either case, the
applicable spread (based on the Authority's Total Leverage Ratio as defined in
the Bank Credit Facility). One-month LIBOR at June 30, 2002 was 1.84% and the
applicable spread on a LIBOR loan was 2.625%. Interest on each LIBOR loan that
is for a term of a quarter or less is due and payable on the last day of the
related interest period. Interest on each base rate loan is due and payable
quarterly in arrears. The Authority had no base rate loans at June 30, 2002.
Accrued interest on the Bank Credit Facility was $178,000 at June 30, 2002.
Pursuant to the terms of the Bank Credit Facility, the commitment (or the
maximum amount that may be borrowed under the Bank Credit Facility) will be
automatically reduced on September 30, 2002, and on the last day of each fiscal
quarter thereafter, by 10% of the commitment as in effect immediately prior to
the first such reduction.
Recent Amendment to the Bank Credit Facility
During the quarter ended June 30, 2002, the Authority received the requisite
consent of its lenders for Amendment No. 4 to its Bank Credit Facility. The
amendment revised the total leverage ratio permitted as of June 30, 2002 to 5.25
to 1.00 from 5.00 to 1.00 and increased the Project Sunburst construction budget
from $960.0 million to $1.0 billion. See Note 7.
Financial Covenant Requirements
The Authority's debt agreements require, among other restrictions, the
maintenance of various financial covenants and terms including a fixed charge
coverage ratio, and certain debt leverage ratios. As of June 30, 2002, the
Authority was in compliance with all financial covenant requirements. See Note 7
for discussion of covenant calculations.
Derivative Instruments
The Authority uses derivative instruments, including an interest rate cap,
collar, and swap in its strategy to manage interest rate risk associated with
the variable interest rates applicable to advances under the Bank Credit
Facility. The Authority's objective in managing interest rate risk is to ensure
appropriate income and sufficient liquidity to meet its obligations. The
Authority analyzes interest rate risk using various models that forecast cash
flows of the liabilities and their supporting assets, including derivative
instruments. The Authority does not believe that there is any material risk
exposure with respect to derivative or other financial instruments which it
currently holds. The Authority continually monitors these exposures and makes
the appropriate adjustments to manage these risks within management's
established limits.
The Authority is considered an "end user" of derivative instruments and engages
in derivative transactions for risk management purposes only. On October 1,
2000, the Authority adopted SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (" SFAS 133") designated all derivative instruments as
7
cash flow hedging instruments and marked them to market. The impact of the
adoption of SFAS 133 was not material to the financial position of the Authority
taken as a whole. The Authority excludes the change in time value when assessing
the effectiveness of the hedging relationships. All derivatives are evaluated
quarterly and were deemed to be effective at June 30, 2002.
Derivative instruments held by the Authority at June 30, 2002 are as follows:
Notional Cost Market
-------------- ----------- ------------
Interest Rate Cap
Strike Rate - 8% $ 63,715,200 $ 410,000 $ 200
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% 73,374,200 295,000 (2,283,753)
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable 36,687,100 221,000 (1,241,450)
-------------- ---------- ------------
Total $ 173,776,500 $ 926,000 $ (3,525,003)
============== ========== ============
All derivative instruments are based on one-month LIBOR. One-month LIBOR was
1.84% on June 30, 2002.
For the quarters ended June 30, 2002 and 2001, the Authority recognized a net
gain of $23,000 and a net loss of $810,000, respectively, relating to the change
in time value of its derivative instruments, as reflected in the statements of
income. The Authority recognized a net gain of $18,000 and a net loss of $2.1
million for the nine months ended June 30, 2002 and 2001, respectively. The
(non-cash) increase in the fair value of the derivative instruments for the
three and nine months ended June 30, 2002 was $172,000 and $1.6 million,
respectively. For the three and nine months ended June 30, 2001, the (non-cash)
decrease was $90,000 and $3.7 million, respectively. The fair value of the
Authority's derivative instruments is included in other long-term liabilities in
the accompanying balance sheets.
Senior Notes
On March 3, 1999, the Authority issued $200.0 million Senior Notes with fixed
interest payable at a rate of 8.125% per annum (the "Senior Notes"). The
proceeds from this financing were used to extinguish or defease existing debt,
pay transaction costs and fund initial costs related to Project Sunburst.
Interest on the Senior Notes is payable semi-annually on January 1 and July 1.
The Senior Notes mature on January 1, 2006. The Senior Notes are
uncollateralized general obligations of the Authority and rank pari passu in
right of payment with all current and future uncollateralized senior
indebtedness of the Authority. Borrowings under the syndicated Bank Credit
Facility and other capital lease obligations are collateralized by first
priority liens on substantially all of the assets of the Authority. As a result,
upon any distribution to creditors in a bankruptcy, liquidation or
reorganization or similar proceeding relating to the Authority or the Tribe, the
holders of collateralized debt may be paid in full in cash before any payment
may be made with respect to the Senior Notes. The Senior Notes rank equally in
right of payment with 50% of the Authority's payment obligations under the
Relinquishment Agreement (see Note 6) and rank senior to the remaining 50% of
the Authority's payment obligations under the Relinquishment Agreement, the 1999
Senior Subordinated Notes, the 2001 Senior Subordinated Notes and the 2002
Senior Subordinated Notes. As of June 30, 2002, accrued interest on the Senior
Notes was $8.1 million. See Note 7.
1999 Senior Subordinated Notes
On March 3, 1999, the Authority issued $300.0 million Senior Subordinated Notes
with fixed interest payable at a rate of 8.75% per annum (the "1999 Senior
Subordinated Notes"). The proceeds from this financing were used to extinguish
or defease existing debt, pay transaction costs and fund initial costs related
to Project Sunburst. Interest on the 1999 Senior Subordinated Notes is payable
semi-annually on January 1 and July 1. The 1999 Senior Subordinated Notes mature
on January 1, 2009. The 1999 Senior Subordinated Notes are uncollateralized
general obligations of the Authority and are subordinated to the Bank Credit
Facility, the Senior Notes and in a liquidation, bankruptcy or similar
proceeding 50% of the Authority's payment obligations under the Relinquishment
Agreement that are then due and owing. The 1999 Senior Subordinated Notes rank
equally with the remaining 50% of the Authority's payment obligations under the
Relinquishment Agreement that are then due and owing, the 2001 Senior
8
Subordinated Notes and the 2002 Senior Subordinated Notes. As of June 30, 2002,
accrued interest on the 1999 Senior Subordinated Notes was $13.1 million. See
Note 7.
2001 Senior Subordinated Notes
On July 26, 2001, the Authority issued $150.0 million Senior Subordinated Notes
with fixed interest payable at a rate of 8.375% per annum (the "2001 Senior
Subordinated Notes"). The proceeds from this financing were used to pay
transaction costs, pay down $90.0 million on the Bank Credit Facility and fund
costs related to Project Sunburst. Interest on the 2001 Senior Subordinated
Notes is payable semi-annually on January 1 and July 1. The 2001 Senior
Subordinated Notes mature on July 1, 2011. The 2001 Senior Subordinated Notes
are uncollateralized general obligations of the Authority and are subordinated
to the Bank Credit Facility, the Senior Notes and in a liquidation, bankruptcy
or similar proceeding 50% of the Authority's payment obligations under the
Relinquishment Agreement that are then due and owing. The 2001 Senior
Subordinated Notes rank equally with the 1999 Senior Subordinated Notes, the
2002 Senior Subordinated Notes and the remaining 50% of the Authority's payment
obligations under the Relinquishment Agreement that are then due and owing. As
of June 30, 2002, accrued interest on the 2001 Senior Subordinated Notes was
$6.3 million. See Note 7.
2002 Senior Subordinated Notes
On February 20, 2002, the Authority issued $250.0 million Senior Subordinated
Notes with fixed interest payable at a rate of 8.0% per annum (the "2002 Senior
Subordinated Notes"). The proceeds from this financing were used to pay
transaction costs and pay down $243.0 million of the outstanding balance under
the Bank Credit Facility. On June 28, 2002, the Authority successfully
consummated its offer to exchange all outstanding 2002 Senior Subordinated Notes
that it had issued on February 20, 2002 for $250.0 million of its fully
registered 8.0% Senior Subordinated Notes due 2012. The terms of such fully
registered exchange notes issued are identical to the terms of the 2002 Senior
Subordinated Notes (such exchange notes are also referred to as the "2002 Senior
Subordinated Notes"). The Authority did not receive any additional proceeds from
this exchange offer. Interest on the 2002 Senior Subordinated Notes is payable
semi-annually on April 1 and October 1, with the first interest payment
scheduled for October 1, 2002. The 2002 Senior Subordinated Notes mature on
April 1, 2012. The 2002 Senior Subordinated Notes are uncollateralized general
obligations of the Authority and are subordinated to the Bank Credit Facility,
the Senior Notes and, in a liquidation, bankruptcy or similar proceeding, 50% of
the Authority's payment obligations under the Relinquishment Agreement that are
then due and owing. The 2002 Senior Subordinated Notes rank equally with the
1999 Senior Subordinated Notes, the 2001 Senior Subordinated Notes and the
remaining 50% of the Authority's payment obligations under the Relinquishment
Agreement that are then due and owing. As of June 30, 2002, accrued interest on
the 2002 Senior Subordinated Notes was $7.2 million. See Note 7.
Letters of Credit
The Authority maintains letters of credit in order to satisfy potential workers
compensation liabilities that may arise. The Authority has available a $250,000
uncollateralized letter of credit that will expire in August 2002. The Authority
also has a $550,000 letter of credit that expires in April 2003. The Authority
is currently negotiating a reduction in the required amounts of these letters of
credit. The $550,000 letter of credit was reduced from $1,000,000 on April 13,
2001. As of June 30, 2002, no amounts were drawn on the letters of credit.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Tribe provides governmental and administrative services to the Authority in
conjunction with the operation of Mohegan Sun. For the quarters ended June 30,
2002 and 2001, expenses associated with these services were $2.9 million and
$2.7 million, respectively. During the nine months ended June 30, 2002 and 2001,
the Authority incurred $7.0 million and $8.2 million, respectively, of expenses
for such services.
9
The Tribe, through one of its limited liability companies, has entered into
various land lease agreements with the Authority for access, parking and related
purposes for Mohegan Sun. For each of the quarters ended June 30, 2002 and 2001,
expenses related to these agreements totaled $89,000 and $97,000, respectively.
The Authority expensed $283,000 and $278,000 for the nine months ended June 30,
2002 and 2001, respectively, relating to these land lease agreements.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Project Sunburst
The Tribe received a notification from Trading Cove Associates, or TCA, the
developer of Project Sunburst, indicating that the cost of completing Project
Sunburst is estimated to be $1.0 billion, excluding capitalized interest, which
represents an increase of $40.0 million over the previous estimate of $960.0
million. TCA indicated that the $40.0 million increase relates to scope changes
to the Mohegan Sun retail program amounting to $10.0 million and acceleration
costs related to the early opening of the Casino of the Sky and the extended
hotel tower completion date in the amount of $12.0 million. The balance of the
increase relates to theming and quality improvements and claims reserves in the
amount of $18.0 million. As of June 30, 2002, the Authority had spent $970.8
million, excluding capitalized interest, on Project Sunburst. The remaining
$29.2 million is anticipated to be spent during the remainder of fiscal year
2002. As of June 30, 2002, cumulative capitalized interest for Project Sunburst
construction expenses totaled $53.8 million. Capitalized interest totaled
$660,000 and $10.8 million for the quarters ended June 30, 2002 and 2001,
respectively. Capitalized interest totaled $2.8 million and $26.2 million for
the nine months ended June 30, 2002 and 2001, respectively.
The Mohegan Compact
In May 1994, the Tribe and the State of Connecticut entered into a Memorandum of
Understanding ("MOU") which sets forth certain matters regarding implementation
of the Mohegan Compact. The MOU stipulates that a portion of the revenues earned
on slot machines must be paid to the State of Connecticut ("Slot Win
Contribution"). The Slot Win Contribution payments will not be required if the
State of Connecticut legalizes any other gaming operations with slot machines or
other commercial casino table games within Connecticut, except those consented
to by the Tribe and the Mashantucket Pequot Tribe. For each 12-month period
commencing July 1, 1995, the Slot Win Contribution shall be the lesser of (a)
30% of gross revenues from slot machines, or (b) the greater of (i) 25% of gross
revenues from slot machines or (ii) $80.0 million. The Authority reflected
expenses associated with the Slot Win Contribution totaling $45.6 million and
$37.6 million, respectively, for the quarters ended June 30, 2002 and 2001. For
the nine months ended June 30, 2002 and 2001, expenses associated with the Slot
Win Contribution totaled $129.8 million and $104.4 million, respectively. As of
June 30, 2002, outstanding Slot Win Contribution payments to the State of
Connecticut totaled $15.4 million.
Expansion Construction Management Agreement with Perini Building Company, Inc.
The Authority engaged Perini Building Company, Inc. ("Perini") as construction
manager to provide construction management services for Project Sunburst. As
construction manager, Perini is receiving a fee of $25.5 million for services
including, but not limited to, pre-construction review and construction phase
contract administration. In addition, the Authority has agreed to pay Perini
$1.3 million in construction management fees relating to the Indian Summer
Garage and $500,000 relating to the Thames Garage. As of June 30, 2002, Perini
had received $23.2 million of the $27.3 million fee. All amounts incurred have
been reflected in the property, plant and equipment section of the accompanying
balance sheets. For the quarters ended June 30, 2002 and 2001, the Authority
paid Perini $1.3 million and $1.5 million, respectively, related to the
construction management fee. The Authority paid Perini $9.2 million and $12.5
million in fees for the nine months ended June 30, 2002 and 2001, respectively.
As of June 30, 2002, the Authority owed $1.4 million to Perini related to the
Construction Management Agreement.
Radio Station Guarantee
The Authority entered into an agreement with AAA Entertainment, LLC ("AAA") to
operate the radio station WMOS on the premises of Mohegan Sun. In the event
WMOS's annual net revenue is less than
10
$600,000, the Authority agrees to reimburse AAA $600,000 less the actual net
revenue. AAA will retain 100% of WMOS's annual net revenues between $600,000 and
$750,000, and the Authority will share one-half of annual net revenues that
exceed $750,000. Amounts to be reimbursed are assessed monthly, but payments are
calculated on a cumulative annual basis. Payments to AAA for the quarter and
nine months ended June 30, 2002 totaled $44,000 and $104,000, respectively.
These amounts represent the revenue shortfall from October 1, 2001 through June
30, 2002. As of June 30, 2002, amounts accrued totaled $44,000.
Litigation
The Authority is a defendant in certain litigation incurred in the normal course
of business. In the opinion of management, based on the advice of counsel, the
aggregate liability, if any, arising from such litigation will not have a
materially adverse effect on the Authority's financial position, results of
operations or cash flows.
NOTE 6 - TCA AGREEMENTS
Relinquishment Agreement
In February 1998, the Authority and TCA entered into an agreement (the
"Relinquishment Agreement"). Effective January 1, 2000 (the "Relinquishment
Date"), the Relinquishment Agreement superseded the September 30, 1995 Amended
and Restated Gaming Facility Management Agreement (the "Management Agreement"),
and provides that the Authority is to make certain payments to TCA out of, and
determined as a percentage of, the gross revenues generated by the Mohegan Sun
over a 15-year period commencing on the Relinquishment Date. The payments
("Senior Relinquishment Payments" and "Junior Relinquishment Payments"), each of
which are calculated as 2.5% of revenues, as defined, have separate payment
schedules and priority. Payment of Senior Relinquishment Payments commenced on
April 25, 2000, twenty-five days following the end of the first three-month
period following the Relinquishment Date, and continue at the end of each
three-month period occurring thereafter until December 31, 2014. Junior
Relinquishment Payments commenced on July 25, 2000, twenty-five days following
the end of the first six-month period following the Relinquishment Date, and
continue at the end of each six-month period occurring thereafter until December
31, 2014. Each Senior Relinquishment Payment and Junior Relinquishment Payment
is an amount equal to 2.5% of the Revenues generated by Mohegan Sun over the
immediately preceding three-month or six-month payment period, as the case may
be. "Revenues" are defined as gross gaming revenues (other than Class II gaming
revenue) and all other facility revenues (including, without limitation, hotel
revenues, room service, food and beverage sales, ticket revenues, fees or
receipts from convention/events center and all rental or other receipts from
lessees and concessionaires but not the gross receipts of such lessees, licenses
and concessionaires).
The Authority, in accordance with SFAS No. 5, "Accounting for Contingencies,"
has recorded a relinquishment liability of the estimated present value of its
obligations under the Relinquishment Agreement. A relinquishment liability of
$549.1 million was established at September 30, 1998 based on the present value
of the estimated future Mohegan Sun revenues utilizing the Authority's risk free
investment rate. At June 30, 2002, the carrying amount of the relinquishment
liability was $588.6 million as compared to $592.0 million at September 30,
2001. The decrease is due to $30.7 million in relinquishment payments, partially
offset by $27.3 million in accretion of relinquishment liability discount. Of
the $30.7 million in relinquishment payments for the nine months ended June 30,
2002, $8.1 million represents principal amounts and the remaining $22.6 million
is payment for the accretion of interest. Of the $26.1 million in
relinquishment payments made during the nine months ended June 30, 2001, $6.9
million represents principal amounts and the remaining $19.2 million is for the
accretion of interest. This accretion resulted from the impact on the discount
for the time value of money due to the passage of time. As of June 30, 2002,
relinquishment payments earned but unpaid were $20.4 million.
Development Agreement
On February 7, 1998, the Authority and TCA entered into a development services
agreement (the "Development Agreement"). Under the Development Agreement, TCA is
responsible for the administration and supervision of the construction manager
and the entire construction process of Project
11
Sunburst. TCA is acting as the Authority's representative in connection with
construction contracts that are approved by the Authority. Specifically, TCA is
responsible for overseeing all persons performing work on the expansion site,
inspecting the progress of construction, determining completion dates and
reviewing contractor payment requests submitted to the Authority.
Payment of the Development Fee
Under the Development Agreement, the Authority is required to pay to TCA a
development fee of $14.0 million. Pursuant to the payment schedule described in
the Development Agreement, on January 15, 2000, the Authority began paying the
development fee to TCA on a quarterly basis, based upon the incremental
completion as of each payment date. As of June 30, 2002, the Authority had
incurred $13.5 million related to the TCA development fee, of which $12.9
million had been paid. All amounts incurred have been included in the property,
plant and equipment section of the accompanying balance sheets.
Termination and Disputes
The Development Agreement terminates upon the earlier of (a) completion of
Project Sunburst or (b) February 7, 2008. In addition, each party has the right
to terminate the Development Agreement if there is a material default or failure
to perform a material duty or obligation by the other party. The parties must
submit disputes arising under the Development Agreement to arbitration and have
agreed that punitive damages may not be awarded to either party by an
arbitrator. The Authority has also waived sovereign immunity for the purpose of
permitting, compelling or enforcing arbitration and has agreed to be sued by TCA
in any court of competent jurisdiction for the purposes of compelling
arbitration or enforcing any arbitration or judicial award arising out of the
Development Agreement.
NOTE 7 - Restatement, Reclassification and Subsequent Events
In connection with the preparation of the Form 10-Q for the period ended June
30, 2002, the Authority determined that capitalized interest for Project
Sunburst was understated, and interest expense was overstated, for the fiscal
year ended September 30, 2001, and capitalized interest was overstated, and
interest expense was understated, for the nine months ended June 30, 2002. As a
result of this determination, the Authority announced its intention to restate
its financial statements for the quarterly periods ended December 31, 2000,
March 31, 2001, June 30, 2001, December 31, 2001 and March 31, 2002 and for the
fiscal year ended September 30, 2001 to reflect the changes in capitalized
interest and interest expense during these periods. The restatements of these
items would increase the Authority's net income by $13.2 million for the year
ended September 30, 2001 and reduce the Authority's net income by $8.4 million
for the nine months ended June 30, 2002. In addition, the Authority also has
reclassified certain other costs, expenses and balances in the financial
statements. However, these reclassifications have no effect on the Authority's
net income. Such adjustments impacted the Authority's cash flow statement
presentation between operating and investing activities.
The tables attached at the end of these notes present the anticipated impact of
the restated and reclassified information for each of the aforementioned
periods.
Certain financial information for the nine months ended June 30, 2002 and for
the interim periods for the prior year contains restated information as
described in the Authority's Current Report on Form 8-K and in the financial
information attached at the end of these notes. At this time, the information
presented herein has not been reviewed pending audit and review of financial
statements by the Authority's independent accountants.
The Authority expects to file amended Quarterly Reports on Form 10-Q for the
quarterly periods ended December 31, 2000, March 31, 2001, June 30, 2001,
December 31, 2001, March 31, 2002 and June 30, 2002 and an amended Annual Report
on Form 10-K for the fiscal year ended September 30, 2001 once the Authority's
independent accountants complete their audit of the restated financial
statements for the fiscal year ended September 30, 2001, and their reviews of
the restated financial statements for the aforementioned quarterly periods.
The Authority also received the requisite consent of its lenders to Amendment
No. 5 to the Bank Credit Facility (the "Amendment") on August 14, 2002. The
Amendment (i) expanded the definition of "approved swap agreements" and
increased the amount of approved swap agreements and other swap agreements that
may be used to secure other indebtedness of the Authority from the notional
amount of $200 million to the notional amount of $300 million and (ii) waived,
for a period of 90 days from the date of the Amendment, (a) the delivery of
audited statements for the fiscal year ended September 30, 2001 and reviewed
financial statements for the quarterly periods ended December 31, 2000, March
31, 2001, June 30, 2001, December 31, 2001 and March 31, 2002, (b) the
requirement to file amended Quarterly Reports on Form 10-Q for the quarterly
periods ended December 31, 2000, March 31, 2001, June 30, 2001, December 31,
2001 and March 31, 2002 and an amended Annual Report on Form 10-K for the fiscal
year ended September 30, 2001, (c) any defaults which may have arisen by reason
of any of the inaccuracies in the financial statements which are described above
and (d) any resulting technical non-compliance with a requirement of law.
The fact that the financial statements contained herein have not been reviewed
by an independent accountant may constitute a violation of certain covenants
under the indentures. A convenant violation of this nature could constitute a
default under the indentures if 25% of the bondholders requested the Trustee to
send a notice and 60 days passed without cure. The Authority believes that if
such notice were given, it could cure the violation within such period.
12
Mohegan Tribal Gaming Authority
Condensed Balance Sheets
(in thousands)
Previously
Reported Restated
December 31, December 31,
2000 2000
----------- -----------
(unaudited) (unaudited)
ASSETS
------
Current assets:
Total current assets $ 93,568 $ 93,568
Non-current assets:
Property and equipment, net 338,145 338,145
Construction in process 341,588 343,289
Trademark, net 122,269 122,269
Other assets, net 20,857 22,073
----------- -----------
Total assets $ 916,427 $ 919,344
=========== ===========
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations $ 2,671 $ 2,671
Current portion of relinquishment liability 61,630 61,630
Accounts payable and accrued expenses 59,331 44,536
Construction payables - 14,795
Accrued interest payable 21,250 21,250
----------- -----------
Total current liabilities 144,882 144,882
Non-current liabilities:
Long-term debt 500,000 500,000
Relinquishment liability 614,751 614,751
Capital lease obligations, net of current portion 1,650 1,650
Other long-term liabilities - 1,216
----------- -----------
Total liabilities 1,261,283 1,262,499
----------- -----------
Commitments and contingencies
Retained deficit (344,856) (343,155)
----------- -----------
Total liabilities and capital $ 916,427 $ 919,344
=========== ===========
13
Mohegan Tribal Gaming Authority
Condensed Statements of Income
(in thousands)
Previously
Reported Restated
For the For the
Quarter Ended Quarter Ended
December 31, 2000 December 31, 2000
------------------ -----------------
(unaudited) (unaudited)
Revenues:
Net revenues $ 183,090 $ 183,090
--------- ---------
Cost and expenses:
Gaming 93,301 93,301
Food and beverage 6,077 6,077
Retail and other 4,809 4,904
General and administration 27,620 27,525
Pre-opening costs 1,389 1,389
Depreciation and amortization 6,579 5,599
--------- ---------
Total costs and expenses 139,775 138,795
--------- ---------
Income from operations 43,315 44,295
--------- ---------
Other income (expense):
Relinquishment liability reassessment (8,958) -
Accretion of relinquishment liability discount - (8,958)
Interest and other income 1,164 1,164
Interest expense, net of capitalized interest (5,925) (5,204)
Change in fair value of derivative instruments (2,142) (2,142)
--------- ---------
(15,861) (15,140)
--------- ---------
Income from continuing operations 27,454 29,155
Loss from discontinued operations (192) (192)
--------- ---------
Net income $ 27,262 $ 28,963
========= =========
14
Mohegan Tribal Gaming Authority
Condensed Balance Sheets
(in thousands)
Previously
Reported Restated
March 31, March 31,
2001 2001
----------- -----------
(unaudited) (unaudited)
ASSETS
------
Current assets:
Total current assets $ 99,433 $ 99,433
Non-current assets:
Property and equipment, net 337,309 337,309
Construction in process 492,093 496,781
Trademark, net 121,410 121,410
Other assets, net 19,144 21,787
----------- -----------
Total assets $ 1,069,389 $ 1,076,720
=========== ===========
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations $ 2,721 $ 2,721
Current portion of relinquishment liability 46,508 46,508
Accounts payable and accrued expenses 72,524 51,707
Construction payables - 20,817
Accrued interest payable 11,041 11,041
----------- -----------
Total current liabilities 132,794 132,794
Non-current liabilities:
Long-term debt 628,000 628,000
Relinquishment liability 623,257 623,257
Capital lease obligations, net of current portion 950 950
Other long-term liabilities - 2,643
----------- -----------
Total liabilities 1,385,001 1,387,644
----------- -----------
Commitments and contingencies
Capital:
Retained deficit (313,321) (308,633)
Accumulated other comprehensive loss (2,291) (2,291)
----------- -----------
(315,612) (310,924)
----------- -----------
Total liabilities and capital $ 1,069,389 $ 1,076,720
=========== ===========
15
Mohegan Tribal Gaming Authority
Condensed Statements of Income
(in thousands)
Previously Previously
Reported Restated Reported Restated
For the For the For the For the
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
March 31, 2001* March 31, 2001 March 31, 2001* March 31, 2001
-------------- -------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Net revenues $ 187,780 $ 187,780 $ 370,870 $ 370,870
--------- --------- --------- ---------
Cost and expenses:
Gaming 87,122 87,122 180,423 180,423
Food and beverage 5,943 5,942 12,020 12,020
Retail and other 4,483 4,552 9,292 9,455
General and administration 26,087 26,019 53,707 53,544
Pre-opening costs 1,927 1,927 3,316 3,316
Depreciation and amortization 6,943 5,829 13,522 11,428
--------- --------- --------- ---------
Total costs and expenses 132,505 131,391 272,280 270,186
--------- --------- --------- ---------
Income from operations 55,275 56,389 98,590 100,684
--------- --------- --------- ---------
Other income (expense):
Accretion of relinquishment liability discount (8,958) (8,958) (17,916) (17,916)
Interest and other income 578 578 1,742 1,742
Interest expense, net of capitalized interest (5,890) (4,017) (11,815) (9,221)
Change in fair value of derivative instruments 865 865 (1,277) (1,277)
--------- --------- --------- ---------
(13,405) (11,532) (29,266) (26,672)
--------- --------- --------- ---------
Income from continuing operations 41,870 44,857 69,324 74,012
Loss from discontinued operations (335) (335) (527) (527)
--------- --------- --------- ---------
Net income $ 41,535 $ 44,522 $ 68,797 $ 73,485
========= ========= ========= =========
- ---------
* Previously reported in Amendment No. 1 to Form S-4 filed with the SEC on
May 21, 2002.
16
Mohegan Tribal Gaming Authority
Condensed Balance Sheets
(in thousands)
Previously
Reported Restated
June 30, June 30,
2001 2001
----------- -----------
(unaudited) (unaudited)
ASSETS
------
Current assets:
Total current assets $ 126,888 $ 126,888
Non-current assets:
Property and equipment, net 350,424 350,424
Construction in process 640,554 648,561
Trademark, net 120,551 120,551
Other assets, net 18,444 21,177
----------- -----------
Total assets $ 1,256,861 $ 1,267,601
=========== ===========
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations $ 1,739 $ 1,739
Current portion of relinquishment liability 46,897 46,897
Accounts payable and accrued expenses 79,986 52,723
Construction payables -- 27,263
Accrued interest payable 21,540 21,540
----------- -----------
Total current liabilities 150,162 150,162
Non-current liabilities:
Long-term debt 774,000 774,000
Relinquishment liability 626,736 626,736
Capital lease obligations, net of current portion 222 222
Other long-term liabilities 45 2,778
----------- -----------
Total liabilities 1,551,165 1,553,898
----------- -----------
Commitments and contingencies
Capital:
Retained deficit (292,733) (284,726)
Accumulated other comprehensive loss (1,571) (1,571)
----------- -----------
(294,304) (286,297)
----------- -----------
Total liabilities and capital $ 1,256,861 $ 1,267,601
=========== ===========
17
Mohegan Tribal Gaming Authority
Condensed Statements of Income
(in thousands)
Previously Previously
Reported Restated Reported Restated
For the For the For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
June 30, 2001 June 30, 2001 June 30, 2001 June 30, 2001
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Net revenues $ 200,542 $ 200,542 $ 571,412 $ 571,412
--------- --------- --------- ---------
Cost and expenses:
Gaming 86,965 97,601 243,123 278,023
Food and beverage 6,442 6,442 18,462 18,462
Retail and other 7,002 3,960 22,476 13,415
General and administration 32,009 24,415 103,798 77,959
Pre-opening costs 3,724 3,724 7,040 7,040
Depreciation and amortization 8,503 7,340 22,025 18,768
--------- --------- --------- ---------
Total costs and expenses 144,645 143,482 416,924 413,667
--------- --------- --------- ---------
Income from operations 55,897 57,060 154,488 157,745
--------- --------- --------- ---------
Other income (expense):
Relinquishment liability reassessment (8,958) - (26,874) -
Accretion of relinquishment liability discount - (8,958) - (26,874)
Interest and other income 648 648 2,390 2,390
Interest expense, net of capitalized interest (6,011) (3,855) (17,826) (13,076)
Loss on disposition of assets (114) (114) (114) (114)
Change in fair value of derivative instruments (810) (810) (2,088) (2,088)
--------- --------- --------- ---------
(15,245) (13,089) (44,512) (39,762)
--------- --------- --------- ---------
Income from continuing operations 40,652 43,971 109,976 117,983
Loss from discontinued operations (64) (64) (591) (591)
--------- --------- --------- ---------
Net income $ 40,588 $ 43,907 $ 109,385 $ 117,392
========= ========= ========= =========
18
Mohegan Tribal Gaming Authority
Condensed Balance Sheets
(in thousands)
Previously Restated
Reported September 30,
September 30, 2001
2001* (unaudited)
----------- -----------
ASSETS
------
Current assets:
Total current assets $ 105,608 $ 105,608
Non-current assets:
Property and equipment, net 935,016 935,016
Construction in process 267,653 280,832
Trademark, net 119,692 119,692
Other assets, net 24,766 24,766
----------- -----------
Total assets $ 1,452,735 $ 1,465,914
=========== ===========
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations $ 1,514 $ 1,514
Current portion of relinquishment liability 68,272 68,272
Accounts payable and accrued expenses 139,316 73,548
Construction payables -- 65,768
Accrued interest payable 13,062 13,062
----------- -----------
Total current liabilities 222,164 222,164
Non-current liabilities:
Long-term debt 908,000 908,000
Relinquishment liability, net of current portion 523,736 523,736
Other long-term liabilities 5,232 5,232
----------- -----------
Total liabilities 1,659,132 1,659,132
----------- -----------
Commitments and contingencies
Capital:
Retained deficit (201,270) (188,091)
Accumulated other comprehensive loss (5,127) (5,127)
----------- -----------
Total capital (206,397) (193,218)
----------- -----------
Total liabilities and capital $ 1,452,735 $ 1,465,914
=========== ===========
- -----------
* Previously reported in Amendment No. 1 to Form S-4 filed with the SEC
on May 21, 2002.
19
Mohegan Tribal Gaming Authority
Condensed Statements of Income
(in thousands)
Previously Restated
Reported For the Year Ended
For the Year Ended September 30, 2001
September 30, 2001* (unaudited)
------------------ ------------------
Revenues:
Net revenues $ 786,605 $ 786,605
--------- ---------
Cost and expenses:
Gaming 334,537 382,171
Food and beverage 24,447 24,447
Retail, entertainment and other 32,114 19,952
General and administration 139,343 103,871
Pre-opening costs 31,344 31,344
Depreciation and amortization 34,753 30,217
Relinquishment liability reassessment (74,410) (74,410)
--------- ---------
Total costs and expenses 522,128 517,592
--------- ---------
Income from operations 264,477 269,013
--------- ---------
Other income (expense):
Accretion of relinquishment liability discount (35,833) (35,833)
Interest and other income 2,920 2,920
Interest expense, net of capitalized interest (25,060) (16,417)
Other expense (116) (116)
Change in fair value of derivative instruments (949) (949)
--------- ---------
(59,038) (50,395)
--------- ---------
Income from continuing operations 205,439 218,618
Loss from discontinued operations (591) (591)
--------- ---------
Net income $ 204,848 $ 218,027
========= =========
- -----
* Previously reported in Amendment No. 1 to Form S-4 filed with the SEC on
May 21, 2002.
20
Mohegan Tribal Gaming Authority
Condensed Balance Sheets
(in thousands)
Previously
Reported Restated
December 31, December 31,
2001 2001
----------- -----------
(unaudited) (unaudited)
ASSETS
------
Current assets:
Total current assets $ 120,019 $ 120,019
Non-current assets:
Property and equipment, net 983,973 983,973
Construction in process 318,490 329,095
Trademark, net 119,692 119,692
Other assets, net 25,189 25,189
----------- -----------
Total assets $ 1,567,363 $ 1,577,968
=========== ===========
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations $ -- $ --
Current portion of relinquishment liability 75,436 75,436
Accounts payable and accrued expenses 155,646 100,354
Construction accounts payable -- 55,292
Accrued interest payable 26,859 26,859
----------- -----------
Total current liabilities 257,941 257,941
Non-current liabilities:
Long-term debt 990,000 990,000
Relinquishment liability 519,890 519,890
Other long-term liabilities 5,088 5,088
----------- -----------
Total Liabilities 1,772,919 1,772,919
----------- -----------
Capital:
Retained deficit (200,626) (190,021)
Accumulated other comprehensive loss (4,930) (4,930)
----------- -----------
Total capital (205,556) (194,951)
----------- -----------
Total liabilities and capital $ 1,567,363 $ 1,577,968
=========== ===========
21
Mohegan Tribal Gaming Authority
Condensed Statements of Income
(in thousands)
Previously
Reported Restated
For the For the
Quarter Ended Quarter Ended
December 31, 2001 December 31, 2001
----------------- -----------------
(unaudited) (unaudited)
Revenues:
Net revenues $ 241,476 $ 241,476
--------- ---------
Cost and expenses:
Gaming 134,209 134,209
Food and beverage 9,917 9,917
Retail, entertainment and other 9,026 9,026
General and administration 37,977 37,977
Pre-opening costs 1,657 1,657
Depreciation and amortization 17,263 15,982
--------- ---------
Total costs and expenses 210,049 208,768
--------- ---------
Income from operations 31,427 32,708
--------- ---------
Other income (expense):
Accretion of relinquishment liability discount (9,083) (9,083)
Interest and other income 123 123
Interest expense, net (14,799) (18,654)
Other non-operating expense (37) (37)
Change in fair value of derivative instruments (16) (16)
--------- ---------
(23,812) (27,667)
--------- ---------
Net income $ 7,615 $ 5,041
========= =========
22
Mohegan Tribal Gaming Authority
Condensed Balance Sheets
(in thousands)
Previously
Reported Restated
March 31, March 31,
2002 2002
----------- -----------
(unaudited) (unaudited)
ASSETS
------
Current assets:
Total current assets $ 121,070 $ 121,070
Non-current assets:
Property and equipment, net 1,044,552 1,044,552
Construction in process 340,244 349,274
Trademark, net 119,692 119,692
Other assets, net 29,131 28,305
----------- -----------
Total assets 1,654,689 1,662,893
=========== ===========
LIABILITIES AND CAPITAL
-----------------------
Total liabilities 1,848,715 1,848,715
----------- -----------
Capital:
Retained deficit (190,357) (182,153)
Accumulated other comprehensive loss (3,669) (3,669)
----------- -----------
(194,026) (185,822)
----------- -----------
Total liabilities and capital $ 1,654,689 $ 1,662,893
=========== ===========
23
Mohegan Tribal Gaming Authority
Condensed Statements of Income
(in thousands)
Previously Previously
Reported Restated Reported Restated
For the For the For the For the
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
March 31, 2002 March 31, 2002 March 31, 2002 March 31, 2002
-------------- -------------- ---------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Net revenues $ 234,682 $ 234,682 $ 476,158 $ 476,158
--------- --------- --------- ---------
Cost and expenses:
Gaming 120,522 120,522 254,731 254,731
Food and beverage 9,097 9,097 19,014 19,014
Retail, entertainment and other 5,940 5,940 14,966 14,966
General and administration 30,962 30,962 68,939 68,939
Pre-opening costs 2,006 2,006 3,663 3,663
Depreciation and amortization 20,013 18,596 37,276 34,578
--------- --------- --------- ---------
Total costs and expenses 188,540 187,123 398,589 395,891
--------- --------- --------- ---------
Income from operations 46,142 47,559 77,569 80,267
--------- --------- --------- ---------
Other income (expense):
Accretion of relinquishment liability discount (9,084) (9,084) (18,167) (18,167)
Interest and other income 117 117 240 240
Interest expense, net of capitalized interest (17,147) (20,965) (31,946) (39,619)
Other non-operating expense (50) (50) (87) (87)
Change in fair value of derivative instruments 11 11 (5) (5)
--------- --------- --------- ---------
(26,153) (29,971) (49,965) (57,638)
--------- --------- --------- ---------
Net income $ 19,989 $ 17,588 $ 27,604 $ 22,629
========= ========= ========= =========
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Authority's financial statements and the related notes beginning on page 1 of
this Form 10-Q.
Forward Looking Statements
Some information included in this Quarterly Report and other materials filed by
the Authority with the Securities and Exchange Commission contain
forward-looking statements, within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements include information relating to plans for future expansion and other
business development activities, as well as other capital spending, financing
sources and the effects of regulation (including gaming and tax regulation) and
competition. These statements can sometimes be identified by our use of
forward-looking words such as "may," "will," "anticipate," "estimate," "expect,"
or "intend" and similar expressions. Such forward-looking information involves
important risks and uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may differ materially from
those expressed in any forward-looking statements made by or on behalf of the
Authority. These risks and uncertainties include, but are not limited to, those
relating to development and construction activities, dependence on existing
management, leverage and debt service, domestic or global economic conditions,
pending litigation, changes in federal tax laws or the administration of such
laws and changes in gaming laws or regulations (including the legalization of
gaming in certain jurisdictions). Additional information concerning potential
factors that could affect the Authority's financial results are included in the
Authority's Form 10-K for the fiscal year ended September 30, 2001, Forms 10-Q
for the quarters ended December 31, 2001 and March 31, 2002, the Authority's
Form 8-K filed on August 19, 2002 and the Authority's quarterly reports on Form
10-Q to be filed after this quarterly report, as well as the Authority's other
reports and filings with the SEC. The forward-looking statements included in
this Quarterly Report on Form 10-Q are made only as of the date of this report.
The Authority does not have and the Authority does not undertake any obligation
to publicly update any forward-looking statements to reflect subsequent events
or circumstances. The Authority can not assure you that projected results or
events will be achieved.
Overview
The Tribe and the Authority
The Tribe is a federally recognized Indian tribe with an approximately 405-acre
reservation situated in southeastern Connecticut. Under the Indian Gaming
Regulatory Act, federally recognized Indian tribes are permitted to conduct
full-scale casino gaming operations on tribal land, subject to, among other
things, the negotiation of a gaming compact with the state in which they
operate. The Tribe and the State of Connecticut have entered into such a compact
that has been approved by the United States Secretary of the Interior. The
Tribe's gaming operation is one of only two legally authorized gaming operations
in New England offering traditional slot machines and table games. The Tribe has
established an instrumentality, the Authority, with the exclusive power to
conduct and regulate gaming activities on the existing reservation of the Tribe
located in Uncasville, Connecticut. The Authority is governed by a Management
Board, consisting of the same nine members of the Mohegan Tribal Council.
Mohegan Sun
In October 1996, the Authority opened a gaming and entertainment complex known
as Mohegan Sun. Mohegan Sun is situated in southeastern Connecticut on a
240-acre site on the Tribe's reservation overlooking the Thames River with
direct access from Routes I-395 and 2A via a four-lane access road constructed
by the Authority. Mohegan Sun is located approximately 125 miles from New York
City and approximately 100 miles from Boston, Massachusetts. The Authority has
recently completed a major expansion of Mohegan Sun known as Project Sunburst.
The first phase of Project Sunburst, the Casino of the Sky, including increased
gaming, restaurant and retail space and an entertainment arena, opened on
September 25, 2001. The remaining components, including the majority of a
1,200-room luxury hotel and approximately 100,000 square feet of convention
space, opened in April 2002, with substantial completion of construction
occurring in June 2002.
25
Mohegan Sun operates in an approximately 3.0 million square foot facility which
includes the following two casinos:
Casino of the Earth. The Casino of the Earth, the original casino at Mohegan
Sun, has approximately 176,500 square feet of gaming space and offers:
. approximately 3,641 slot machines, 164 table games (including blackjack,
roulette, craps and baccarat) and 40 poker tables;
. food and beverage amenities, including three full-service themed fine
dining restaurants, a 680-seat buffet, a New York style delicatessen, a
24-hour coffee shop, a ten-station food court featuring international and
domestic cuisine and multiple service bars for a total of approximately
1,800 restaurant seats;
. an approximately 10,000 square foot, 400-seat lounge featuring live
entertainment seven days a week;
. an approximately 9,000 square foot simulcasting race book facility;
. an approximately 3,000 square foot, 50-seat Keno lounge; and
. three retail shops providing shopping opportunities ranging from
souvenirs to clothing to cigars.
Casino of the Sky. The Casino of the Sky has approximately 119,000 square feet
of gaming space and offers:
. approximately 2,560 slot machines and 82 table games (including
blackjack, roulette, craps and baccarat);
. food and beverage amenities, including two full-service restaurants,
three quick-service restaurants, a 350-seat buffet and four lounges
operated by Mohegan Sun, as well as four full-service and three
quick-service restaurants operated by third-parties, for a total of
approximately 2,200 restaurant seats;
. the Mohegan Sun Arena with seating for up to 10,000;
. a 300-seat cabaret;
. an arcade-style recreation area and a child care facility;
. the Shops at Mohegan Sun containing approximately 30 different retail
shops, five of which are owned by the Authority;
. a 1,200-room luxury hotel;
. a 20,000 square foot spa; and
. 100,000 square feet of convention space.
Mohegan Sun currently has parking spaces for approximately 12,941 guests and
3,075 employees. In addition, the Authority operates an approximately 4,000
square foot, 20-pump gasoline and convenience center located adjacent to Mohegan
Sun.
Additional Mohegan Sun Enhancements
In addition to Project Sunburst, the Authority has completed the following
capital improvements to the Mohegan Sun facility:
Parking Garages. Capital expenditures for the $65.0 million Indian Summer
Garage, a 2,700-space patron parking garage, totaled $56.0 million for the nine
months ending June 30, 2002. Cumulative expenditures
26
totaled $60.5 million as of June 30, 2002. The Authority expects that the
remaining $4.5 million will be spent in the fourth quarter of fiscal year 2002.
The Indian Summer Garage opened in June 2002.
Capital expenditures for the $25.0 million, 1,700-space Thames Garage totaled
$22.7 million for the nine months ended June 30, 2002, and the remaining $2.3
million will be spent in the fourth quarter of fiscal year 2002. The Thames
Garage opened in April 2002.
Project Sunburst Utilities. The Authority has constructed various utility
upgrades and enhancements needed to support Project Sunburst. These improvements
originally were to be financed entirely by the Tribe from the proceeds of
tax-exempt financing. The Tribe, however, subsequently received an opinion from
its outside legal counsel advising it that a portion of the costs for these
improvements would not qualify for tax-exempt financing. Therefore, the
Authority will pay for this portion of the total costs, which we expect will
equal the budget of approximately $35.0 million. These improvements were
completed concurrently with the opening of certain components of Project
Sunburst in April 2002.
Other Reservation Enhancements
Child Development Center. The Tribe is constructing a 36,000 square foot
employee day care facility which will enhance the benefits and services provided
to employees of both the Tribe and of the Authority. The project is expected to
cost approximately $13.0 million. The Authority originally paid $1.1 million of
the facility's cost; however, that amount was later fully reimbursed by the
Tribe. The Tribe will pay all future expenditures related to this project.
Construction began in November 2001, and the Tribe anticipates that the project
will be completed in January 2003.
Explanation of Key Financial Statement Captions
Gross revenues. The Authority's gross revenues are derived mostly from the
following four sources:
. Gaming revenues, which include revenues from slot machines, table games,
keno and racebook;
. Food and beverage sales;
. Hotel revenues; and
. Retail, entertainment and other revenues, which include revenues from the
Mohegan Sun managed retail outlets and the Mohegan Sun Arena.
The table below summarizes the Authority's percentage of gross revenues from
each of these sources:
For the Quarter For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
-------- --------- --------- ---------
Gaming ................................................... 85% 88% 87% 88%
Food and beverage ........................................ 7% 6% 6% 6%
Hotel .................................................... 2% 0% 1% 0%
Retail, entertainment and other .......................... 6% 6% 6% 6%
-------- --------- -------- ---------
Total .......................................... 100% 100% 100% 100%
Slot win. Gross slot win represents all amounts played in the slot machines
reduced by both (1) the winnings paid out and (2) all amounts deposited by the
Authority into the slot machines to ensure sufficient coins in each machine to
pay out the winnings. Progressive slot machines retain some of each amount
wagered and aggregate these amounts with similar amounts from other slot
machines in order to create one-time winnings that are substantially larger than
those paid in the ordinary course. The Authority refers to such aggregated
amounts as progressive jackpots. In-house progressive jackpot amounts are
accrued by the
27
Authority until paid and such accrued amounts are deducted from gross slot win
to arrive at net slot win. Wide-area progressive jackpot amounts are paid by a
third-party vendor, and the Authority remits a fixed monthly payment to the
vendor, which is deducted from gross slot win.
Casino revenues and promotional allowances. The Authority recognizes casino
revenue as gaming wins less gaming losses. Revenues from food and beverages,
hotel, retail and entertainment events are recognized at the time the service is
performed. The Authority operates the Mohegan Sun complimentary program in which
food, beverages, hotel, retail, entertainment and other services are provided to
guests based on points that are earned through the Mohegan Sun Player's Club.
The retail value of these complimentary items is included in gross revenue and
then deducted as promotional allowances, except for the redemption at third
party retail tenants at the Shops at Mohegan Sun and from a catalog program, the
Sun Select Catalog, which includes vacations, electronics and gift items, to
arrive at net revenues. The estimated cost of providing these promotional
allowances is charged to the casino department in the following amounts:
For the For the For the For the
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- ----------- ------------
Food and beverage .................. $ 5,261 $ 6,565 $ 19,883 $ 18,879
Hotel .............................. 1,885 - 1,885 -
Retail, entertainment and other .... 6,581 8,697 18,358 22,437
-------- -------- --------- ----------
Total .............................. $ 13,727 $ 15,262 $ 40,126 $ 41,316
======== ======== ========= ==========
Mohegan Sun Player's Club. The Mohegan Sun Player's Club is a voluntary program,
without membership fees, which awards points to members based on their gaming
activities. These points may be used to purchase items at restaurants located
within Mohegan Sun, and the Mohegan Sun gasoline and convenience center, as well
as to purchase tickets to entertainment events held at the Mohegan Sun
facilities. These points may also be used to purchase items at the Shops at
Mohegan Sun and from the Sun Select Catalog. The Authority accrues for Player's
Club points expected to be redeemed in the future based on the average cost to
the Authority of items expected to be redeemed, and includes the related cost in
gaming expenses in the Authority's income statement.
Gaming expenses. Gaming expenses primarily include the Slot Win Contribution
which the Authority is required to pay to the State of Connecticut, expenses
associated with slot operations and table game expenses and promotional expenses
for the redemption of the Mohegan Sun Player's Club points in third party
locations, including the Shops at Mohegan Sun and the Sun Select Catalog.
EBITDA and Adjusted EBITDA. EBITDA represents earnings before interest, income
taxes, depreciation and amortization. The EBITDA margin is calculated as EBITDA
as a percentage of net revenue. Adjusted EBITDA represents further adjustments
to EBITDA to remove the effects of pre-opening costs and certain other
non-operating income/expense. The Adjusted EBITDA margin is calculated as
Adjusted EBITDA as a percentage of net revenue. Adjusted EBITDA should not be
considered as an alternative to any measure of performance as promulgated under
accounting principles generally accepted in the United States of America (such
as operating income or net income), nor should it be considered as an indicator
of the Authority's overall financial performance. The Authority's calculation of
Adjusted EBITDA is likely to be different from the calculation of EBITDA or
similar measurements used by other companies and therefore comparability may be
limited. EBITDA and Adjusted EBITDA are computed as follows:
28
-------------------------------- ----------------------------------
For the For the For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
(unaudited) (unaudited and (unaudited) (unaudited and
restated - restated -
See note 7 to) See note 7 to)
the accompanying the accompanying
financial statement) financial statement)
EBITDA
Net income $ 17,963 $ 43,907 $ 40,592 $ 117,392
Add back:
Interest expense, net of capitalized interest 23,395 3,855 63,014 13,076
Interest income (95) (648) (335) (2,390)
Income taxes - - - -
Depreciation and amortization 20,841 7,340 55,419 18,768
-------- -------- --------- ---------
EBITDA $ 62,104 $ 54,454 $ 158,690 $ 146,846
-------- -------- --------- ---------
EBITDA Margin 23.5% 27.2% 21.4% 25.7%
Adjustments to EBITDA to
reconcile to Adjusted EBITDA
Pre-opening expense $ 4,092 $ 3,724 $ 7,755 $ 7,040
Accretion of relinquishment liability discount 9,083 8,958 27,250 26,874
Other non-operating costs 50 114 137 114
Change in fair value of derivative instruments (23) 810 (18) 2,088
Discontinued operations - 64 - 591
-------- -------- --------- ---------
Adjusted EBITDA $ 75,306 $ 68,124 $ 193,814 $ 183,553
======== ======== ========= =========
Adjusted EBITDA Margin 28.6% 34.0% 26.2% 32.1%
Accretion on relinquishment liability discount and reassessment of
relinquishment liability. The Authority stopped paying management fees to TCA
due to the termination of the Management Agreement and began paying fees under
the Relinquishment Agreement beginning January 1, 2000. Under the Management
Agreement, TCA was responsible for the day-to-day management, operation and
maintenance of Mohegan Sun. The Management Agreement authorized TCA to pay
itself a management fee in monthly installments based on 30% to 40% of net
income, before management fees, as defined in the Management Agreement,
depending on profitability levels. Under the Relinquishment Agreement, the
Authority and TCA agreed to terminate the Management Agreement with TCA on
January 1, 2000. To compensate TCA for terminating its management rights, the
Authority agreed to pay to TCA five percent of the revenues, as defined in the
Relinquishment Agreement, generated by Mohegan Sun (including Project Sunburst)
during the 15-year period commencing on January 1, 2000 and ending on December
31, 2014.
The Authority has recorded a relinquishment liability of the estimated present
value of its obligations under the Relinquishment Agreement. The relinquishment
liability is reassessed when necessary to account for material increases or
decreases in projected revenues as well as the effect of the passage of time on
the present value of the future payments to be made pursuant to the
Relinquishment Agreement. In addition, the Authority has capitalized $130.0
million of this relinquishment liability in connection with the trademark value
of the Mohegan Sun brand name. The Authority adopted SFAS No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142") on October 1, 2001. Under SFAS 142, the
Mohegan Sun trademark is no longer subject to amortization over its estimated
useful life as it has been deemed to have an indefinite useful life. However,
SFAS 142 requires the trademark to be evaluated at least annually for impairment
by applying a fair-value based test and, if impairment occurs, the amount of
impaired trademark must be written off immediately. With the adoption of SFAS
142, the Authority no longer records amortization of the trademark. See Note 6
to the Authority's financial statements beginning on page 11 for a further
discussion of how the relinquishment liability and related reassessments are
calculated.
Results of Operations
Comparison of Operating Results for the Quarters Ended June 30, 2002 and 2001:
29
Net revenues for the quarter ended June 30, 2002 increased by $63.2 million, or
31.5%, to $263.7 million from $200.5 million reported for the same period of the
prior year. This increase primarily is attributable to an increase in gaming,
food and beverage, and hotel revenues due to the opening of the Casino of the
Sky on September 25, 2001 and the opening of the convention center and the hotel
in April 2002.
Adjusted EBITDA for the quarter ended June 30, 2002 increased by $7.2 million,
or 10.5%, to $75.3 million from $68.1 million for the quarter ended June 30,
2001. Mohegan Sun achieved a 28.6% Adjusted EBITDA margin for the quarter ended
June 30, 2002 compared to a 34.0% Adjusted EBITDA margin for the quarter ended
June 30, 2001. The decline in the margin was the result of increased labor,
marketing and operating expenses related to operating the expanded facility. The
Authority relies heavily on drive-in traffic, and the Authority believes that
its ability to host events in the arena on weekends and to otherwise accommodate
guests during peak periods have been limited until recently when the parking
enhancements provided by the Thames Garage and the Indian Summer Garage were
fully completed in April and June 2002, respectively. Accordingly, operating
revenues and margins have been negatively impacted during the quarter ended June
30, 2002. See "Overview - Additional Mohegan Sun Enhancements - Parking Garages"
and "Liquidity, Capital Resources and Capital Spending - Capital Expenditures"
for a discussion of parking enhancements.
The Connecticut slot market grew at a rate of 10.4% from the quarter ended June
30, 2001 to the quarter ended June 30, 2002. The State of Connecticut reported a
gross slot win of $382.9 million and $346.7 million for the quarters ended June
30, 2002 and 2001, respectively. Mohegan Sun exceeded the market's growth in
slot win as it experienced an increase in gross slot revenues of 21.2% in the
quarter ended June 30, 2002 over the quarter ended June 30, 2001. Gross slot
revenues were $182.4 million and $150.5 million for the quarters ended June 30,
2002 and 2001, respectively. Gross slot win per unit per day was $323 and $466
for the respective periods. The decrease in gross slot win per unit was due to
an increase in the weighted average number of slot machines from approximately
3,546 in the quarter ended June 30, 2001 to approximately 6,199 in the quarter
ended June 30, 2002. The increase in weighted average slot machines is primarily
attributable to the opening of the Casino of the Sky, which added a total of
approximately 2,500 slot machines to Mohegan Sun.
Gaming revenues for the quarter ended June 30, 2002 increased by $50.4 million,
or 26.2%, to $242.4 million from $192.1 million for the quarter ended June 30,
2001. This increase is due to a 21.0% growth in net slot machine revenues and a
45.1% increase in table game revenues as a result of the opening of the Casino
of the Sky.
Food and beverage revenues for the quarter ended June 30, 2002 increased by $6.6
million, or 51.1%, to $19.4 million from $12.8 million for the quarter ended
June 30, 2001. This increase is attributable to a 40.9% increase in meals served
for the quarter ended June 30, 2002, as compared to the same period in the prior
year, and a higher average sale per check. Meals served increased 408,000 or
40.9% to 1.4 million from 997,000 for the same period in the prior year. The
average sale per check was $12.12 for the quarter ended June 30, 2002, as
compared to $11.84 for the same period in the prior year. The increases in meals
served and higher average sale per check are primarily associated with the new
Project Sunburst restaurants which include the 350-seat Sunburst Buffet, the
Rising Moon Gallery of Eateries, Fidelia's, Rain and Tuscany.
Hotel revenues for the quarter ended June 30, 2002 were $6.8 million due to the
opening of the Mohegan Sun hotel in April 2002. Average daily room rates were
$178 for the quarter ended June 30, 2002 with an occupancy rate of 69%. Revenue
per available room was $119. There were no hotel revenues for the quarter ended
June 30, 2001.
Retail, entertainment and other revenues increased $1.6 million or 11.2% to
$15.6 million for the quarter ended June 30, 2002 from $14.0 million for the
same period in the prior year. Entertainment revenue increased primarily due to
the opening of the Mohegan Sun Arena on September 25, 2001. Additional increases
are attributable to an increase in other revenue associated with the rental
income earned from third party retail tenants in the Shops at Mohegan Sun. There
were 18 Mohegan Sun Arena events and 72 Cabaret events held during the quarter.
Average ticket price for the Mohegan Sun Arena events was $26, while the average
ticket price for Cabaret events was $13. The increase is partially offset by a
decrease in
30
retail revenues from Mohegan Sun operated outlets. Retail revenues decreased by
$2.0 million or 16.1% to $10.7 million for the quarter ended June 30, 2002 from
$12.7 million for the same period in the prior year.
Promotional allowances for the quarter ended June 30, 2002 increased by $2.1
million, or 11.3%, to $20.5 million from $18.4 million for the quarter ended
June 30, 2001. The increase is attributable to the addition of hotel
complimentaries of $2.7 million, partially offset by decreases in retail and gas
complimentaries. The decrease in retail and gas complimentaries is due to the
shift in patronage from Mohegan Sun retail outlets to the third party retail
tenants in the Shops at Mohegan Sun. These expenses related to the Shops at
Mohegan Sun are included in gaming expenses. Effective with the opening of the
first phase of Project Sunburst, members of the Mohegan Sun Player's Club were
eligible to redeem points at these tenant outlets.
Total costs and expenses for the quarter ended June 30, 2002 increased by $69.9
million, or 48.7%, to $213.4 million from $143.5 million for the quarter ended
June 30, 2001. The increase is primarily the result of supporting a $65.3
million increase in gross revenues.
Gaming costs and expenses for the quarter ended June 30, 2002 increased by $34.2
million, or 35.0%, to $131.8 million from $97.6 million for the quarter ended
June 30, 2001. The majority of the increase is attributable to additional labor
costs associated with the approximately 90-unit increase in table games and the
addition of approximately 2,500 slot machines associated with the opening of the
Casino of the Sky. The Slot Win Contribution payments to the State of
Connecticut also have contributed to the increase in gaming costs and expenses.
The Authority reflected expenses associated with the Slot Win Contribution
totaling $45.6 million and $37.6 million, respectively, for the quarters ended
June 30, 2002 and 2001. Also, the point redemption by Mohegan Sun Player's Club
patrons in the third party retail tenant Shops at Mohegan Sun resulted in an
increase in Mohegan Sun's gaming expenses for the quarter ended June 30, 2002.
Gaming costs and expenses as a percentage of gaming revenues were 54.4% in the
quarter ended June 30, 2002 compared to 50.8% in the same period of the prior
year, an increase of 3.6 percentage points.
Food and beverage costs and expenses for the quarter ended June 30, 2002
increased by $4.6 million, or 71.1%, to $11.0 million from $6.4 million in
expenses for the quarter ended June 30, 2001. These increases are the result of
higher food and beverage operating costs, particularly labor costs and other
operating expenses related to the opening of the Rising Moon Gallery of
Eateries, a 350-seat Sunburst Buffet, Fidelia's, Rain, and Tuscany. Also
contributing to the food and beverage costs were banquets and room service
associated with the opening of the Mohegan Sun hotel. The opening of these
additional outlets resulted in an increase in the number of meals served, or
food covers, from 997,000 in the quarter ended June 30, 2001 to 1.4 million in
the quarter ended June 30, 2002, a 40.9% increase. The cost of sales for food
calculated as a percentage of food revenue was 33.1% for the quarter ended June
30, 2002 compared to 34.9% for the quarter ended June 30, 2001.
Hotel costs and expenses for the quarter ended June 30, 2002 were $1.4 million
due to the opening of the Mohegan Sun hotel in April 2002.
Retail, entertainment and other costs and expenses for the quarter ended June
30, 2002 increased by $1.2 million, or 30.5%, to $5.2 million from $4.0 million
for the quarter ended June 30, 2002. The increase is mainly attributable to a
$2.2 million increase in entertainment costs associated with events held in the
Mohegan Sun Arena during the quarter ended June 30, 2002. Some of these events
included an HBO boxing match with Arturo Gatti vs. Micky Ward, concerts by
Brooks and Dunn, ZZ Top, Alan Jackson and Cher, Summer Music Mania, a special
televised by the Fox network, a CBS television special by Marc Anthony, a
stand-up comedy performance by Steve Harvey, seven Arena Football games and
World Wrestling Entertainment event. The increase in entertainment costs is
partially offset by a decrease in retail and gas station expenses of $1.2
million for the quarter ended June 30, 2002 compared to the prior year. This
decrease was primarily attributable to lower retail sales in Mohegan Sun
operated retail shops as a result of the addition of the Shops at Mohegan Sun.
During the quarter ended June 30, 2002, Mohegan Sun added two retail shops
including a Joseph Abboud Menswear and Sun Shoes.
31
General and administrative costs and expenses for the quarter ended June 30,
2002 increased by $14.7 million, or 60.0%, to $39.1 million from the $24.4
million for the quarter ended June 30, 2001. This increase is primarily
associated with costs to operate the expanded facility such as utilities,
engineering, risk management and environmental services, and advertising
expenses targeted to promote Mohegan Sun through all major media outlets.
Pre-opening costs and expenses during the quarter and substantially associated
with the June 21 and June 22, 2002 grand opening celebration were $4.1 million
for the quarter ended June 30, 2002 compared to $3.7 million in pre-opening
expenses (relating to the opening of the first phase of Project Sunburst) for
the quarter ended June 30, 2001. The grand opening weekend celebration of the
1,200-room, luxury Mohegan Sun hotel included performances by Cher, The Blues
Brothers, Rosie O'Donnell, Ray Charles and Aretha Franklin.
Depreciation and amortization for the quarter ended June 30, 2002 increased by
$13.5 million, or 183.9%, to $20.8 million from $7.3 million for the quarter
ended June 30, 2001. This increase was a result of $1.0 billion of assets
related to Project Sunburst, including $49.6 million of capitalized interest,
placed in service between the opening of the first phase of Project Sunburst in
September 2001 and the completion of the second phase of Project Sunburst in
June 2002.
Income from operations for the quarter ended June 30, 2002 decreased by $6.7
million, or 11.7%, to $50.4 million from $57.1 million for the quarter ended
June 30, 2001. This decrease is attributable to increases in costs and expenses
associated with the expansion of Mohegan Sun and increases in depreciation and
amortization associated with the completion of Project Sunburst, which included
the opening of the Casino of the Sky, the Shops at Mohegan Sun and the
10,000-seat Mohegan Sun Arena.
Accretion of the discount associated with the relinquishment liability
reassessment for the quarter ended June 30, 2002 increased by $125,000, or 1.4%,
to $9.1 million from $9.0 million for the quarter ended June 30, 2001.
Interest and other income for the quarter ended June 30, 2002 decreased by
$553,000, or 85.3%, to $95,000 from $648,000 in income for the quarter ended
June 30, 2001. The decrease in interest income resulted from the liquidation of
investments to fund Project Sunburst plus a decline in return on the invested
assets. The weighted average invested cash was $17.5 million and $39.3 million
for the quarters ended June 30, 2002 and June 30, 2001, respectively. The
Authority invests in investment-grade commercial paper having maturities of not
more than six months from the date of acquisition.
Interest expense for the quarter ended June 30, 2002 increased by $19.5 million,
or 506.9%, to $23.4 million from $3.9 million in expense for the quarter ended
June 30, 2001. This increase is mainly attributable to higher average debt
outstanding and a decrease in the amount of capitalized interest as a result of
the decrease in the weighted average cumulative expenditures for the period due
to the opening of the first phase of Project Sunburst in September 2001 and the
completion of the second phase of Project Sunburst in June 2002. The weighted
average outstanding debt was $1.1 billion for the quarter ended June 30, 2002,
compared to $730.7 million for the quarter ended June 30, 2001. Capitalized
interest was $660,000 for the quarter ended June 30, 2002 compared to $10.8
million for the same period in the prior year. The weighted average interest
rate for the quarter ended June 30, 2002 was 7.59%, compared to 7.67% for the
quarter ended June 30, 2001.
Loss from discontinued operations associated with the conversion of the bingo
hall into the smoke-free Hall of the Lost Tribes slot machine venue totaled
$64,000 for the quarter ended June 30, 2001. There was no loss from discontinued
operations for the quarter ended June 30, 2002.
Net income for the quarter ended June 30, 2002 decreased by $25.9 million, or
59.1%, to $18.0 million from $43.9 million for the quarter ended June 30, 2001.
The decrease is primarily due to the increase in
32
interest expense and depreciation and amortization. Interest expense increased
by $19.5 million during the quarter ended June 30, 2002 contributing to the
reduction in net income. This increase is mainly attributable to higher average
debt outstanding and a decrease in capitalized interest as a result of the
decrease in the weighted average cumulative expenditures for the period due to
the opening of the first phase of Project Sunburst in September 2001 and the
completion of the second phase of Project Sunburst in June 2002. The weighted
average outstanding debt was $1.1 billion for the quarter ended June 30, 2002,
compared to $730.7 million for the quarter ended June 30, 2001. Depreciation and
amortization increased by $13.5 million for the quarter ended June 30, 2002, due
to the placing in service of assets related to Project Sunburst.
Comparison of Operating Results for the Nine Months Ended June 30, 2002 and
2001:
Net revenues for the nine months ended June 30, 2002 increased by $168.5
million, or 29.5%, to $739.9 million from $571.4 million reported for the same
period of the prior year. This increase is primarily attributable to an increase
in gaming, food and beverage, and hotel revenues due to the opening of the first
phase of Project Sunburst in September 2001 and the completion of the second
phase of Project Sunburst in June 2002.
Adjusted EBITDA for the nine months ended June 30, 2002 increased by $10.3
million, or 5.6%, to $193.8 million from $183.6 million for the nine months
ended June 30, 2001. Mohegan Sun achieved a 26.2% Adjusted EBITDA margin for the
nine months ended June 30, 2002 compared to a 32.1% Adjusted EBITDA margin for
the nine months ended June 30, 2001. The decline in the margin was the result of
increased labor, marketing and operating expenses related to operating the
expanded Mohegan Sun facility. Additionally, the unfavorable variance due to the
mitigated revenue growth can be attributed to the impact of the weakened
economy. The Authority relies heavily on drive-in traffic, and the Authority
believes that its ability to host events in the arena on weekends and to
otherwise accommodate guests during peak periods has been limited until recently
when the parking enhancements provided by the Thames Garage and the Indian
Summer Garage were fully completed in April and June 2002, respectively. See
"Overview-Additional Mohegan Sun Enhancements-Parking Garages" and "Liquidity,
Capital Resources and Capital Spending-Capital Expenditures" for a discussion of
parking enhancements.
The Connecticut slot market grew at a rate of 13.1% for the nine months ending
June 30, 2002. The State of Connecticut reported a gross slot win of $1.1
billion and $973.5 million for the nine months ended June 30, 2002 and 2001,
respectively. Mohegan Sun exceeded the market's growth in slot win as it
experienced an increase in gross slot revenues of 24.3% in the nine months ended
June 30, 2002 over the nine months ended June 30, 2001. Mohegan Sun gross slot
revenues were $519.0 million and $417.7 million for the nine months ended June
30, 2002 and 2001, respectively. Gross slot win per unit per day was $306 and
$478 for the respective periods. The decrease in gross slot win per unit was due
to an increase in the weighted average number of slot machines from
approximately 3,204 in the nine months ended June 30, 2001 to approximately
6,206, in the nine months ended June 30, 2002. The increase in weighted average
slot machines is primarily attributable to the opening of the Casino of the Sky,
which added a total of approximately 2,500 slot machines to Mohegan Sun.
Gaming revenues for the nine months ended June 30, 2002 increased by $142.9
million, or 26.1%, to $690.5 million from $547.6 million for the nine months
ended June 30, 2001. This increase is due to a 23.6% growth in net slot machine
revenues and a 35.0% increase in table game revenues as a result of the opening
of the Casino of the Sky.
Food and beverage revenues for the nine months ended June 30, 2002 increased by
$16.8 million, or 48.7%, to $51.5 million from $34.6 million for the nine months
ended June 30, 2001. This increase in food and beverage revenues is attributable
to a 36.6% increase in meals served for the nine months ended June 30, 2002, as
compared to the same period in the prior year and a higher average sale per
check. The increases in meals served and higher average sale per check are
primarily associated with the new Project Sunburst restaurants which include the
350-seat Sunburst Buffet, the Rising Moon Gallery of Eateries, Fidelia's, Rain
and Tuscany.
33
Hotel revenues for the nine months ended June 30, 2002 were $6.8 million. The
Mohegan Sun hotel opened in April 2002. Average daily room rates were $178 for
the nine months ended June 30, 2002 with an occupancy rate of 69%. Revenue per
available room was $119. There were no hotel revenues for the nine months ended
June 30, 2001.
Retail, entertainment and other revenues for the nine months ended June 30, 2002
increased by $579,000, or 1.4%, to $43.2 million from $42.6 million for the nine
months ended June 30, 2001. Entertainment revenue increased by $3.0 million
primarily due to the opening of the Mohegan Sun Arena on September 25, 2001.
Additional increases are attributable to an increase in other revenue of $2.8
million primarily associated with the rental income earned from third party
retail tenants in the Shops at Mohegan Sun. These increases are partially offset
by a $5.3 million decrease in retail revenue due to a shift in patronage from
Mohegan Sun operated outlets to the tenant outlets in the Shops at Mohegan Sun.
Promotional allowances for the nine months ended June 30, 2002 decreased by $1.4
million, or 2.6%, to $52.0 million from $53.4 million for the nine months ended
June 30, 2001. The first phase of Project Sunburst included the opening of the
Shops at Mohegan Sun. Effective with the opening of the first phase of Project
Sunburst on September 25, 2001, members of the Mohegan Sun Player's Club were
eligible to redeem points at these tenant outlets. The decrease is attributable
to the shift in patronage from Mohegan Sun retail outlets to the third party
retail tenants in the Shops at Mohegan Sun, as expenses related to the Shops at
Mohegan Sun are included in gaming expenses.
Total costs and expenses for the nine months ended June 30, 2002 increased by
$195.6 million, or 47.3%, to $609.3 million from $413.7 million during the nine
months ended June 30, 2001. This increase is primarily the result of supporting
a $167.1 million increase in gross revenues.
Gaming costs and expenses for the nine months ended June 30, 2002 increased by
$108.5 million, or 39.0%, to $386.5 million from $278.0 million for the nine
months ended June 30, 2001. The increase is attributable to an approximately
90-unit increase in table games and the addition of approximately 2,500 slot
machines associated with the opening of the first phase of Project Sunburst.
Additionally, the first phase of Project Sunburst included the opening of the
Shops at Mohegan Sun. The point redemption by Mohegan Sun Players Club patrons
in the third party retail tenant Shops at Mohegan Sun resulted in an increase in
Mohegan Sun's gaming expenses for the nine months ended June 30, 2002. Gaming
costs and expenses as a percentage of gaming revenues were 56.0% in the nine
months ended June 30, 2002 compared to 50.8% in the same period of the prior
year, an increase of 5.2 percentage points.
Food and beverage costs and expenses for the nine months ended June 30, 2002
increased by $11.6 million, or 62.7%, to $30.0 million from $18.5 million for
the nine months ended June 30, 2001. These increases are the result of higher
food and beverage operating costs, particularly labor costs and other operating
expenses due to the September 25, 2001 opening of the Rising Moon Gallery of
Eateries, a 350-seat Sunburst Buffet, Rain, Fidelia's and Tuscany, and
additional beverage service in the Casino of the Sky, the arena concessions, the
Cabaret bar and Leffingwell's bar located at the base of Wombi Rock. The opening
of these additional outlets resulted in an increase in the number of meals
served, or food covers, from 2.8 million in the nine months ended June, 2001 to
3.8 million in the nine months ended June 30, 2002, a 36.6% increase. The cost
of sales for food as calculated as a percentage of food revenue increased to
34.2% in the nine months ended June 30, 2002, from 35.1% in the nine months
ended June 30, 2001.
Hotel costs and expenses for the nine months ended June 30, 2002 were $1.4
million due to the opening of the Mohegan Sun hotel in April 2002.
Retail, entertainment and other costs and expenses for the nine months ended
June 30, 2002 increased by $6.7 million, or 50.1%, to $20.1 million from $13.4
million for the nine months ended June 30, 2001. This increase is primarily a
result of the events that were held in the Mohegan Sun Arena in the nine months
ended June 30, 2002. The first event held in the Mohegan Sun Arena on October
26, 2001 was a pre-season NBA basketball game with Michael Jordan and the
Washington Wizards. Additional events included
34
the National Women's Basketball League Championships, concerts with Tim McGraw,
Gloria Estefan, Aerosmith, Bob Dylan, Janet Jackson, Anne Murray, Julio Iglesis,
Toby Keith, Brooks and Dunn, ZZ Top, Alan Jackson, Cher and Marc Anthony, Summer
Music Mania, ESPN Bowling, an exhibition tennis match with Martina Navritolova
and Monica Seles, Showtime Boxing, Polkapalooza and an HBO boxing event with
Arturo Gatti vs. Micky Ward. Also contributing to the increase are expenses
associated with the Cabaret, an intimate 300-seat theater that plays host to
entertainers from singers, such as Tony Bennett, Betty Buckley, Shirley Jones
and Jack Jones, to comics, such as Phyllis Diller, Nell Carter and the Amazing
Kreskin.
General and administrative costs and expenses for the nine months ended June 30,
2002 increased by $30.0 million, or 38.5%, to $108.0 million from the $78.0
million for the nine months ended June 30, 2001. This increase is primarily
associated with costs to operate the expanded facility such as utilities,
engineering, risk management and environmental services, and advertising
expenses targeted to promote Mohegan Sun through all major media outlets.
Pre-opening costs and expenses associated with the opening of the Mohegan Sun
hotel were $7.8 million for the nine months ended June 30, 2002 compared to
pre-opening expenses (relating to the opening of the first phase of Project
Sunburst) of $7.0 million for the nine months ended June 30, 2001.
Depreciation and amortization for the nine months ended June 30, 2002 increased
by $36.7 million, or 195.3%, to $55.4 million for the nine months ended June 30,
2002 from $18.8 million for the nine months ended June 30, 2001. This increase
was a result of $1.0 billion of assets related to Project Sunburst, including
$49.6 million of capitalized interest, placed in service between the opening of
the first phase of Project Sunburst on September 25, 2001 and June 30, 2002.
Income from operations for the nine months ended June 30, 2002 decreased by
$27.1 million, or 17.2%, to $130.6 million from $157.7 million for the nine
months ended June 30, 2001. This decrease is attributable to increases in costs
and expenses associated with the expansion of Mohegan Sun, including increased
staffing levels and depreciation and amortization of the expanded facility.
Additionally, the unfavorable variance can be attributed to the impact of the
economic slowdown.
Accretion of the discount associated with the relinquishment liability
reassessment for the nine months ended June 30, 2002 increased by $376,000, or
1.4%, to $27.3 million from $26.9 million for the same period in the prior year.
Interest and other income for the nine months ended June 30, 2002 decreased by
$2.1 million, or 86.0%, to $335,000 from $2.4 million for the nine months ended
June 30, 2001. The decrease in interest income resulted from the liquidation of
investments to fund Project Sunburst plus a decline in the return on the
invested assets. The weighted average invested cash was $25.8 million and $34.1
million for the nine months ended June 30, 2002 and 2001, respectively. The
Authority invests in investment-grade commercial paper having maturities of not
more than six months from the date of acquisition.
Interest expense for the nine months ended June 30, 2002 increased $49.9
million, or 381.9%, to $63.0 million from $13.1 million for the nine months
ended June 30, 2001. This increase is mainly attributable to higher average debt
outstanding and a decrease in capitalized interest as a result of the decrease
in the weighted average cumulative expenditures for the period due to the
opening of the first phase of Project Sunburst in September 2001 and the
completion of the second phase of Project Sunburst in June 2002. The weighted
average outstanding debt was $1.1 billion for the nine months ended June 30,
2002, compared to $610.5 million for the nine months ended June 30, 2001.
Capitalized interest was $2.8 million for the nine months ended June 30, 2002
compared to $26.2 million for the same period in the prior year. The weighted
average interest rate for the nine months ended June 30, 2002 was 7.39%,
compared to 8.03% for the nine months ended June 30, 2001.
35
Loss from discontinued operations associated with the conversion of the bingo
hall into the smoke-free Hall of the Lost Tribes slot machine venue totaled
$591,000 for the nine months ended June 30, 2001. There was no loss from
discontinued operations for the nine months ended June 30, 2002.
Net income for the nine months ended June 30, 2002 decreased by $76.8 million,
or 65.4%, to $40.6 million from $117.4 million for the same period in the prior
year. The decrease is primarily attributable to increases in interest expense
and depreciation and amortization. Interest expense increased by $49.9 million
during the nine months ended June 30, 2002, contributing to the reduction in net
income. The increase in interest expense is primarily attributable to a decrease
in capitalized interest as a result of the decrease in the weighted average
cumulative expenditures for the period due to the opening of the first phase of
Project Sunburst in September 2001 and the completion of the second phase of
Project Sunburst in June 2002 and higher average debt outstanding. The weighted
average outstanding debt was $1.1 billion for the nine months ended June 30,
2002, compared to $610.5 million for the nine months ended June 30, 2001.
Depreciation and amortization increased by $36.7 million for the nine months
ended June 30, 2002, due to the placing in service of assets related to the
first phase of Project Sunburst.
Liquidity, Capital Resources and Capital Spending
As of June 30, 2002, the Authority held cash and cash equivalents of $57.3
million, a decrease of $17.0 million from $74.3 million as of September 30,
2001. This decrease is mainly attributable to the decrease in investments held
at June 30, 2002 due to liquidation of the investments for construction
payments. Cash provided by operating activities for the nine months ended June
30, 2002 decreased by $22.9 million, or 16.7%, to $114.3 million from $137.1
million for the nine months ended June 30, 2001. This decrease in cash provided
from operating activities is attributable to a decrease in net income.
Operating activities are the principal source of the Authority's cash flows. The
principal application of these funds was capital expenditures incurred in
connection with the construction and development of Project Sunburst and other
real property improvements. While the Authority does not believe that there is
any trend or a likelihood of an event that would adversely impact the level of
cash generated by its activities, there are numerous potential factors which may
cause a substantial reduction in the amount of cash flow, including, but not
limited to the following:
. downturn in the economy and lack of consumer confidence, which would
result in reduced spending on discretionary items such as gaming
activities;
. an act of terrorism on the United States of America;
. operating expenses increasing at a greater rate than revenue; and
. increased competition in the gaming industry, or the legalization of
gaming activities in the State of Connecticut, which may result in a
substantial decrease in revenue.
In addition to cash generated by operating activities, the Authority has relied
on external sources of liquidity to meet its operating and investing
requirements.
External Source of Liquidity
Bank Credit Facility. One of the Authority's main external sources of liquidity
is the $400.0 million reducing, revolving, collateralized Bank Credit Facility.
At the Authority's option, each advance of loan proceeds accrues interest on the
basis of a base rate or on the basis of a one-month, two-month, three-month or
six-month London Inter-Bank Offered Rate, or LIBOR, plus, in either case, the
applicable spread (based on the Authority's Total Leverage Ratio as defined in
the Bank Credit Facility). One-month LIBOR as of June 30, 2002 was 1.84% and the
applicable spread on a LIBOR loan was 2.625%. Interest on each LIBOR loan that
is for a term of a quarter or less is due and payable on the last day of the
related interest period. Interest on each LIBOR loan that is for a term of more
than a quarter is due and payable on the date
36
which is a quarter after the date such LIBOR loan was made, every quarter
thereafter and, in any event, on the last day of the related interest period.
Interest on each base rate loan is due and payable quarterly in arrears. As of
June 30, 2002, the Authority had no base rate loans.
Pursuant to the terms of the Bank Credit Facility, the commitment (or the
maximum amount that may be borrowed under the Bank Credit Facility) will be
automatically reduced on September 30, 2002, and on the last day of each fiscal
quarter thereafter, by 10% of the commitment as in effect immediately prior to
the first such reduction.
On February 20, 2002, the Authority issued $250.0 million Senior Subordinated
Notes with fixed interest payable at a rate of 8.0% per annum (the "2002 Senior
Subordinated Notes"), net proceeds of which were used to pay down a portion of
the outstanding balance under the Bank Credit Facility.
During the nine months ended June 30, 2002, the Authority reduced the balance of
the Bank Credit Facility by $243.0 million and borrowed $205.0 million. The
outstanding balance under the Bank Credit Facility as of June 30, 2002 was
$220.0 million. The Bank Credit Facility contains various provisions that
require the Authority to maintain specified financial ratios. If the Authority's
revenue declines due to economic or competitive factors, it is possible that
these financial ratios may be violated. If this were to happen, the Authority
would not be able to borrow additional funds under the Bank Credit Facility and
it may even result in an event of default, which could accelerate the payment of
any outstanding balance. In addition, while the Authority has entered into some
hedging transactions to mitigate against its exposure to interest rate
fluctuations on the Bank Credit Facility, the majority of the outstanding
balance is subject to interest rate fluctuations. As the economy rebounds, it is
possible that the interest rate will start to increase, which would mean that
the Authority's interest cost may increase significantly. A substantial increase
in interest expense could have a negative effect on the Authority's liquidity.
For a further discussion on hedging transactions that mitigate against this
exposure, see "Quantitative and Qualitative Disclosure of Market Risk" and Note
3 to the Authority's unaudited financial statements as of June 30, 2002.
Recent Amendments to the Bank Credit Facility. On June 21, 2002, the Authority
received the requisite consent of its lenders to Amendment No. 4 to its Bank
Credit Facility. The amendment revised the total leverage ratio permitted as of
June 30, 2002 to 5.25 to 1.00 from 5.00 to 1.00 and increased the construction
budget from $960.0 million to $1.0 billion.
The Authority also received the requisite consent of its lenders to Amendment
No. 5 to the Bank Credit Facility (the "Amendment") on August 14, 2002. The
Amendment (i) expanded the definition of "approved swap agreements" and
increased the amount of approved swap agreements and other swap agreements that
may be used to secure other indebtedness of the Authority from the notional
amount of $200 million to the notional amount of $300 million and (ii) waived,
for a period of 90 days from the date of the Amendment, (a) the delivery of
audited statements for the fiscal year ended September 30, 2001 and reviewed
financial statements for the quarterly periods ended December 31, 2000, March
31, 2001, June 30, 2001, December 31, 2001 and March 31, 2002, (b) the
requirement to file amended Quarterly Reports on Form 10-Q for the quarterly
periods ended December 31, 2000, March 31, 2001, June 30, 2001, December 31,
2001 and March 31, 2002 and an amended Annual Report on Form 10-K for the fiscal
year ended September 30, 2001, (c) any defaults which may have arisen by reason
of any of the inaccuracies in the financial statements which are described above
and (d) any resulting technical non-compliance with a requirement of law.
Exchange Offer. On June 28, 2002, the Authority successfully consummated its
offer to exchange all outstanding 2002 Senior Subordinated Notes that it had
issued on February 20, 2002 for $250.0 million of its fully registered 8% Senior
Subordinated Notes due 2012. The terms of such fully registered exchange notes
are identical to the terms of the 2002 Senior Subordinated Notes. The Authority
did not receive any additional proceeds from this exchange offer.
Capital Expenditures
Capital Expenditures Incurred to Date. Capital expenditures totaled $268.3
million, including capitalized interest, for the nine months ended June 30,
2002, versus $412.1 million for the same period in the prior year. These capital
expenditures were an aggregate of the following:
. Cumulative Project Sunburst construction expenses totaled $1.0
billion, including $53.8 million in capitalized interest and net of
$5.0 million expensed or recorded as inventory, through June 30, 2002.
During the nine months ending June 30, 2002 expenditures totaled
$162.2 million, including $2.8 million in capitalized interest and net
of $3.7 million expensed or recorded as inventory, versus $377.3
million, including $26.2 million in capitalized interest, expended
during the nine months ended June 30, 2001. The Mohegan Sun hotel and
convention center opened in April 2002 and the hotel was substantially
completed in June 2002. Mohegan After Dark, a 19,000 square foot
nightclub, will open in three phases with phase one, Lucky's Lounge,
anticipated to open in August 2002.
37
. Property maintenance capital expenditures for furniture, fixtures and
equipment totaled $22.0 million and $14.8 million for the nine months
ended June 30, 2002 and June 30, 2001, respectively.
. Capital expenditures on the Authority's electrical and water systems
infrastructure improvements totaled $5.4 million and $6.7 million for
the nine months ended June 30, 2002 and June 30, 2001, respectively.
Cumulative infrastructure improvements totaled $34.9 million as of
June 30, 2002. The total estimated cost of the infrastructure
improvements is $35.0 million. The infrastructure improvements will
handle the increased utility demands of the expanded facility that are
attributable to the Project Sunburst expansion.
. Capital expenditures for the $65.0 million Indian Summer Garage, a
2,700-space patron parking garage, totaled $56.0 million for the nine
months ended June 30, 2002. The Authority did not incur any capital
expenditures for the Indian Summer Garage for the nine months ended
June 30, 2001. Cumulative expenditures totaled $60.5 million as of
June 30, 2002. The Indian Summer Garage opened in June 2002.
. Capital expenditures for the $25.0 million, 1,700-space Thames Garage
have totaled $22.7 million to date, all of which has been spent during
the nine months ended June 30, 2002. The Authority did not incur any
capital expenditures for the construction of the Thames Garage for the
nine months ending June 30, 2001. The Thames Garage opened in April
2002.
. Capital expenditures for the construction of the Hall of the Lost
Tribes, the 637-unit smoke-free slot machine venue which opened on
April 18, 2001, were $523,000 for the nine months ended June 30,
2002. Expenditures for the construction of the Hall of the Lost Tribes
for the nine months ended June 30, 2001 totaled $12.1 million.
Cumulative expenditures for the Hall of the Lost Tribes totaled $15.4
million as of June 30, 2002. Construction is now complete.
. Capital expenditures for the construction of the employee day care
facility were $554,000 during the nine months ended June 30, 2002 and
cumulative expenditures on the employee day care facility reached $1.1
million as of June 30, 2002. The Authority did not incur any
construction expenses in conjunction with the employee day care
facility for the nine months ended June 30, 2001. The Authority's
expenditure of $1.1 million has been fully reimbursed by the Tribe.
The Tribe will pay all future expenditures related to this project and
operate it when opened.
. The Authority, in conjunction with the Project Sunburst expansion,
commenced construction on the employee parking center in March 1999.
The employee parking center includes 2,550 parking spaces and
amenities such as a dry cleaning service, on-site banking, an employee
computer/training center and a 15,000 square foot exercise facility. A
portion of the employee parking center opened in June 2000 with the
remainder opening in January 2001. The total cost of the Employee
Parking Center was $25.0 million. The Authority did not incur any
capital expenditures for the employee parking center for the nine
months ended June 30, 2002 as construction of the facility is
complete. Capital expenditures associated with the Employee Parking
Garage were $1.2 million for the nine months ended June 30, 2001.
In keeping with standard practice in the construction industry, the Authority
retains a portion of the construction expenditures until satisfactory completion
of individual contracts. As of June 30, 2002, construction retainage totaled
$10.3 million, which has been included in construction payables in the
Authority's financial statements.
Expected future capital expenditures. During the remainder of fiscal year 2002,
the Authority expects capital expenditures to total approximately $39.0 million
and to be allocated as follows:
. $3.0 million on maintenance capital expenditures.
38
. $29.2 million on Project Sunburst construction.
. $4.5 million on the Indian Summer parking garage.
. $2.3 million on the Thames Garage.
Project Sunburst
The Tribe received a notification from TCA, the developer of Project Sunburst,
indicating that the cost of completing Project Sunburst is estimated to be $1.0
billion, excluding capitalized interest, which represents an increase of $40.0
million over the previous estimate of $960.0 million. TCA indicated that the
$40.0 million increase relates to scope changes to the Mohegan Sun retail
program amounting to $10.0 million and acceleration costs related to the early
opening of the Casino of the Sky and the extended hotel tower completion date in
the amount of $12.0 million. The balance of the increase relates to theming and
quality improvements and claims reserves in the amount of $18.0 million. Mohegan
Sun currently anticipates funding the cost overrun from the Bank Credit
Facility. As of June 30, 2002, the Authority has spent $970.8 million, excluding
capitalized interest, on Project Sunburst. The remaining $29.2 million is
anticipated to be spent during the remainder of fiscal year 2002.
As of June 30, 2002, cumulative capitalized interest for Project Sunburst
construction expenses totaled $53.8 million. Capitalized interest totaled
$660,000 and $10.8 million for the quarter ended June 30, 2002 and 2001,
respectively. Capitalized interest totaled $2.8 million and $26.2 million for
the nine months ended June 30, 2002 and 2001, respectively.
Sources of funding for capital expenditures. The Authority will rely primarily
on cash generated from its operations and amounts available to be drawn under
the Bank Credit Facility to finance these capital expenditures. However, the
Authority's ability to finance sufficiently the anticipated capital expenditures
from these sources depends on its ability to maintain a stable level of cash
generation from its operations and its ability to draw down on the Bank Credit
Facility.
Relinquishment Agreement
Under the terms of the Relinquishment Agreement, TCA continued to manage Mohegan
Sun under the Management Agreement until January 1, 2000, when the Management
Agreement terminated, and the Authority assumed day-to-day management of Mohegan
Sun. As a result of the termination of the Management Agreement, the Authority
has agreed to pay TCA five percent of gross revenues (as defined in the
Relinquishment Agreement) generated from Mohegan Sun including Project Sunburst,
beginning January 1, 2000 and ending December 31, 2014. We refer to these
payments as the relinquishment payments. The Authority initially recorded a
relinquishment liability of $549.1 million in September 1998. The present value
of this liability is estimated at $588.6 million as of June 30, 2002. The
Authority annually reviews revenue forecasts and revenue projections for the
period in which the Relinquishment Agreement applies, due to uncertainties
involving economic market conditions and future competition from potential
Native American casinos. See Note 6 to the Authority's financial statements. The
relinquishment liability is reassessed quarterly, and additionally when
necessary to account for material increases or decreases in projected revenues
and the impact on the time value of money due to the passage of time. The
Authority has capitalized $130.0 million of the relinquishment liability
associated with the trademark value of the Mohegan Sun brand name. The Authority
paid $30.7 million in Senior Relinquishment Payments during the nine months
ended June 30, 2002. Of the $30.7 million in relinquishment payments for the
nine months ended June 30, 2002, $8.1 million represents principal amounts and
the remaining $22.6 million is payment for the accretion of interest. As of June
30, 2002, relinquishment payments earned but unpaid were $20.4 million. During
the nine months ended June 30, 2001, the Authority paid $26.1 million in Senior
Relinquishment Payments consisting of $6.9 million in principal amounts and
$19.2 million for the accretion of interest.
Distributions to the Tribe
During the three and nine months ending June 30, 2002, the Authority distributed
$11.2 million and $27.9 million, respectively, to the Tribe. The Authority
distributed $20.0 million and $40.0 million, respectively, to the Tribe for the
three and nine months ended June 30, 2001.
39
Debt Service Costs
For the nine months ended June 30, 2002 and June 30, 2001 the Authority incurred
the following debt service costs:
For the
Nine Months
Ended
June 30, 2001
For the (unaudited and
Nine Months restated-See
Ended Note 7 to
June 30, 2002 the accompanying
(in thousands) (unaudited) financial statements)
--------------- ---------------------
Bank Credit Facility $ 12,336 $ 3,882
$200M 8.125% Senior Notes 12,187 12,187
$300M 8.75% Senior Subordinated Notes 19,688 19,688
$150M 8.375% Senior Subordinated Notes 9,422 -
$250M 8% Senior Subordinated Notes 7,167 -
Financing Fees 5,039 3,257
Capital Leases 9 236
Capitalized Interest (2,834) (26,174)
--------------- -------------
Total Interest Expense $ 63,014 $ 13,076
=============== =============
Sufficiency of Resources
The Authority believes that existing cash balances, financing arrangements and
operating cash flow will provide the Authority with sufficient resources to meet
its existing debt obligations, relinquishment payments, distributions to the
Tribe and foreseeable capital expenditure requirements with respect to current
operations and Project Sunburst for at least the next twelve months.
Nonetheless, as discussed above, there are potential events or occurrences that
may affect adversely the Authority's ability to meet its existing debt
obligations, make relinquishment payments and distributions to the Tribe and pay
for capital expenditures.
The fact that the financial statements contained herein have not been reviewed
by an independent accountant may constitute a violation of certain covenants
under the indentures. A covenant violation of this nature could constitute a
default under the indentures if 25% of the bondholders requested the Trustee to
send a notice and 60 days passed without cure. The Authority believes that if
such notice were given, it could cure any such violation within such period.
Contractual Obligations and Commitments
The Authority's future payment obligations related to its material debt and
certain other contractual obligations and the timing of those payments are set
forth below. Since many of these payment amounts are not fixed, the amounts in
the table below are solely estimates as more fully described in the footnotes
and the actual amounts may be different.
Contractual Obligations Fiscal
(in thousands) Year 2-3 years 4-5 years After 5 years
2002 (1)
- -----------------------------------------------------------------------------------
Long-term debt (2) $ 22,000 $236,000 $200,000 $700,000
Construction obligations (3) 187,400 - - -
Development obligations (4) 4,718 - - -
--------------------------------------------------
Total $ 214,118 $236,000 $200,000 $700,000
==================================================
(1) Amounts due within one year represent payment obligations from October 1,
2001 to September 30, 2002.
(2) Long-term debt includes scheduled amortization and scheduled maturities for
notes payable and credit facilities, but excludes interest payments.
(3) Construction obligations represent the remainder of expenditures the
Authority must pay to Perini Building Company, Inc. for Project Sunburst.
See Note 5 to the Authority's financial statements. The Authority does not
believe that it will have any construction obligations after September 30,
2002, and this table has been prepared based on that assumption.
40
(4) Under the Development Agreement, the Authority is required to pay to TCA a
development fee of $14.0 million. Development obligations represent the
remainder of the fee due to TCA. See Note 6 to the Authority's financial
statements. The Authority does not believe that it will have any
development fee obligations after September 30, 2002, and this table has
been prepared based on that assumption.
In addition to the contractual obligations described above, the Authority has
certain other contractual commitments that will require payments throughout the
periods described below. The calculation of the estimated payments in the table
below are based, in large part, on projections of future revenues over an
extended period of time, as well as other factors which are indicated more fully
in the footnotes to the following table. Since there is a high level of
estimates and judgments used with respect to calculating these liabilities,
future events that affect or undermine such estimates and judgments may cause
the actual payments to differ significantly from the estimates set forth below.
Contractual Commitments Fiscal Year
(in thousands) 2002 (1) 2-3 years 4-5 years 5-10 years
- -------------------------------------------------------------------------------------------------
Slot winning payment commitments (2) $180,381 $392,963 $425,029 $1,184,902
Relinquishment commitments (3) 55,935 128,675 139,162 578,699
Priority distributions (4) 14,882 31,282 33,420 93,889
------------------------------------------------------
Total $251,198 $552,920 $597,611 $1,857,490
======================================================
(1) Amounts due within one year represent payment commitments from October 1,
2001 to September 30, 2002.
(2) Slot winning payment commitments are a portion of the revenues earned on
slot machines that must be paid by the Authority to the State of
Connecticut pursuant to the Mohegan Compact. The payment commitment is the
lesser of (a) 30% of gross revenues from slot machines, or (b) the greater
of (i) 25% of gross revenues from slot machines or (ii) $80.0 million. For
the fiscal years ended September 30, 2001, 2000 and 1999, the Slot Win
Contribution totaled $144.6 million, $135.1 million and $121.1 million,
respectively. The amounts shown in this table are estimates.
(3) Relinquishment commitments represent payment commitments of the Authority
to TCA under the Relinquishment Agreement as described in Note 6 to the
Authority's financial statements. The relinquishment commitment is
calculated as five percent of revenues, as defined in the Relinquishment
Agreement.
(4) Priority distributions are monthly payments required to be made by the
Authority to the Tribe pursuant to the Priority Distribution Agreement. The
payments are calculated based on net cash flow and are limited to a maximum
amount of $14.0 million, which maximum amount is subject to an annual
adjustment based on Consumer Price Index, or CPI. During the fiscal year
ended September 30, 2001, the Authority paid $14.0 million in priority
distributions to the Tribe. In addition, for the nine months ended June 30,
2002, the Authority paid $11.4 million in priority distributions to the
Tribe. The amounts included in the table are estimates and, while this
agreement is perpetual in term, for the purposes of calculating these
amounts, the Authority has assumed that it will pay the maximum amount in
each of the years covered by the table, as adjusted by an annual CPI
adjustment of 3.361%.
Critical Accounting Policies and Estimates
Management has identified the following critical accounting policies that affect
the Authority's more significant judgments and estimates used in the preparation
of the Authority's financial statements. The preparation of the Authority's
financial statements in conformity with accounting principles generally accepted
in the United States of America requires the Authority's management to make
estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, management evaluates those estimates,
including those related to asset impairment, accruals for Player's Club points,
self-insurance, compensation and related benefits, revenue recognition,
allowance for doubtful accounts, contingencies and
41
litigation. The Authority states these accounting policies in the notes to the
financial statements and in relevant sections in this discussion and analysis.
These estimates are based on the information that is currently available to the
Authority and on various other assumptions that management believes to be
reasonable under the circumstances. Actual results could vary from those
estimates.
The Authority believes that the following critical accounting policies affect
significant judgments and estimates used in the preparation of its financial
statements:
One of the most significant policies used by the Authority relates to its
estimate of its relinquishment liability. The Authority, in accordance with
Financial Accounting Standards Board Statement No. 5 "Accounting for
Contingencies", has recorded a relinquishment liability of the estimated present
value of its obligations under the Relinquishment Agreement. At June 30, 2002,
the carrying amount of the relinquishment liability was $588.6 million as
compared to $592.0 million at September 30, 2001. The decrease is due to $30.7
million in relinquishment payments, partially offset by $27.3 million in
accretion of relinquishment liability discount. Of the $30.7 million in
relinquishment payments for the nine months ended June 30, 2002, $8.1 million
represents principal amounts and the remaining $22.6 million is payment for the
accretion of interest. This accretion resulted from the impact on the discount
for the time value of money due to the passage of time. As of June 30, 2002,
relinquishment payments earned but unpaid were $20.4 million. Since there is a
high level of estimates and judgments used with respect to calculating this
liability, future events that affect or undermine such estimates and judgments
may cause the actual liability to differ significantly from the estimate.
The Authority recognizes revenue upon occupancy of hotel rooms, as net wins and
losses occur in the casino and upon delivery of food, beverage and other
services. Cancellation fees for hotel and food and beverage services are
recognized as revenue when collection is probable and upon cancellation by the
customer as defined by a written contract entered into with the customer.
Minimum rental revenues in the Shops at Mohegan Sun are recognized on a
straight-line basis over the terms of the related leases. Percentage rents are
recognized in the period in which the tenants exceed their respective percentage
rent thresholds. Recoveries from tenants for operating expenses related to the
Shops at Mohegan Sun are recognized as offsetting expenses in the period billed,
which approximates the period in which the applicable costs are incurred.
The Authority maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments, which
results in bad debt expense. Management determines the adequacy of this
allowance by continually evaluating individual customer receivables, considering
the customer's financial condition, credit history and current economic
conditions. If the financial condition of customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
The Authority's trademark is no longer subject to amortization over its
estimated useful life as it has been deemed to have an indefinite useful life.
The trademark is evaluated periodically for impairment by applying a fair-value
based test and, if impairment occurs, the amount of impaired trademark will be
written off immediately. The Authority applied the initial fair value test and
determined that no impairment existed at March 31, 2002.
The Authority maintains accruals for health and workers compensation
self-insurance, Player's Club points redemption and group sales commissions,
which are classified in other accrued liabilities in the accompanying balance
sheets. Management determines the adequacy of these accruals by periodically
evaluating the historical experience and projected trends related to these
accruals. If such information indicates that the accruals are overstated or
understated, the Authority will adjust the assumptions utilized in the
methodologies and reduce or provide for additional accruals as appropriate.
The Authority is subject to various claims and legal actions in the ordinary
course of business. Some of these matters relate to personal injuries to
customers and damage to customers' personal assets. Management estimates guest
claims expense and accrues for such liability based upon historical experience
in the accounts payable and accrued expenses category in its accompanying
balance sheets.
42
Impact of Inflation
Absent changes in competitive and economic conditions or in specific prices
affecting the hotel and casino industry, the Authority does not expect that
inflation will have a significant impact on its operations. Changes in specific
prices, such as fuel and transportation prices, relative to the general rate of
inflation may have a material adverse effect on the hotel and casino industry in
general.
New Accounting Pronouncements
In January 2001, the Emerging Issues Task Force ("EITF") reached a consensus on
certain issues within Issue No. EITF 00-22, "Accounting for Points and Certain
Other Time-Based or Volume-Based Sales Incentive Offers". In April 2002, the
Authority adopted EITF 00-22, which requires that cash or equivalent amounts
provided or returned to customers as part of a transaction not be shown as an
expense, but instead as an offset to the related revenue. The Authority offers
cash inducements in certain circumstances and has reflected $227,000 for the
nine months ended June 30, 2002 as an offset to gaming revenues for these
incentives.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 modifies the rules for
accounting for the impairment or disposal of long-lived assets. The new rules
become effective for fiscal years beginning after December 15, 2001, with
earlier application encouraged. The Authority has not yet adopted, and has not
yet quantified the impact of implementing SFAS 144 on the Authority's financial
statements, but does not anticipate a negative effect on the Authority's
financial position, results of operations or cash flows upon adoption of the
standard.
The Authority adopted SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142") on October 1, 2001. Under SFAS 142, the trademark is no longer subject to
amortization over its estimated useful life as it has been deemed to have an
indefinite useful life. However, SFAS 142 requires the trademark to be evaluated
at least annually for impairment by applying a fair-value based test and, if
impairment occurs, the amount of impaired trademark must be written off
immediately. With the adoption of SFAS 142, the Authority no longer records
amortization of the trademark. For the quarter and nine months ended June 30,
2001, the Authority recorded $859,000 and $2.6 million, respectively, related to
the amortization of the trademark. The Authority applied the initial fair value
test and determined that no impairment existed at March 31, 2002. Had SFAS 142
been in effect in these periods, the Authority's results would have been as
follows:
For the For the
Quarter Nine Months
Ended Ended
June 30, June 30,
2001 2001
(unaudited and (unaudited and
For the restated - For the restated -
Quarter See Note 7 Nine Months See Note 7
Ended to the Ended to the
June 30, accompanying June 30, accompanying
2002 financial 2002 financial
(unaudited) statements) (unaudited) statements)
-------------- -------------- ---------------- ----------------
Net income $ 17,963 $ 43,907 $ 40,592 $ 117,392
Trademark amortization - 859 - 2,577
-------------- -------------- ---------------- ----------------
As adjusted net income $ 17,963 $ 44,766 $ 40,592 $ 119,969
============== ============== ================ ================
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, "Rescission of FASB Statements 4, 44,
and 64, Amendment of FASB Statement 13, and Technical Corrections as of April
2002" ("SFAS 145"). The key provision of SFAS 145 which will affect the
Authority rescinds the existing rule that all gains or losses from the
extinguishment of debt should be classified as extraordinary items. Instead,
such gains and losses must be analyzed to determine if they meet the criteria
for extraordinary item classification based on the event being both unusual and
infrequent. The Authority will adopt SFAS 145 beginning October 1, 2002. Prior
period gains and losses must be analyzed to determine if they meet the criteria
to be classified as extraordinary items. If they fail to meet the criteria,
prior period gains and losses must be reclassified. The Authority has not yet
quantified the impact of implementing SFAS 145.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan, as
previously required under EITF Issue 94-3. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The Authority
will adopt SFAS 146 beginning January 1, 2003 and does not believe the adoption
will have a significant impact on results of operations, financial position and
cash flows.
43
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The Authority is exposed to inherent market risk on the following:
At the Authority's option, Bank Credit Facility interest accrues on the basis of
a base rate formula or a LIBOR-based formula, plus applicable spreads. As of
June 30, 2002, the Authority had drawn $220.0 million from the Bank Credit
Facility. The Authority expects to continue to draw down on the Bank Credit
Facility in fiscal year 2002 in connection with Project Sunburst and other
capital expenditures.
The Authority analyzes interest rate risk using various models that forecast
cash flows of the liabilities and their supporting assets, including derivative
instruments. The Authority uses derivative instruments, including an interest
rate cap, collar and swap as its strategy to manage interest rate risk
associated with the variable interest rates applicable to advances under the
Bank Credit Facility. The Authority's objective in managing interest rate risk
is to ensure appropriate income and sufficient liquidity to meet its
obligations. The Authority does not believe that there is any material risk
exposure with respect to derivative or other financial instruments which it
currently holds. The Authority continually monitors these exposures and makes
the appropriate adjustments to manage these risks within management's
established limits.
The Authority is considered an "end user" of derivative instruments and engages
in derivative transactions for risk management purposes only. On October 1,
2000, the Authority adopted SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") designated all derivative instruments as
cash flow hedging instruments and marked them to market. The impact of the
adoption of SFAS 133 was not material to the financial position of the Authority
taken as a whole. The Authority excludes the change in time value when assessing
the effectiveness of the hedging relationships. All derivatives are evaluated
quarterly and were deemed to be effective at June 30, 2002.
44
Derivative instruments held by the Authority at June 30, 2002 are as follows:
- ---------------------------------------------------------------------------------------------------------------------
Effective Maturity Notional Cost Market
Date Date
- ---------------------------------------------------------------------------------------------------------------------
Interest Rate Cap
Strike Rate - 8% October 1, October 1, $ 63,715,200 $410,000 $ 200
2000 2003
- ---------------------------------------------------------------------------------------------------------------------
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% January 2, March 1, 73,374,200 295,000 (2,283,753)
2001 2004
- ---------------------------------------------------------------------------------------------------------------------
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable January 2, March 1, 36,687,100 221,000 (1,241,450)
2001 2004
- ---------------------------------------------------------------------------------------------------------------------
Total $173,776,500 $926,000 ($3,525,003)
- ---------------------------------------------------------------------------------------------------------------------
All derivative instruments are based upon one-month LIBOR, which was 1.84% on
June 30, 2002.
For the quarters ended June 30, 2002 and 2001, the Authority recognized a net
gain of $23,000 and a net loss of $810,000, respectively, relating to the change
in time value of its derivative instruments, as reflected in the statements of
income. The Authority recognized a net gain of $18,000 and a net loss of $2.1
million for the nine months ended June 30, 2002 and 2001, respectively. The
(non-cash) increase in the fair value of the derivative instruments for the
three and nine months ended June 30, 2002 was $172,000 and $1.6 million,
respectively. For the three and nine months ended June 30, 2001, the (non-cash)
decrease was $90,000 and $3.7 million, respectively. The fair value of the
Authority's derivative instruments is included in other liabilities in the
accompanying balance sheets.
45
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings
The Authority is a defendant in certain litigation incurred in the normal course
of business. In the opinion of management, based on the advice of counsel, the
aggregate liability, if any, arising from such litigation will not have a
material adverse effect on the Authority's financial position, results of
operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index filed herewith is incorporated herein by reference.
(b) Reports on Form 8-K
On April 5, 2002, the Authority filed a Current Report on Form 8-K
regarding its decision to dismiss its independent auditors, Arthur
Andersen LLP, and to engage the services of PricewaterhouseCoopers LLP
as its new independent auditors.
On June 24, 2002, the Authority filed a Current Report on Form 8-K
regarding Amendment No. 4 to its Bank Credit Facility. The amendment
revised the total leverage ratio permitted as of June 30, 2002 to 5.25
to 1.00 from 5.00 to 1.00 and increased the Project Sunburst
construction budget from $960.0 million to $1.0 billion.
46
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOHEGAN TRIBAL GAMING AUTHORITY
Date: August 19, 2002 By: /s/ Mark F. Brown
-------------------- --------------------------------------
Mark F. Brown
Chairman, Management Board
Date: August 19, 2002 By: /s/ William J. Velardo
-------------------- --------------------------------------
William J. Velardo
President and General Manager
Date: August 19, 2002 By: /s/ Jeffrey E. Hartmann
-------------------- --------------------------------------
Jeffrey E. Hartmann, Executive Vice
President Finance/Chief Financial Officer
(Principal Financial and Accounting
Officer)
Exhibit Index
Exhibit
No. Exhibit Description
- ------- -------------------
3.1 Constitution of the Mohegan Tribe of Indians of Connecticut (filed as
Exhibit 3.1 to the Registration Statement on Form S-1, File No.
33-80655, filed with the SEC on December 21, 1995 (the "1996 Form
S-1"), and incorporated by reference herein).
3.2 Ordinance No. 95-2 of the Tribe for Gaming on Tribal Lands, enacted on
July 15, 1995 (filed as Exhibit 3.2 to the 1996 Form S-1 and
incorporated by reference herein).
4.1 Relinquishment Agreement dated February 7, 1998 by and among the
Mohegan Tribal Gaming Authority, The Mohegan Tribe of Indians of
Connecticut and Trading Cove Associates (filed as Exhibit 10.14 to
Form 10-K for the Authority's fiscal year ended September 30, 1998,
File No. 33-80653, and incorporated by reference herein).
4.2 Indenture dated March 3, 1999 among the Mohegan Tribal Gaming
Authority, the Mohegan Tribe of Indians of Connecticut and First Union
National Bank, as Trustee, relating to the 8 1/8% Senior Notes Due
2006 of the Mohegan Tribal Gaming Authority (filed as Exhibit 4.3 to
Registration Statement on Form S-4, File No. 333-76753, filed with the
SEC on April 21, 1999 (the "1999 Form S-4"), and incorporated by
reference herein).
4.3 Form of Global 8 1/8% Senior Note Due 2006 of the Mohegan Tribal
Gaming Authority (contained in the Indenture filed as Exhibit 4.3 to
the 1999 Form S-4 and incorporated by reference herein).
4.4 Senior Registration Agreement dated March 3, 1999 among the Mohegan
Tribal Gaming Authority, Salomon Smith Barney Inc., NationsBanc
Montgomery Securities, LLC, SG Cowen Securities Corporation, Bear,
Sterns & Co. Inc., BankBoston Robertson Stephens Inc. and Fleet
Securities, Inc. (filed as Exhibit 4.5 to the 1999 Form S-4 and
incorporated by reference herein).
4.5 Indenture dated as of March 3, 1999 among the Mohegan Tribal Gaming
Authority, the Mohegan Tribe of Indians of Connecticut and State
Street Bank and Trust Company, as Trustee, relating to the 8 3/4%
Senior Subordinated Notes Due 2009 of the Mohegan Tribal Gaming
Authority (filed as Exhibit 4.6 to the 1999 Form S-4 and incorporated
by reference herein).
4.6 Form of Global 8 3/4% Senior Subordinated Notes Due 2009 of the
Mohegan Tribal Gaming Authority (contained in the Indenture filed as
Exhibit 4.6 to the 1999 Form S-4 and incorporated by reference
herein).
4.7 Senior Subordinated Registration Agreement dated March 3, 1999 among
the Mohegan Tribal Gaming Authority, Salomon Smith Barney Inc.,
NationsBanc Montgomery Securities LLC, SG Cowen Securities
Corporation, Bear, Stearns & Co. Inc., BankBoston Robertson Stephens
Inc. and Fleet Securities, Inc. (filed as Exhibit 4.8 to the 1999 Form
S-4 and incorporated by reference herein).
4.8 Indenture dated as of July 26, 2001 among the Mohegan Tribal Gaming
Authority, the Mohegan Tribe of Indians of Connecticut and State
Street Bank and Trust Company, as Trustee, relating to the 8 3/8%
Senior Subordinated Notes Due 2011 of the Mohegan Tribal Gaming
Authority (filed as Exhibit 4.9 to Registration Statement on Form S-4,
File No. 333-69472, filed with the SEC on September 14, 2001 (the
"2001 Form S-4") and incorporated by reference herein).
4.9 Form of Global 8 3/8% Senior Subordinated Notes Due 2011 of the
Mohegan Tribal Gaming Authority (contained in the Indenture filed as
Exhibit 4.9 to the 2001 Form S-4 and incorporated by reference
herein).
4.10 Registration Rights Agreement dated July 26, 2001 among the Mohegan
Tribal Gaming Authority, Salomon Smith Barney Inc., Banc of America
Securities LLC, Fleet Securities, Inc., SG Cowen Securities
Corporation, Commerzbank Capital Markets Corp., McDonald Investments
Inc. and Wells Fargo Brokerage Services, LLC (filed as Exhibit 4.11 to
the 2001 Form S-4 and incorporated by reference herein).
4.11 Indenture dated as of February 20, 2002 among the Mohegan Tribal
Gaming Authority, the Mohegan Tribe of Indians of Connecticut and
State Street Bank and Trust Company, as Trustee, relating to the 8%
Senior Subordinated Notes Due 2012 of the Mohegan Tribal Gaming
Authority (filed as Exhibit 4.12 to Registration Statement on Form
S-4, File No. 333-84984, filed with the SEC on March 27, 2002 (the
"2002 Form S-4") and incorporated by reference herein.
4.12 Form of Global 8% Senior Subordinated Notes Due 2012 of the Mohegan
Tribal Gaming Authority (contained in the Indenture filed as Exhibit
4.12 to the 2002 Form S-4 and incorporated by reference herein).
4.13 Registration Rights Agreement dated February 20, 2002 among the
Mohegan Tribal Gaming Authority, Banc of America Securities LLC,
Salomon Smith Barney Inc., Fleet Securities, Inc., SG Cowen Securities
Corporation, Commerzbank Securities, McDonald Investments Inc., Wells
Fargo Brokerage Services, LLC, and Credit Lyonnais Securities (filed
as Exhibit 4.14 to the 2002 Form S-4 and incorporated by reference
herein).
10.1 Amendment No. 4 to Loan Agreement entered into as of June 21, 2002 by
and among the Mohegan Tribal Gaming Authority, the Mohegan Tribe of
Indians of Connecticut and Bank of America National Trust and Savings
Association (filed as Exhibit 99.1 to the Form 8-K filed on June 24,
2002, and incorporated by reference herein).