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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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: March 31, 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
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MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of registrant as specified in its charter)
Connecticut 06-1436334
(State or other
jurisdiction of
incorporation or (IRS employer
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 [_]
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MOHEGAN TRIBAL GAMING AUTHORITY
INDEX TO FORM 10-Q
Page
Number
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets of Mohegan Tribal Gaming Authority as of March 31, 2002 (unaudited) and
September 30, 2001......................................................................... 1
Statements of Income of Mohegan Tribal Gaming Authority for the Quarter and Six Months Ended
March 31, 2002 and 2001 (unaudited)........................................................ 2
Statements of Capital of Mohegan Tribal Gaming Authority for the Six Months Ended March 31,
2002 and 2001 (unaudited).................................................................. 3
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the Six Months Ended
March 31, 2002 and 2001 (unaudited)........................................................ 4
Notes to Financial Statements of Mohegan Tribal Gaming Authority............................. 5-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 13-30
Item 3. Quantitative and Qualitative Disclosure of Market Risk.................................. 30-31
PART II--OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 32
Item 2. Changes in Securities and Use of Proceeds............................................... 32
Item 3. Defaults upon Senior Securities......................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders..................................... 32
Item 5. Other Information....................................................................... 32
Item 6. Exhibits and Reports on Form 8-K........................................................ 32
Signatures. Mohegan Tribal Gaming Authority..................................................... 33
MOHEGAN TRIBAL GAMING AUTHORITY
BALANCE SHEETS
(in thousands)
March 31, September 30,
2002 2001
----------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................... $ 80,656 $ 74,284
Receivables, net............................. 12,154 7,163
Inventories.................................. 12,064 11,455
Other current assets......................... 16,196 12,706
---------- ----------
Total current assets..................... 121,070 105,608
Non-current assets:
Property and equipment, net.................. 1,044,552 935,016
Construction in process...................... 340,244 267,653
Trademark, net............................... 119,692 119,692
Other assets, net............................ 29,131 24,766
---------- ----------
Total assets............................. $1,654,689 $1,452,735
========== ==========
LIABILITIES AND CAPITAL
Current liabilities:
Current portion of capital lease obligations. $ -- $ 1,514
Current portion of relinquishment liability.. 69,207 68,272
Accounts payable and accrued expenses........ 73,782 73,548
Construction accounts payable................ 70,306 65,768
Accrued interest payable..................... 16,080 13,062
---------- ----------
Total current liabilities................ 229,375 222,164
Non-current liabilities:
Long-term debt............................... 1,099,000 908,000
Relinquishment liability..................... 516,516 523,736
Other long-term liabilities.................. 3,824 5,232
---------- ----------
Total liabilities........................ 1,848,715 1,659,132
---------- ----------
Commitments and contingencies (Note 5)
Capital:
Retained Earnings............................ (190,357) (201,270)
Accumulated other comprehensive loss......... (3,669) (5,127)
---------- ----------
(194,026) (206,397)
---------- ----------
Total liabilities and capital............ $1,654,689 $1,452,735
========== ==========
The accompanying notes to the 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 Six For the Six
Quarter Ended Quarter Ended Months Ended Months Ended
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Gaming......................................... $221,254 $180,605 $448,121 $355,563
Food and beverage.............................. 14,946 11,037 32,037 21,761
Retail, entertainment and other................ 12,943 11,981 27,588 28,576
-------- -------- -------- --------
Gross revenues............................... 249,143 203,623 507,746 405,900
Less--Promotional allowances................... (14,461) (15,843) (31,588) (35,030)
-------- -------- -------- --------
Net revenues...................................... 234,682 187,780 476,158 370,870
-------- -------- -------- --------
Cost and expenses:
Gaming......................................... 119,725 87,122 253,015 180,423
Food and beverage.............................. 10,131 5,943 21,222 12,020
Retail, entertainment and other................ 5,818 4,483 14,728 9,292
General and administration..................... 30,847 26,087 68,685 53,707
Pre-opening costs.............................. 2,006 1,927 3,663 3,316
Depreciation and amortization.................. 20,013 6,943 37,276 13,522
-------- -------- -------- --------
Total costs and expenses................... 188,540 132,505 398,589 272,280
-------- -------- -------- --------
Income from operations............................ 46,142 55,275 77,569 98,590
-------- -------- -------- --------
Other income (expense):
Accretion of relinquishment liability discount
(Note 6)..................................... (9,084) (8,958) (18,167) (17,916)
Interest and other income...................... 117 578 240 1,742
Interest expense, net of capitalized interest
(Note 5)..................................... (17,147) (5,890) (31,946) (11,815)
Other non-operating expense.................... (50) -- (87) --
Change in fair value of derivative
instruments (Note 3)......................... 11 865 (5) (1,277)
-------- -------- -------- --------
(26,153) (13,405) (49,965) (29,266)
-------- -------- -------- --------
Income from continuing operations................. 19,989 41,870 27,604 69,324
Loss from discontinued operations.............. -- (335) -- (527)
-------- -------- -------- --------
Net income........................................ $ 19,989 $ 41,535 $ 27,604 $ 68,797
======== ======== ======== ========
The accompanying notes to the financial statements
should be read in conjunction with the financial statements
2
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CAPITAL
(in thousands)
For the Six Months Ended For the Six Months Ended
March 31, 2002 March 31, 2001
------------------------ -----------------------
(unaudited) (unaudited)
Comprehensive Comprehensive
Capital Income Capital Income
--------- ------------- --------- -------------
Balance September 30............................ $(201,270) $(362,118)
Net income...................................... 27,604 $27,604 68,797 $68,797
Distributions to Tribe.......................... (16,691) (20,000)
--------- ---------
Balance March 31................................ (190,357) (313,321)
--------- ---------
Accumulated other comprehensive loss............ (5,127) --
Unrealized gain (loss) on derivative instruments 1,458 (2,291)
------- -------
Other comprehensive income...................... 1,458 1,458 (2,291) (2,291)
--------- ------- --------- -------
Comprehensive income............................ $29,062 $66,506
======= =======
Balance March 31................................ (3,669)
---------
Ending balance.................................. $(194,026) $(315,612)
========= =========
The accompanying notes to the financial statements
should be read in conjunction with the financial statements
3
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months Ended For the Six Months Ended
March 31, 2002 March 31, 2001
------------------------ ------------------------
(unaudited) (unaudited)
Cash flows provided by operating activities:
Net income................................................... $ 27,604 $ 68,797
Adjustments to reconcile net income to net cash flow
provided by operating activities:
Depreciation and amortization............................ 37,276 13,522
Loss on early extinguishment of debt..................... 6 --
Loss on asset disposal................................... 80 --
Provision for losses on receivables...................... 459 275
Accretion of relinquishment liability discount........... 18,167 17,916
Cash paid for accretion of relinquishment liability
discount............................................... (18,041) (14,721)
Change in fair value of derivative instruments........... 5 1,277
Changes in operating assets and liabilities:
Increase in receivables and other assets................. (10,391) (16,547)
Increase in accounts payable and accrued expenses........ 3,252 6,312
--------- ---------
Net cash flows provided by operating activities.......... 58,417 76,831
--------- ---------
Cash flows used in investing activities:
Purchase of property and equipment........................... (144,229) (8,744)
Increase in construction in process, net of change in
construction accounts payable of $4,538 and $9,027,
respectively............................................... (68,053) (218,067)
Proceeds from asset sale..................................... 72 --
--------- ---------
Net cash flows used in investing activities.............. (212,210) (226,811)
--------- ---------
Cash flows provided by financing activities:
Proceeds from issuance of long-term debt..................... 250,000 --
Draw on Bank Credit Facility................................. 184,000 128,000
Payment on Bank Credit Facility.............................. (243,000) --
Principal portion of relinquishment payments................. (6,411) (6,310)
Distributions to Tribe....................................... (16,691) (20,000)
Capitalized financing fees................................... (6,257) (2,234)
Payment on equipment financing............................... (1,520) (2,719)
Increase in other long-term liabilities...................... 44 --
--------- ---------
Net cash flows provided by financing activities.......... 160,165 96,737
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 6,372 (53,243)
Cash and cash equivalents at beginning of period................ 74,284 115,731
--------- ---------
Cash and cash equivalents at end of period...................... $ 80,656 $ 62,488
========= =========
Supplemental disclosures:
Cash paid during the period for interest..................... $ 41,286 $ 22,111
The accompanying notes to the 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. Accordingly, they 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 period ending March
31, 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.
New Accounting Pronouncements
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 No. 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 No.
144, and has not yet quantified the impact of implementing SFAS No. 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 on October 1, 2001. Under SFAS No. 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 No. 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 No. 142, the Authority no longer records amortization of the
trademark. For the quarter and six months ended March 31, 2001, the Authority
recorded $859,000 and $1.7 million, respectively, related to the amortization
of the trademark. The Authority has applied the initial fair value test and has
determined that no impairment exists at March 31, 2002.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002." SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and an amendment of that Statement,
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." The Statement also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers." The Statement amends FASB Statement
No. 13, "Accounting for Leases," to eliminate an inconsistency between the
5
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENT--(Continued)
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 shall be
applied in fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified. Early
application of the provisions of this Statement related to the rescission of
Statement 4 is encouraged. The provisions in paragraphs 8 and 9(c) of this
Statement related to Statement 13 shall be effective for transactions occurring
after May 15, 2002, with early application encouraged. All other provisions of
this Statement shall be effective for financial statements issued on or after
May 15, 2002, with early application encouraged. The Authority has not adopted
SFAS No. 145 and has not yet quantified the impact of implementing SFAS No. 145
on the Authority's financial statements. The Authority does not anticipate a
negative effect on the Authority's financial position, results of operations or
cash flows upon adoption of the standard.
Reclassifications
Certain amounts in the 2001 financial statements have been reclassified to
conform with the 2002 presentation.
NOTE 3--FINANCING FACILITIES
Financing facilities, as described below, consisted of the following (in
thousands):
March 31, September 30,
2002 2001
---------- -------------
Bank Credit Facility.................. $ 199,000 $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 --
---------- --------
$1,099,000 $908,000
========== ========
Bank Credit Facility
On March 26, 2002 the Authority reduced the commitment amount on the Bank
Credit Facility to $400.0 million from $500.0 million (see Third Amendment
below). As of March 31, 2002, the Authority had $199.0 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 March 31, 2002 was 1.88% and the
applicable spread on a LIBOR loan
6
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENT--(Continued)
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 has
no base rate loans at March 31, 2002. Accrued interest on the Bank Credit
Facility was $148,000 at March 31, 2002.
On February 20, 2002, the Authority used the net proceeds from the issuance
of the $250.0 million 8% Senior Subordinated Notes to repay a portion of the
outstanding balance under the Bank Credit Facility.
Recent Amendments to the Bank Credit Facility
During the quarter ended March 31, 2002, the Authority received consent of
its lenders for two amendments. On February 8, 2002, the Authority received the
requisite consent of its lenders for Amendment No. 2 to its Bank Credit
Facility. The amendment revised several of the restrictive covenants governing
the Authority's activities and finances. On March 26, 2002, the Authority
received the requisite consent of its lenders for Amendment No. 3 to its Bank
Credit Facility. The amendment reduced the lenders' commitment from $500.0
million to $400.0 million effective March 26, 2002, and changed the first
scheduled commitment reduction date to September 30, 2002 from March 31, 2002.
The amount of each reduction on the last day of each fiscal quarter must equal
10% of the commitment as in effect immediately prior to the first such
reduction. For more information regarding the amendments to the Bank Credit
Facility, see the Authority's 8-Ks filed on February 12, 2002 and March 26,
2002, respectively.
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 March 31, 2002, the
Authority was in compliance with all financial covenant requirements.
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," 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 March 31, 2002.
7
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENT--(Continued)
Derivative instruments held by the Authority at March 31, 2002 are as
follows:
Notional Cost Market
------------ -------- -----------
Interest Rate Cap
Strike Rate--8%......... $ 69,883,000 $410,000 $ 1,300
Interest Rate Collar
Ceiling Strike Rate--8%
Floor Strike Rate--6%... 79,063,800 295,000 (2,383,757)
Interest Rate Swap
Pay fixed--6.35%
Receive Variable........ 39,531,900 221,000 (1,314,262)
------------ -------- -----------
Total...................... $188,478,700 $926,000 $(3,696,719)
============ ======== ===========
All derivative instruments are based on one-month LIBOR. One-month LIBOR was
1.88% on March 31, 2002.
For the quarters ended March 31, 2002 and 2001, the Authority recognized a
net gain of $11,000 and $865,000 respectively, relating to the change in time
value of its derivative instruments, as reflected in the statements of
income.The Authority recognized a net loss of $5,000 and $1,277,000 for the six
months ended March 31, 2002 and 2001, respectively.
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 March 31, 2002, accrued
interest on the Senior Notes was $4.1 million.
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
8
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENT--(Continued)
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 Subordinated Notes and the 2002 Senior Subordinated
Notes. As of March 31, 2002, accrued interest on the 1999 Senior Subordinated
Notes was $6.6 million.
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 March 31, 2002, accrued interest on the 2001 Senior Subordinated Notes was
$3.1 million.
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. 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 March 31, 2002, accrued interest on the 2002 Senior Subordinated Notes was
$2.2 million.
Letters of Credit
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, which the Authority is currently negotiating
a reduction. The $550,000 letter of credit was reduced from $1,000,000 on April
13, 2001. As of March 31, 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 March
31, 2002 and 2001, expenses associated with these services were $1.2 million
and $2.7 million, respectively. During the six months ended March 31, 2002 and
2001, the Authority incurred $4.1 million and $5.5 million, respectively, of
expenses for such services.
9
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENT--(Continued)
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 March 31, 2002
and 2001, expenses related to these agreements totaled $97,000. The Authority
expensed $194,000 and $181,000 for the six months ended March 31, 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 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 obtaining $25.0
million in operating lease financing to fund a portion of the cost overrun and
will increase its 2002 maintenance capital expenditures by $15.0 million to the
maximum authorized spending of $35.0 million to fund the balance of the overrun
out of operating cash flows. As of March 31, 2002, the Authority has spent
$936.2 million, excluding capitalized interest, on Project Sunburst. The
remaining $63.8 million (of which $15.0 million will be categorized as
maintenance capital expenditures) is anticipated to be spent during the
remainder of fiscal year 2002.
As of March 31, 2002, cumulative capitalized interest for Project Sunburst
construction expenses totaled $44.1 million. Capitalized interest totaled $3.1
million and $5.9 million for the quarters ended March 31, 2002 and 2001,
respectively. Capitalized interest totaled $6.3 million and $10.7 million for
the six months ended March 31, 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
$41.2 million and $33.8 million, respectively, for the quarters ended March 31,
2002 and March 31, 2001. For the six months ended March 31, 2001 and 2001,
expenses associated with the Slot Win Contribution totaled $84.2 million and
$66.8 million, respectively.
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
10
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENT--(Continued)
$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 March 31, 2002, Perini has received $22.3 million of the $27.3
million fee. Of the $22.3 million, $15.3 million has been included in property,
plant and equipment and the remainder has been included in "construction in
process" in the accompanying balance sheets. For the quarters ended March 31,
2002 and 2001, the Authority paid Perini $2.5 million and $970,000,
respectively, related to the construction management fee. The Authority paid
Perini $7.9 million and $3.0 million in fees for the six months ended March 31,
2002 and 2001, respectively.
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 $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. No payments have been made during the quarter ended March 31,
2002. Payments to AAA have totaled $61,000 for the six months ended March 31,
2002. As of March 31, 2002 amounts due to AAA but not yet paid totaled $44,000.
These amounts represent the revenue shortfall from October 1, 2001 through
March 31, 2002.
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 cashflows.
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).
11
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENT--(Continued)
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 March 31, 2002, the
carrying amount of the relinquishment liability was $585.7 million as compared
to $592.0 million at September 30, 2001. The decrease is due to $24.5 million
in relinquishment payments, partially offset by $18.2 million in accretion of
relinquishment liability discount. Of the $24.5 million in relinquishment
payments for the six months ended March 31, 2002, $6.4 million represents
principal amounts and the remaining $18.1 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 March 31, 2002,
relinquishment payments earned but unpaid were $12.5 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 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 March 31, 2002, the Authority has
incurred $12.9 million related to the TCA development fee, of which $12.5
million has been paid. Of the $12.9 million, $8.8 million has been included in
property, plant and equipment and the remainder has been included in
"construction in process" in 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.
12
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 included information relating to plans for future expansion and
other business development activities, as well as other capital spending,
financing sources and the effects of regulation (including gaming and tax
regulation) and competition. Such forward-looking information involves
important risks and uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the
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 and Form
10-Q for the quarter ended December 31, 2001. The forward-looking statements
included in this Quarterly Report on Form 10-Q are made only as of the date of
this report. We do not have and we do not undertake any obligation to publicly
update any forward-looking statements to reflect subsequent events or
circumstances. We 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 is
currently engaged in a major expansion of Mohegan Sun known as Project
Sunburst. The first phase of Project Sunburst, the Casino of the Sky, which
includes 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 full completion of construction
expected by the end of June 2002.
13
Mohegan Sun operates in an approximately 1.9 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 3,655 slot machines, 158 table games (including blackjack,
roulette, craps, baccarat, pai gow tiles and let it ride) and 42 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
1,888 restaurant seats;
. an approximately 10,000 square foot, 350-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 2,564 slot machines and 82 table games (including blackjack,
roulette, craps, baccarat, Spanish 21 and blackjack bonanza);
. 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 1,088
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; and
. the Shops at Mohegan Sun containing approximately 30 different retail
shops, five of which are owned by the Authority.
Mohegan Sun currently has parking spaces for approximately 9,965 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 scheduled the following
capital improvements to the Mohegan Sun facility:
Parking Garages. The Indian Summer Garage will provide approximately 2,700
additional parking spaces and is currently being constructed. The approved
budget for the construction of the Indian Summer Garage is $65.0 million.
Construction began on the Indian Summer Garage in July 2001, and the Authority
anticipates that the project will be completed in June 2002. A second parking
garage, the Thames Garage, which provides approximately 1,700 additional
parking spaces was completed in April 2002 at an estimated cost of $25.0
million.
14
Project Sunburst Utilities. The Authority is constructing 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 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 $10.0 million. The Authority originally paid
$1.1 million of the facility's cost; however, that amount was later fully
reimbursed by the Tribe. 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 three sources:
. Gaming revenues, which include revenues from slot machines, table games,
keno and racebook;
. Food and beverage sales; and
. Retail, entertainment and other revenues, which include revenues from the
Mohegan Sun gasoline and convenience center that opened in December 1998
and the Mohegan Sun Arena which opened in September 2001.
The table below summarizes the Authority's percentage of gross revenues from
each of these sources:
For the For the
Quarter ended Six Months
March 31, ended March 31,
------------ --------------
2002 2001 2002 2001
---- ---- ---- ----
Gaming revenues......................... 89% 89% 88% 88%
Food and beverage....................... 6% 5% 6% 5%
Retail, entertainment and other revenues 5% 6% 6% 7%
--- --- --- ---
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 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,
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, 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 tenant
outlets at the Shops at Mohegan
15
Sun, 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 Six For the Six
Quarter Ended Quarter Ended Months Ended Months Ended
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
-------------- -------------- -------------- --------------
Food and Beverage.............. $ 6,658 $ 5,947 $14,622 $12,314
Retail, entertainment and other 5,623 6,304 11,777 13,740
------- ------- ------- -------
Total....................... $12,281 $12,251 $26,399 $26,054
======= ======= ======= =======
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 a catalog program, the Sun Select Catalog, which
includes vacations, electronics and gift items. 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. Adjusted EBITDA represents further
adjustments to EBITDA to reflect pre-opening costs and certain other
non-operating income/expense. 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:
For the For the For the Six For the Six
Quarter Ended Quarter Ended Months Ended Months Ended
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
EBITDA
Net Income.................................... $19,989 $41,535 $ 27,604 $ 68,797
Add back:
Interest expense, net of capitalized interest. 17,147 5,890 31,946 11,815
Interest income............................... (117) (578) (240) (1,742)
Income taxes.................................. -- -- -- --
Depreciation and amortization................. 20,013 6,943 37,276 13,522
------- ------- -------- --------
EBITDA........................................ $57,032 $53,790 $ 96,586 $ 92,392
------- ------- -------- --------
EBITDA Margin................................. 24.3% 28.6% 20.3% 24.9%
Adjustments to EBITDA to reconcile to Adjusted
EBITDA
Pre-opening expense........................... $ 2,006 $ 1,927 $ 3,663 $ 3,316
Accretion of Relinquishment Liability discount 9,084 8,958 18,167 17,916
Other non-operating expense................... 50 -- 87 --
Change in fair value of derivative instruments (11) (865) 5 1,277
Discontinued Operations....................... -- 335 -- 527
------- ------- -------- --------
Adjusted EBITDA............................... $68,161 $64,145 $118,508 $115,428
======= ======= ======== ========
Adjusted EBITDA Margin........................ 29.0% 34.2% 24.9% 31.1%
16
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. 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 March 31, 2002 and
2001:
Net revenues for the quarter ended March 31, 2002 increased by $46.9
million, or 25.0%, to $234.7 million from $187.8 million reported for the same
period of the prior year. This increase is primarily attributable to an
increase in gaming revenues due to the opening of the Casino of the Sky on
September 25, 2001.
Adjusted EBITDA for the quarter ended March 31, 2002 increased by $4.0
million, or 6.3%, to $68.2 million from $64.1 million for the quarter ended
March 31, 2001. Mohegan Sun achieved a 29.0% Adjusted EBITDA margin for the
quarter ended March 31, 2002 compared to a 34.2% Adjusted EBITDA margin for the
quarter ended March 31, 2001. The decline in the margin was the result of
increased labor, marketing and operating expenses related to operating the
expanded facility. The Authority expects revenues to increase and operating
expenses to decrease as a percentage of revenues as the facility matures and as
the remaining amenities are opened. However, the Authority relies heavily on
drive-in traffic and the current parking infrastructure is not sufficient to
accommodate peak crowds. The Authority believes that its ability to host events
in the arena on weekends and to otherwise accommodate guests during peak
periods will be limited until the parking enhancements provided by the Thames
Garage and the Indian Summer Garage are fully completed in June 2002.
Accordingly, operating revenues and margins are expected to be negatively
impacted until the fourth quarter of 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 13.4% from the quarter ended
March 31, 2001 to the quarter ended March 31, 2002. The State of Connecticut
reported a gross slot win of $359.7 million and $317.2 million for the quarters
ended March 31, 2002 and 2001, respectively. Mohegan Sun exceeded the market's
growth in slot win as it experienced an increase in gross slot revenues of
21.8% in the quarter ended March 31, 2002 over the quarter ended March 31,
2001. Gross slot revenues were $164.8 million and $135.2 million for the
quarters ended March 31, 2002 and 2001, respectively. Gross slot win per unit
per day was $295 and $496 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 year over year from approximately 3,031 in the quarter ended March 31,
2001 to approximately 6,207 in the quarter ended March 31, 2002. The increase
in weighted average slot machines is primarily attributable to the opening of
the Casino of the Sky the Hall of the Lost Tribes smoke-free slot machine
venue, which added a total of approximately 3,200 slot machines to Mohegan Sun.
17
Gaming revenues for the quarter ended March 31, 2002 increased by $40.6
million, or 22.5%, to $221.3 million from $180.6 million for the quarter ended
March 31, 2001. This increase is due to a 20.1% growth in slot machine revenues
and a 30.4% 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 March 31, 2002 increased by
$3.9 million, or 35.4%, to $14.9 million from $11.0 million for the quarter
ended March 31, 2001. This increase is attributable to a 29.4% increase in
meals served for the quarter ended March 31, 2002, as compared to the same
period in the prior year and a higher average sale per check. The average sale
per check was $11.71 for the quarter ended March 31, 2002, as compared to
$11.60 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, a gourmet restaurant named Rain, and Todd English's
Tuscany Restaurant.
Retail, entertainment and other revenues for the quarter ended March 31,
2002 increased by $962,000, or 8.0%, to $12.9 million from $12.0 million for
the same period in the prior year. The increase was attributable to $2.5
million in entertainment and other revenue due to the opening of the Mohegan
Sun Arena on September 25, 2001 and the rental income earned from tenant
outlets in the Shops at Mohegan Sun. The increase was partially offset by a
decrease in retail revenue of $1.5 million 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 quarter ended March 31, 2002 decreased by
$1.4 million, or 8.7%, to $14.5 million from $15.8 million for the quarter
ended March 31, 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, 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 tenant outlets 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 quarter ended March 31, 2002 increased by
$56.0 million, or 42.3%, to $188.5 million from $132.5 million for the quarter
ended March 31, 2001. The increase is primarily the result of supporting a
$45.5 million increase in gross revenues and a $13.1 million increase in
depreciation expense due to the opening of the Casino of the Sky.
Gaming costs and expenses for the quarter ended March 31, 2002 increased by
$32.6 million, or 37.4%, to $119.7 million from $87.1 million for the quarter
ended March 31, 2001. This increase is attributable to an approximately 90-unit
increase in table games and the addition of approximately 3,200 slot machines
associated with the opening of the Casino of the Sky and the Hall of the Lost
Tribes. Gaming costs and expenses as a percentage of gaming revenues were 54.1%
in the quarter ended March 31, 2002 compared to 48.2% in the same period of the
prior year, an increase of 5.9%. Additionally, the first phase of Project
Sunburst included the opening of the Shops at Mohegan Sun. The substantial
point redemption by Mohegan Sun Player's Club patrons in the tenant Shops at
Mohegan Sun resulted in a significant increase in Mohegan Sun's gaming expenses
for the quarter ended March 31, 2002.
Food and beverage costs and expenses for the quarter ended March 31, 2002
increased by $4.2 million, or 70.5%, to $10.1 million from $5.9 million in
expenses for the quarter ended March 31, 2001. The cost of sales for food
calculated as a percentage of food revenue was 33.8% for the quarter ended
March 31, 2002 and 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, a gourmet restaurant named Rain, and Todd English's Tuscany
during the quarter ended December 31, 2001, and additional beverage service in
the Casino of the Sky, the arena concessions, the Cabaret bar, Leffingwell's
bar located at the base of Wombi Rock and Sachem's Lounge. The opening of these
additional outlets resulted in an increase in the number of meals served, or
food covers, from 870,000 in the quarter ended March 31, 2001 to 1,126,000 in
the quarter ended March 31, 2002, a 29.4% increase.
18
Retail, entertainment and other costs and expenses for the quarter ended
March 31, 2002 increased by $1.3 million, or 29.8%, to $5.8 million from $4.5
million for the quarter ended March 31, 2001. This increase was primarily a
result events held in the Mohegan Sun Arena during the quarter ended March 31,
2002. Some of these events included the National Women's Basketball League
Championships, concerts by Janet Jackson and Anne Murray, Showtime Boxing, and
an Ultimate Fighting Championship. Costs associated with operating the Cabaret,
an intimate 300-seat theater in the Casino of the Sky, also contributed to the
increase.
General and administrative costs and expenses for the quarter ended March
31, 2002 increased by $4.8 million, or 18.2%, to $30.8 million from the $26.1
million for the quarter ended March 31, 2001. This increase is primarily
associated with utilities costs related to the expanded facility and
advertising expenses targeted to promote Mohegan Sun through all major media
outlets.
Pre-opening costs and expenses associated with the April 23, 2002 partial
opening of the Mohegan Sun hotel were $2.0 million for the quarter ended March
31, 2002 compared to pre-opening expenses (relating to the opening of the first
phase of Project Sunburst) of $1.9 million for the quarter ended March 31, 2001.
Depreciation and amortization for the quarter ended March 31, 2002 increased
by $13.1 million, or 188.2%, to $20.0 million from $6.9 million for the quarter
ended March 31, 2001. This increase was a result of $719.4 million of assets
related to Project Sunburst, including $26.5 million of capitalized interest,
placed in service between the opening of the first phase of Project Sunburst on
September 25, 2001 and March 31, 2002.
Income from operations for the quarter ended March 31, 2002 decreased by
$9.1 million, or 16.5%, to $46.1 million from $55.3 million for the quarter
ended March 31, 2001. This decrease is attributable to increases in costs and
expenses associated with the expansion of Mohegan Sun, including increased
staffing levels and increases in depreciation and amortization.
Accretion of the discount associated with the relinquishment liability
reassessment for the quarter ended March 31, 2002 increased by $126,000, or
1.4%, to $9.1 million from $9.0 million for the quarter ended March 31, 2001.
Interest and other income for the quarter ended March 31, 2002 decreased by
$461,000, or 79.8%, to $117,000 from $578,000 in income for the quarter ended
March 31, 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 $23.8 million and $20.6
million for the quarters ended March 31, 2002 and March 31, 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 March 31, 2002 increased by $11.3
million, or 191.1%, to $17.1 million from $5.9 million in expense for the
quarter ended March 31, 2001. This increase was mainly attributable to higher
average debt outstanding and a decrease in the amount of capitalized interest.
The weighted average outstanding debt was $1.1 billion for the quarter ended
March 31, 2002, compared to $595.9 million for the quarter ended March 31,
2001. Capitalized interest was $3.1 million for the quarter months ended March
31, 2002 compared to $5.9 million for the same period in the prior year. The
weighted average interest rate for the quarter ended March 31, 2002 was 7.4%,
compared to 8.2% for the quarter ended March 31, 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 $335,000 for the quarter ended March 31, 2001. There was no loss from
discontinued operations for the quarter ended March 31, 2002.
Net income for the quarter ended March 31, 2002 decreased by $21.5 million,
or 51.9%, to $20.0 million from $41.5 million for the quarter ended March 31,
2001. The decrease is primarily due to the increase in interest expense and
depreciation and amortization. Interest expense increased by $11.3 million
during the quarter ended March 31, 2002 contributing to the reduction in net
income. The increase in interest expense was mainly
19
attributable to higher average debt outstanding. The weighted average
outstanding debt was $1.1 billion for the quarter ended March 31, 2002,
compared to $595.9 million for the quarter ended March 31, 2001. Depreciation
and amortization increased by $13.1 million for the quarter ended March 31,
2002, due to the placing in service of assets related to the first phase of
Project Sunburst.
Comparison of Operating Results for the Six Months Ended March 31, 2002 and
2001:
Net revenues for the six months ended March 31, 2002 increased by $105.3
million, or 28.4%, to $476.2 million from $370.9 million reported for the same
period of the prior year. This increase is primarily attributable to an
increase in gaming revenues due to the opening of the Casino of the Sky on
September 25, 2001.
Adjusted EBITDA for the six months ended March 31, 2002 increased by $3.1
million, or 2.7%, to $118.5 million from $115.4 million for the six months
ended March 31, 2001. Mohegan Sun achieved a 24.9% Adjusted EBITDA margin for
the six months ended March 31, 2002 compared to a 31.1% adjusted EBITDA margin
for the six months ended March 31, 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 can be attributed to the impact of the national recession and the
events of the September 11, 2001 tragedy. The Authority expects revenues to
increase and operating expenses to decrease as a percentage of revenues as the
facility matures and as the remaining amenities are opened. However, the
Authority relies heavily on drive-in traffic and the current parking
infrastructure is not sufficient to accommodate peak crowds. The Authority
believes that its ability to host events in the arena on weekends and to
otherwise accommodate guests during peak periods will be limited until the
parking enhancements provided by the Thames Garage and the Indian Summer Garage
are fully completed in June 2002. Accordingly, operating revenues and margins
are expected to be negatively impacted until the fourth quarter of 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 14.5% for the six months
ending March 31, 2002. The State of Connecticut reported a gross slot win of
$717.9 million and $626.8 million for the six months ended March 31, 2002 and
2001, respectively. Mohegan Sun exceeded the market's growth in slot win as it
experienced an increase in gross slot revenues of 26.0% in the six months ended
March 31, 2002 over the six months ended March 31, 2001. Gross slot revenues
were $336.6 million and $267.2 million for the six months ended March 31, 2002
and 2001, respectively. Gross slot win per unit per day was $298 and $484 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 year over year from
approximately 3,033 in the six months ended March 31, 2001 to approximately
6,213, in the six months ended March 31, 2002. The increase in weighted average
slot machines is primarily attributable to the opening of the Casino of the Sky
and the Hall of the Lost Tribes smoke-free slot machine venue, which added a
total of approximately 3,200 slot machines to Mohegan Sun.
Gaming revenues for the six months ended March 31, 2002 increased by $92.6
million, or 26.0%, to $448.1 million from $355.6 million for the six months
ended March 31, 2001. This increase is due to a 25.1% growth in slot machine
revenues and a 30.2% increase in table game revenues as a result of the opening
of the Casino of the Sky.
Food and beverage revenues for the six months ended March 31, 2002 increased
by $10.3 million, or 47.2%, to $32.0 million from $21.8 million for the six
months ended March 31, 2001. This increase in food and beverage revenues is
attributable to a 34.1% increase in meals served for the six months ended March
31, 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, a
gourmet restaurant named Rain, and Todd English's Tuscany Restaurant.
Retail, entertainment and other revenues for the six months ended March 31,
2002 decreased by $988,000, or 3.5%, to $27.6 million from $28.6 million for
the six months ended March 31, 2001. Retail revenue decreased
20
$4.3 million due to a shift in patronage from Mohegan Sun operated outlets to
the tenant outlets in the Shops at Mohegan Sun. The decrease was partially
offset by an increase of $3.3 million in entertainment and other revenue due to
the opening of the Mohegan Sun Arena on September 25, 2001 and the rental
income earned from tenant outlets in the Shops at Mohegan Sun.
Promotional allowances for the six months ended March 31, 2002 decreased by
$3.4 million, or 9.8%, to $31.6 million from $35.0 million for the six months
ended March 31, 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, 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 tenant outlets 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 six months ended March 31, 2002 increased
by $126.3 million, or 46.4%, to $398.6 million from $272.3 million during the
six months ended March 31, 2001. This increase is primarily the result of
supporting a $101.9 million increase in gross revenues and a $23.8 million
increase in depreciation expense due to the opening of the Casino of the Sky.
Gaming costs and expenses for the six months ended March 31, 2002 increased
by $72.6 million, or 40.2%, to $253.0 million from $180.4 million for the six
months ended March 31, 2001. The increase is attributable to an approximately
90-unit increase in table games and the addition of approximately 3,200 slot
machines associated with the opening of the first phase of Project Sunburst and
the Hall of the Lost Tribes. Gaming costs and expenses as a percentage of
gaming revenues were 56.5% in the six months ended March 31, 2002 compared to
50.7% in the same period of the prior year, an increase of 5.8%. Additionally,
the first phase of Project Sunburst included the opening of the Shops at
Mohegan Sun.The substantial point redemption by Mohegan Sun Players Club
patrons in the tenant Shops at Mohegan Sun resulted in a significant increase
in Mohegan Sun's gaming expenses for the six months ended March 31, 2002.
Food and beverage costs and expenses for the six months ended March 31, 2002
increased by $9.2 million, or 76.6%, to $21.2 million from $12.0 million for
the six months ended March 31, 2001. The cost of sales for food as calculated
as a percentage of food revenue decreased to 34.9% in the six months ended
March 31, 2002, from 35.3% in the six months ended March 31, 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, a gourmet restaurant named Rain, and Todd English's 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 1.8 million in the six months ended March
31, 2001 to 2.4 million in the six months ended March 31, 2002, a 34.1%
increase.
Retail, entertainment and other costs and expenses for the six months ended
March 31, 2002 increased by $5.4 million, or 58.5%, to $14.7 million from $9.3
million for the six months ended March 31, 2001. This increase is primarily a
result of the events that were held in the Mohegan Sun Arena in the six months
ended March 31, 2002. The Mohegan Sun Arena opened on September 25, 2001. These
events included an NBA basketball game with Michael Jordan and the Washington
Wizards, the National Women's Basketball League Championships, concerts with
Janet Jackson, Tim McGraw, Gloria Estefan, Aerosmith, Julio Iglesias, Toby
Keith, Bob Dylan and Anne Murray, Polkapalooza, Showtime Boxing, an exhibition
tennis match with Martina Navritolova and Monica Seles and ESPN Bowling. 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 six months ended March
31, 2002 increased by $15.0 million, or 27.9%, to $68.7 million from the $53.7
million for the six months ended March 31, 2001. This
21
increase is primarily associated with advertising expenses targeted to promote
Mohegan Sun through all major media outlets.
Pre-opening costs and expenses associated with the April 23, 2002 partial
opening of the Mohegan Sun hotel were $3.7 million for the six months ended
March 31, 2002 compared to pre-opening expenses (relating to the opening of the
first phase of Project Sunburst) of $3.3 million for the six months ended March
31, 2001.
Depreciation and amortization for the six months ended March 31, 2002
increased by $23.8 million, or 175.7%, to $37.3 million for the six months
ended March 31, 2002 from $13.5 million for the six months ended March 31,
2001. This increase was a result of $719.4 million of assets related to Project
Sunburst, including $26.5 million of capitalized interest, placed in service
between the opening of the first phase of Project Sunburst on September 25,
2001 and March 31, 2002.
Income from operations for the six months ended March 31, 2002 decreased by
$21.0 million, or 21.3%, to $77.6 million from $98.6 million for the six months
ended March 31, 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 and the events of the September 11, 2001 tragedy.
Accretion of the discount associated with the relinquishment liability
reassessment for the six months ended March 31, 2002 increased by $251,000, or
1.4%, to $18.2 million from $17.9 million for the same period in the prior year.
Interest and other income for the six months ended March 31, 2002 decreased
by $1.5 million, or 86.2%, to $240,000 from $1.7 million for the six months
ended March 31, 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 $18.2
million and $21.3 million for the six months ended March 31, 2002 and March 31,
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 six months ended March 31, 2002 increased $20.1
million, or 170.4%, to $31.9 million from $11.8 million for the six months
ended March 31, 2001. This increase is mainly attributable to higher average
debt outstanding offset by a decrease in interest rates. Capitalized interest
was $6.3 million for the six months ended March 31, 2002 compared to $10.7
million for the same period in the prior year. The weighted average interest
rate for the six months ended March 31, 2002 was 7.27%, compared to 8.31% for
the six months ended March 31, 2001. The weighted average outstanding debt was
$1.0 billion for the six months ended March 31, 2002, compared to $550.3
million for the six months ended March 31, 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 $527,000 for the six months ended March 31, 2001. There was no loss
from discontinued operations for the six months ended March 31, 2002.
Net income for the six months ended March 31, 2002 decreased by $41.2
million, or 59.9%, to $27.6 million from $68.8 million for the same period in
the prior year. The decrease is primarily attributable to increase in interest
expense and depreciation and amortization. Interest expense increased by $20.1
million during the six months contributing to the reduction in net income. The
increase in interest expense was mainly attributable to higher average debt
outstanding. The weighted average outstanding debt was $1.0 billion for the six
months ended March 31, 2002, compared to $550.3 million for the six months
ended March 31, 2001. Depreciation and amortization increased by $23.8 million
for the six months ended March 31, 2002, due to the placing in service of
assets related to the first phase of Project Sunburst.
22
Liquidity, Capital Resources and Capital Spending
As of March 31, 2002, the Authority held cash and cash equivalents of $80.7
million, an increase of $18.2 million from $62.5 million as of March 31, 2001.
This increase is mainly attributable to the increase in cash on hand
requirements related to the opening of the Casino of the Sky. Cash provided by
operating activities for the six months ended March 31, 2002 decreased by $18.4
million, or 24.0%, to $58.4 million from $76.8 million for the six months ended
March 31, 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 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;
. substantial cost overruns in connection with the completion of Project
Sunburst;
. 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 March 31,
2002 was 1.88% 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 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 March 31,
2002, the Authority had no base rate loans.
During the six months ended March 31, 2002, the Authority paid down $59.0
million, net of $184.0 million in draws, on the Bank Credit Facility. The
outstanding balance under the Bank Credit Facility as of March 31, 2002 was
$199.0 million. 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. 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, or if there is a substantial
cost overrun in connection with the completion of Project Sunburst, 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
23
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 March 31, 2002.
Recent Amendments to the Bank Credit Facility. On February 8, 2002 the
Authority received the requisite consent of its lenders for Amendment No. 2 to
its Bank Credit Facility. The amendment revised several of the restrictive
covenants governing the Authority's activities and finances.
On March 26, 2002, the Authority received the requisite consent of its
lenders for Amendment No. 3 to its Bank Credit Facility. The amendment reduced
the lenders' commitment from $500.0 million to $400.0 million effective March
26, 2002, and changed the first scheduled commitment reduction date to
September 30, 2002 from March 31, 2002.
Capital Expenditures
Capital Expenditures Incurred to Date. Capital expenditures totaled $216.8
million including capitalized interest for the six months ended March 31, 2002,
versus $235.8 million for the same period in the prior year. These capital
expenditures were an aggregate of the following:
. Cumulative Project Sunburst construction expenses, including capitalized
interest, totaled $978.2 million, including $44.1 million in capitalized
interest and net of $2.1 million expensed or recorded as inventory,
through March 31, 2002. During the six months ending March 31, 2002
expenditures totaled $133.9 million, including $6.3 million in capitalized
interest and net of $780,000 expensed or recorded as inventory, versus
$203.2 million, net of $10.7 million in capitalized interest, expended
during the six months ended March 31, 2001.
. Property maintenance capital expenditures for furniture, fixtures and
equipment totaled $16.9 million and $11.7 million for the six months ended
March 31, 2002 and March 31, 2001, respectively.
. Capital expenditures on the Authority's electrical and water systems
infrastructure improvements totaled $5.4 million and $3.9 million for the
six months ended March 31, 2002 and March 31, 2001, respectively.
Cumulative infrastructure improvements totaled $35.0 million as of March
31, 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, which
will provide 2,700 additional patron parking spaces, totaled $42.3 million
for the six months ending March 31, 2002. The Authority did not incur any
capital expenditures for the Indian Summer Garage for the six months
ending March 31, 2001. Cumulative expenditures totaled $46.8 million as of
March 31, 2002. The Indian Summer Garage is expected to open in June 2002.
. Capital expenditures for the $25.0 million, 1,700-space Thames Garage
totaled $18.3 million for the six months ended March 31, 2002. The
Authority did not incur any capital expenditures for the construction of
the Thames Garage for the six months ending March 31, 2001.
. 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 $499,000 for the six months ending March 31, 2002. Expenditures for
the construction of the Hall of the Lost Tribes for the six months ending
March 31, 2001 totaled $5.1 million. Cumulative expenditures for the Hall
of the Lost Tribes totaled $15.4 million as of March 31, 2002.
Construction is now complete.
. Capital expenditures for the construction of the employee day care
facility were $554,000 during the six months ended March 31, 2002 and
cumulative expenditures on the employee day care facility reached $1.1
million as of March 31, 2002. The Authority did not incur any construction
expenses in conjunction
24
with the employee day care facility for the six months ended March 31,
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 six months ended March 31, 2002 as
construction of the facility is complete. Capital expenditures associated
with the Employee Parking Garage were $1.2 million for the six months
ended March 31, 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 March 31, 2002, construction
retainage totaled $16.3 million, which has been included in construction
accounts payable 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 $91.8
million and to be allocated as follows:
. $18.1 million on maintenance capital expenditures.
. $48.8 million on Project Sunburst construction.
. $18.2 million on the Indian Summer parking garage.
. $6.7 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 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 obtaining $25.0
million in operating lease financing to fund a portion of the cost overrun and
will increase its 2002 maintenance capital expenditures by $15.0 million to the
maximum authorized spending of $35.0 million to fund the balance of the overrun
out of operating cash flows. As of March 31, 2002, the Authority has spent
$936.2 million, excluding capitalized interest, on Project Sunburst. The
remaining $63.8 million (of which $15.0 million will be categorized as
maintenance capital expenditures) is anticipated to be spent during the
remainder of fiscal year 2002.
As of March 31, 2002, cumulative capitalized interest for Project Sunburst
construction expenses totaled $44.1 million. Capitalized interest totaled $3.1
million and $5.9 million for the quarter ended March 31, 2002 and 2001,
respectively. Capitalized interest totaled $6.3 million and $10.7 million for
the six months ended March 31, 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. In
addition, the Authority expects to complete a $25.0 million operating lease
transaction to fund a portion of the cost overrun. 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, its ability to draw down on the Bank Credit Facility and
the successful completion of the operating lease transaction.
25
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 present
value of this liability is estimated at $585.7 million as of March 31, 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 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 $24.5 million in Senior
Relinquishment Payments during the six months ended March 31, 2002. Of the
$24.5 million in relinquishment payments for the six months ended March 31,
2002, $6.4 million represents principal amounts and the remaining $18.1 million
is payment for the accretion of interest. As of March 31, 2002, relinquishment
payments earned but unpaid were $12.5 million. During the six months ended
March 31, 2001, the Authority paid $21.0 million in Senior Relinquishment
Payments consisting of $6.3 million in principal amounts and $14.7 million for
the accretion of interest.
Distributions to the Tribe
During the three and six months ending March 31, 2002, the Authority
distributed $9.7 million and $16.7 million, respectively, to the Tribe. The
Authority distributed $10.0 million and $20.0 million, respectively, to the
Tribe for the three and six months ended March 31, 2001.
Debt Service Costs
For the six months ended March 31, 2002 and March 31, 2001 the Authority
incurred the following debt service costs:
Six Months Ended Six Months Ended
March 31, 2002 March 31, 2001
(in thousands) ---------------- ----------------
Bank Credit Facility.................. $ 8,561 $ 1,087
$200M 8.125% Senior Notes............. 8,125 8,125
$300M 8.75% Senior Subordinated Notes. 13,125 13,125
$150M 8.375% Senior Subordinated Notes 6,281 --
$250M 8% Senior Subordinated Notes.... 2,167 --
Capital Leases........................ 9 189
Capitalized Interest.................. (6,322) (10,711)
------- --------
Total Interest Expense............. $31,946 $ 11,815
======= ========
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.
26
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.
Fiscal
Year
Contractual Obligations (in thousands) 2002 (1) 2-3 years 4-5 years After 5 years
- -------------------------------------- -------- --------- --------- -------------
Long-term debt (2)............... $114,648 $143,352 $200,000 $700,000
Construction obligations (3)..... 192,200 -- -- --
Development obligations (4)...... 4,718 -- -- --
-------- -------- -------- --------
Total......................... $311,566 $143,352 $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.
(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.
Fiscal
Year
Contractual Commitments (in thousands) 2002 (1) 2-3 years 4-5 years After 5 years
- -------------------------------------- -------- --------- --------- -------------
Slot winning payment commitments (2). 187,388 402,144 434,959 1,212,586
Relinquishment commitments (3)....... 58,478 131,341 142,058 578,699
Priority distributions (4)........... 14,882 31,282 33,420 93,889
-------- -------- -------- ----------
Total............................. $260,748 $564,767 $610,437 $1,885,174
======== ======== ======== ==========
(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 and, while the
Mohegan Compact is perpetual in term, for purposes of calculating these
amounts, the Authority has assumed that this commitment will terminate in
10 years.
(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
27
relinquishment commitments are calculated as five percent of revenues, as
defined in the Relinquishment Agreement. The amounts shown in this table are
estimates and have been calculated through December 31, 2014, the date on
which the Relinquishment Agreement terminates.
(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 six months ended March 31,
2002, the Authority paid $7.7 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%, and has assumed that this commitment will terminate
in 10 years.
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
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" ("SFAS No. 5"), has recorded a relinquishment liability of the
estimated present value of its obligations under the Relinquishment Agreement.
At March 31, 2002, the carrying amount of the relinquishment liability was
$585.7 million as compared to $592.0 million at September 30, 2001. The
decrease is due to $24.5 million in relinquishment payments, partially offset
by $18.2 million in accretion of relinquishment liability discount. Of the
$24.5 million in relinquishment payments for the six months ended March 31,
2002, $6.4 million represents principal amounts and the remaining $18.1 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 March 31, 2002, relinquishment payments earned but unpaid were $12.5
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 lease. 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.
28
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 has applied the initial fair value test
and has determined that no impairment exists 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.
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 August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 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 No. 144 on the Authority's
financial statements, but does not anticipated 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 on October 1, 2001. Under SFAS No. 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 No.
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
No. 142, the Authority no longer records amortization of the trademark. For the
quarter and six months ended March 31, 2001, the Authority recorded $859,000
and $1.7 million, respectively, related to the amortization of the trademark.
As of March 31, 2002, the Authority has applied the initial fair value test and
has determined that no impairment exists.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002." SFAS No. 145 rescinds
29
FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." The Statement also rescinds
FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers."
The Statement amends FASB Statement No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. The
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this Statement
related to the rescission of Statement 4 shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does
not meet the criteria in Opinion 30 for classification as an extraordinary item
shall be reclassified. Early application of the provisions of this Statement
related to the rescission of Statement 4 is encouraged. The provisions in
paragraphs 8 and 9(c) of this Statement related to Statement 13 shall be
effective for transactions occurring after May 15, 2002, with early application
encouraged. All other provisions of this Statement shall be effective for
financial statements issued on or after May 15, 2002, with early application
encouraged. The Authority has not adopted SFAS No. 145, and has not yet
quantified the impact of implementing SFAS No. 145 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.
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 March 31, 2002, the Authority had drawn $199.0 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," 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 March 31, 2002.
30
Derivative instruments held by the Authority at March 31, 2002 are as
follows:
Effective Date Maturity Date Notional Cost Market
--------------- --------------- ------------ -------- -----------
Interest Rate Cap
Strike Rate--8%......... October 1, 2000 October 1, 2003 $ 69,883,000 $410,000 $ 1,300
Interest Rate Collar
Ceiling Strike Rate--8%
Floor Strike Rate--6%... January 2, 2001 March 1, 2004 79,063,800 295,000 (2,383,757)
Interest Rate Swap
Pay fixed--6.35%
Receive Variable........ January 2, 2001 March 1, 2004 39,531,900 221,000 (1,314,262)
------------ -------- -----------
Total............... $188,478,700 $926,000 $(3,696,719)
============ ======== ===========
All derivative instruments are based upon one-month LIBOR, which was 1.88%
on March 31, 2002.
For the quarters ended March 31, 2002 and March 31, 2001, the Authority
recognized a net gain of $11,000 and $865,000, respectively. For the six months
ended March 31, 2002 and March 31, 2001, the Authority recognized a net loss of
$5,000 and $1,277,000 respectively, relating to the change in time value of its
derivative instruments, as reflected in the statement of income. See also Note
3 to the Authority's financial statements.
31
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
None
(b) Form 8-K
On February 12, 2002, the Authority filed a Form 8-K regarding Amendment
No. 2 to its Bank Credit Facility. The amendment revised several of the
restrictive covenants governing the Authority's activities and finances.
On March 26, 2002, the Authority filed a Form 8-K regarding Amendment No.
3 to its Bank Credit Facility. The amendment reduced the lenders' commitment
from $500.0 million to $400.0 million effective March 26, 2002, and changed
the first scheduled commitment reduction date to September 30, 2002 from
March 31, 2002.
32
SIGNATURES
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
Name Title Date
---- ----- ----
/s/ MARK F. BROWN Chairman, Management Board May 9, 2002
- -----------------------------
Mark F. Brown
/s/ WILLIAM J. VELARDO President and General Manager May 9, 2002
- -----------------------------
William J. Velardo
/s/ JEFFREY E. HARTMANN Executive Vice President May 9, 2002
- ----------------------------- Finance/Chief Financial
Jeffrey E. Hartmann Officer (Principal
Financial and Accounting
Officer)
33