SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission file number 033-80655
MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of registrant as specified in its charter)
Connecticut 06-1436334
(State or other jurisdiction of (IRS employer
incorporation or organization) Identification No.)
One Mohegan Sun Boulevard, Uncasville, CT 06382
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860) 862-8000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated file (as
defined in Rule 12b-2 of the Exchange Act): Yes No X
----- -----
EXPLANATORY NOTE
The Mohegan Tribal Gaming Authority (the "Authority") has restated its financial
statements for the quarterly periods ended December 31, 2000, March 31, 2001,
June 30, 2001, December 31, 2001, March 31, 2002, June 30, 2002 and for the
fiscal year ended September 30, 2001.
As more fully described in Note 7, this Form 10-Q/A includes in Item 1 of Part I
the restated information and related notes thereto for the quarter and nine
months ended June 30, 2002 and other information relating to such restated
financial statements. Item 2 of Part I also includes the Authority's amended and
restated discussion and analysis of financial condition and results of
operations. Except for Part I, Item 6 of Part II and the addition of the
certifications required under Sections 302 (as further described in Rule 15d 14
issued by the Securities and Exchange Commission) and 906 of the Sarbanes-Oxley
Act of 2002, no other information included in the original report on Form 10-Q
is amended by this amendment. The information contained herein is as of June 30,
2002 and does not reflect subsequent events except any that may have existed as
of the date of the original Form 10-Q relating to such quarter and nine months
and which were disclosed therein.
MOHEGAN TRIBAL GAMING AUTHORITY
INDEX TO FORM 10-Q/A
PART I. FINANCIAL INFORMATION Page
Number
------
Item 1. Financial Statements
Report of Independent Accountants by PricewaterhouseCoopers LLP. 1
Balance Sheets of Mohegan Tribal Gaming Authority as of June 30, 2002
(unaudited) and September 30, 2001. 2
Statements of Income of Mohegan Tribal Gaming Authority for the Quarters and Nine 3
Months Ended June 30, 2002 and 2001 (unaudited).
Statements of Changes in Capital of Mohegan Tribal Gaming Authority for the
Quarters and Nine Months Ended June 30, 2002 and 2001 (unaudited). 4
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the Nine Months
Ended June 30, 2002 and 2001 (unaudited). 5
Notes to Financial Statements of Mohegan Tribal Gaming Authority. 6-21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 22-40
Item 3. Quantitative and Qualitative Disclosure of Market Risk. 40
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 42
Signatures. Mohegan Tribal Gaming Authority. 43
Certifications. 44-45
Report of Independent Accountants
To the Mohegan Tribal Gaming Authority:
We have reviewed the accompanying balance sheet of the Mohegan Tribal Gaming
Authority ("the Authority") as of June 30, 2002, the related statements of
income and of changes in capital for the quarters and nine-month periods ended
June 30, 2002 and 2001 and the related statements of cash flows for the
nine-month periods ended June 30, 2002 and 2001. These financial statements are
the responsibility of the Authority's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 7 to the financial statements, the Authority has restated
its financial statements as of June 30, 2002 and for the quarter and nine-month
period ended June 30, 2002. The financial statements for the quarter and
nine-month period ended June 30, 2001 were previously reviewed by other
independent accountants who have ceased operations.
We also audited in accordance with auditing standards generally accepted in the
United States of America, the Authority's balance sheet as of September 30,
2001, and the related statements of income, of changes in capital and of cash
flows for the year then ended (not presented herein), and in our report dated
November 11, 2002, we expressed an unqualified opinion on those financial
statements (with an explanatory paragraph indicating that the Authority has
restated those financial statements which were previously audited by other
independent accountants who have ceased operations). In our opinion, the
information set forth in the accompanying balance sheet as of September 30, 2001
(after the restatement described in Note 7 to these financial statements), is
fairly stated in all material respects in relation to the balance sheet from
which it has been derived.
/S/ PRICEWATERHOUSECOOPERS LLP
Hartford, CT
November 11, 2002
1
Mohegan Tribal Gaming Authority
Balance Sheets
(in thousands)
June 30,
2002 September 30,
(unaudited) 2001
----------------------- -------------
(restated - see note 7)
ASSETS
------
Current assets:
Cash and cash equivalents $ 57,273 $ 74,284
Receivables, net 12,392 5,347
Due from Tribe 10 957
Inventories 15,513 11,455
Other current assets 19,108 14,209
-------------- -------------
Total current assets 104,296 106,252
Non-current assets:
Property and equipment, net 1,380,787 1,080,415
Construction in process 80,272 223,568
Trademark, net 119,692 119,692
Other assets, net 27,371 24,766
-------------- -------------
Total assets $ 1,712,418 $ 1,554,693
============== =============
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of long-term debt $ 20,000 $ -
Current portion of capital lease obligations - 1,514
Current portion of relinquishment liability 78,634 70,199
Accounts payable and accrued expenses 76,686 73,548
Construction payables 60,558 155,497
Accrued interest payable 34,876 13,062
-------------- -------------
Total current liabilities 270,754 313,820
Non-current liabilities:
Long-term debt, net of current portion 1,100,000 908,000
Relinquishment liability, net of current portion 509,944 521,809
Other long-term liabilities 3,652 5,232
-------------- -------------
Total liabilities 1,884,350 1,748,861
-------------- -------------
Commitments and contingencies (Note 5)
Capital:
Retained deficit (170,594) (192,177)
Accumulated other comprehensive loss (1,338) (1,991)
-------------- -------------
Total capital (171,932) (194,168)
-------------- -------------
Total liabilities and capital $ 1,712,418 $ 1,554,693
============== =============
The accompanying notes to financial statements should be read
in conjunction with the financial statements
2
Mohegan Tribal Gaming Authority
Statements of Income
(in thousands)
For the For the For the For the
Quarter Ended Quarter Ended Nine Months Ended Nine Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
(unaudited) (unaudited) (unaudited) (unaudited)
----------------- --------------- ------------------ ------------------
(restated - see (restated - see
note 7) note 7)
Revenues:
Gaming $ 242,414 $ 192,053 $ 690,535 $ 547,616
Food and beverage 19,417 12,849 51,454 34,610
Hotel 6,785 - 6,785 -
Retail, entertainment and other 15,581 14,014 43,169 42,590
----------------- --------------- ------------------ ------------------
Gross revenues 284,197 218,916 791,943 624,816
Less - Promotional allowances (20,454) (18,374) (52,042) (53,404)
----------------- --------------- ------------------ ------------------
Net revenues 263,743 200,542 739,901 571,412
----------------- --------------- ------------------ ------------------
Operating costs and expenses:
Gaming 112,542 86,965 320,228 243,123
Food and beverage 11,023 6,442 30,037 18,462
Hotel 1,392 - 1,392 -
Retail, entertainment and other 8,850 7,002 29,097 22,476
Marketing, general and administrative 54,630 32,009 165,333 103,798
Pre-opening costs and expenses 4,092 3,724 7,755 7,040
Depreciation and amortization 21,689 7,404 56,987 18,938
----------------- --------------- ------------------ ------------------
Total operating costs and expenses 214,218 143,546 610,829 413,837
----------------- --------------- ------------------ ------------------
Income from operations 49,525 56,996 129,072 157,575
----------------- --------------- ------------------ ------------------
Other income (expense):
Accretion of relinquishment liability
discount (Note 6) (9,083) (8,958) (27,250) (26,874)
Interest income 95 648 335 2,389
Interest expense, net of capitalized
interest (Note 5) (21,732) (3,219) (52,525) (13,524)
Other expense, net (50) (114) (137) (113)
----------------- --------------- ------------------ ------------------
Total other income (expense) (30,770) (11,643) (79,577) (38,122)
----------------- --------------- ------------------ ------------------
Income from continuing operations 18,755 45,353 49,495 119,453
Loss from discontinued operations - (64) - (591)
----------------- --------------- ------------------ ------------------
Net income $ 18,755 $ 45,289 $ 49,495 $ 118,862
================= =============== ================== ==================
The accompanying notes to financial statements should be read
in conjunction with the financial statements
3
Mohegan Tribal Gaming Authority
Statements of Changes in Capital
(in thousands)
For the Nine Months For the Nine Months
Ended June 30, 2002 Ended June 30, 2001
(unaudited) (unaudited)
---------------------------------- -------------------------------
(restated - see note 7)
Comprehensive Comprehensive
Capital Income Capital Income
------------- ------------- ------------- ------------
Retained deficit at October 1 $ (192,177) $ (362,118)
Net income 49,495 $ 49,495 118,862 $ 118,862
------------- ------------
Distributions to Tribe (27,912) (40,000)
------------ ------------
Retained deficit at June 30 (170,594) (283,256)
------------ ------------
Accumulated other comprehensive loss at October 1 (1,991) -
Unrealized gain (loss) on derivative instruments 653 (1,171)
------------- ------------
Other comprehensive income (loss) 653 653 (1,171) (1,171)
------------ ------------- ------------ ------------
Comprehensive income $ 50,148 $ 117,691
============= ============
Accumulated other comprehensive loss at June 30 (1,338) (1,171)
------------ ------------
Total capital ending balance at June 30 $ (171,932) $ (284,427)
============ ============
For the Quarter For the Quarter
Ended June 30, 2002 Ended June 30, 2001
(unaudited) (unaudited)
---------------------------------- --------------------------------
(restated - see note 7)
Comprehensive Comprehensive
Capital Income Capital Income
------------ ------------- ------------ -------------
Retained deficit at April 1 $ (178,128) $ (308,545)
Net income 18,755 $ 18,755 45,289 $ 45,289
------------- -------------
Distributions to Tribe (11,221) (20,000)
------------ ------------
Retained deficit at June 30 (170,594) (283,256)
------------ ------------
Accumulated other comprehensive loss at April 1 (1,428) (1,166)
Unrealized gain (loss) on derivative instruments 90 (5)
------------- -------------
Other comprehensive income (loss) 90 90 (5) (5)
------------ ------------- ------------ -------------
Comprehensive income $ 18,845 $ 45,284
============= =============
Accumulated other comprehensive loss at June 30 (1,338) (1,171)
------------ ------------
Total capital ending balance at June 30 $ (171,932) $ (284,427)
============ ============
The accompanying notes to financial statements should be read
in conjunction with the financial statements
4
Mohegan Tribal Gaming Authority
Statements of Cash Flows
(in thousands)
For the For the
Nine Months Ended Nine Months Ended
June 30, 2002 June 30, 2001
(unaudited) (unaudited)
------------------- --------------------
(restated - see note 7)
Cash flows provided by (used in) operating activities:
Net income $ 49,495 $ 118,862
Adjustments to reconcile net income to
cash flow provided by operating activities:
Depreciation and amortization 56,987 18,938
Loss on early extinguishment of debt, net 6 -
Loss on disposition of assets 130 114
Provision for losses on receivables 633 288
Accretion of relinquishment liability discount 27,250 26,874
Cash paid for accretion of relinquishment liability discount (22,583) (19,200)
Change in fair value of derivative instruments (972) 2,488
Amortization of debt issuance costs 5,039 3,257
Changes in operating assets and liabilities:
Increase in receivables and other assets (15,394) (30,281)
Increase in accounts payable and accrued expenses 24,952 17,827
------------------- -------------------
Net cash flows provided by operating activities 125,543 139,167
------------------- -------------------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment, net of change in construction
account payables of ($94,939) and $57,972, respectively (309,224) (398,653)
Proceeds from asset sale 148 89
Issuance of tenant loans (1,181) -
Tenant loan payments 163 -
------------------- -------------------
Net cash flows used in investing activities (310,094) (398,564)
------------------- -------------------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of long-term debt 250,000 -
Bank Credit Facility borrowings 205,000 274,000
Bank Credit Facility payments (243,000) -
Principal portion of relinquishment liability payments (8,098) (6,921)
Distributions to Tribe (27,912) (40,000)
Capitalized financing fees (6,975) (2,789)
Payment on capital lease obligations (1,520) (4,430)
Increase in other long-term liabilities 45 45
------------------- -------------------
Net cash flows provided by financing activities 167,540 219,905
------------------- -------------------
Net decrease in cash and cash equivalents (17,011) (39,492)
Cash and cash equivalents at beginning of period 74,284 115,731
------------------- -------------------
Cash and cash equivalents at end of period $ 57,273 $ 76,239
=================== ===================
The accompanying to financial statements should be read
in conjunction with the financial statements
5
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 President and Chief Executive Officer 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. In accordance with Rule 10-01, the
unaudited financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals and
adjustments) considered necessary for a fair presentation have been included.
For further information, refer to the financial statements and footnotes thereto
included in the Authority's Annual Report on Form 10-K/A, for the year ended
September 30, 2001 filed with the Securities and Exchange Commission (the
"SEC").
Reclassifications
Certain amounts in the fiscal year 2001 financial statements have been
reclassified to conform to the fiscal year 2002 presentation.
New Accounting Pronouncements
In January 2001, the Emerging Issues Task Force ("EITF") reached a
consensus on certain issues within Issue No. EITF 00-22, "Accounting for Points
and Certain Other Time-Based or Volume-Based Sales Incentive Offers". In April
2002, the Authority adopted EITF 00-22, which requires that cash or equivalent
amounts provided or returned to customers as part of a transaction not be shown
as an expense, but instead as an offset to the related revenue. The Authority
offers cash inducements in certain circumstances and has reflected $227,000 for
the three and nine months ended June 30, 2002 as an offset to gaming revenues
for these incentives.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
modifies the rules for accounting for the impairment or disposal of long-lived
assets. The new rules become effective for fiscal years beginning after December
15, 2001, with earlier application encouraged. The Authority has not adopted
SFAS 144, and has not yet quantified the impact of implementing SFAS 144 on the
Authority's financial statements, but does not anticipate a negative effect on
the Authority's financial position, results of operations or cash flows upon
adoption of the standard.
The Authority adopted Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") on October
1, 2001. Under SFAS 142, the Mohegan Sun trademark is no longer subject to
amortization over its estimated useful life as it has been deemed to have an
indefinite useful life. However, SFAS 142 requires the trademark to be evaluated
at least annually for impairment by applying a fair-value based test and, if
impairment occurs, the amount of impaired trademark must be written off
immediately. With the adoption of SFAS 142, the Authority no longer records
amortization of the trademark. For the quarter and nine months ended June 30,
2001, the Authority recorded $859,000 and $2.6 million, respectively, related to
the amortization of the trademark. The Authority applied the initial fair value
test and determined that no impairment existed at June 30, 2002. Had SFAS 142
been in effect in these periods, the Authority's results would have been as
follows (in thousands):
6
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
For the For the For the Nine For the Nine
Quarter Ended Quarter Ended Months Ended Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- -------------- ------------------ ----------------
(restated - (restated -
see note 7) see note 7)
Net income $ 18,755 $ 45,289 $ 49,495 $ 118,862
Trademark amortization - 859 - 2,577
-------------- --------------- ------------------ ----------------
As adjusted net income $ 18,755 $ 46,148 $ 49,495 $ 121,439
============== =============== ================== ================
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections as of
April 2002" ("SFAS 145"). The key provision of SFAS 145 which will affect the
Authority rescinds the existing rule that all gains or losses from the
extinguishment of debt should be classified as extraordinary items. Instead,
such gains and losses must be analyzed to determine if they meet the criteria
for extraordinary item classification based on the event being both unusual and
infrequent. The Authority will adopt SFAS 145 beginning October 1, 2002. Prior
period gains and losses must be analyzed to determine if they meet the criteria
to be classified as extraordinary items. If they fail the criteria, prior period
gains and losses must be reclassified. The Authority has not yet quantified the
impact of implementing SFAS 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan, as previously required under EITF Issue 94-3. Examples of costs covered by
the standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. SFAS 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Authority will adopt SFAS 146 beginning January 1, 2003 and does not believe
the adoption will have a material impact on results of operations, financial
position or cash flows.
NOTE 3 - FINANCING FACILITIES:
Financing facilities, as described below, consisted of the following
(in thousands):
June 30, 2002 September 30, 2001
------------- ------------------
Bank Credit Facility $ 220,000 $ 258,000
$200M 8 1/8% Senior Notes 200,000 200,000
$300M 8 3/4% Senior Subordinated Notes 300,000 300,000
$150M 8 3/8% Senior Subordinated Notes 150,000 150,000
$250M 8% Senior Subordinated Notes 250,000 -
---------- -----------
$1,120,000 $ 908,000
========== ===========
7
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Bank Credit Facility
As of June 30, 2002, the Authority had $220.0 million outstanding under
a $400.0 million reducing, revolving, collateralized credit facility (the "Bank
Credit Facility") with a syndicate of lenders led by Bank of America N.A.
(formerly known as Bank of America National Trust and Savings Association),
which will mature in March 2004. 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). At June 30, 2002, one-month LIBOR
was 1.84% and the applicable spread on a LIBOR loan was 2.625%. Interest on each
LIBOR loan that is for a term of three months 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 three months is due and payable on the date that is
three months after the date such LIBOR loan was made, every three months
thereafter and on the last day of the related interest period. Interest on each
base rate loan is due and payable quarterly in arrears. The Authority had no
base rate loans at June 30, 2002. Accrued interest on the Bank Credit Facility
was $178,000 at June 30, 2002.
Pursuant to the terms of the Bank Credit Facility, the commitment (or
the maximum amount that may be borrowed under the Bank Credit Facility) will be
reduced automatically on September 30, 2002, and on the last day of each fiscal
quarter thereafter, by 10% of the commitment as in effect immediately prior to
the first such reduction.
Recent Amendment to the Bank Credit Facility
During the quarter ended June 30, 2002, the Authority received the
requisite consent of its lenders for Amendment No. 4 to its Bank Credit
Facility. The amendment revised the total leverage ratio permitted as of June
30, 2002 to 5.25 to 1.00 from 5.00 to 1.00 and increased the Project Sunburst
construction budget from $960.0 million to $1.0 billion. For more information
regarding the amendment to the Bank Credit Facility, see the Authority's Current
Report on Form 8-K filed on June 24, 2002.
Financial Covenant Requirements
The Authority's debt agreements require, among other restrictions, the
maintenance of various financial covenants and terms including a fixed charge
coverage ratio, and certain debt leverage ratios. As of June 30, 2002, the
Authority was in compliance with all financial covenant requirements.
Derivative Instruments
The Authority uses derivative instruments, including an interest rate
cap, collar, and swap in its strategy to manage interest rate risk associated
with the variable interest rates applicable to advances under the Bank Credit
Facility. The Authority's objective in managing interest rate risk is to ensure
appropriate income and sufficient liquidity to meet its obligations. The
Authority analyzes interest rate risk using various models that forecast cash
flows of the liabilities and their supporting assets, including derivative
instruments. The Authority does not believe that there is any material risk
exposure with respect to derivative or other financial instruments which it
currently holds. The Authority continually monitors these exposures and makes
the appropriate adjustments to manage these risks within management's
established limits.
The Authority is considered an "end user" of derivative instruments and
engages in derivative transactions for risk management purposes only. On October
1, 2000, the Authority adopted SFAS 133, designated all derivative instruments
as cash flow hedging instruments, and marked them to market. The Authority
excludes the change in time value when assessing the effectiveness of the
hedging relationships. The interest rate cap and interest rate swap
8
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
listed below were deemed to be effective at June 30, 2002. The interest rate
collar listed below was deemed to be ineffective at June 30, 2002.
Derivative instruments held by the Authority at June 30, 2002 are as
follows:
Notional Estimated
Value Cost Fair Value
------------ -------- ------------
Interest Rate Cap
Strike Rate - 8% $ 63,715,200 $410,000 $ 200
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% 73,374,200 295,000 (2,283,753)
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable 36,687,100 221,000 (1,241,450)
------------ -------- ------------
Total $173,776,500 $926,000 $(3,525,003)
============ ======== ============
All derivative instruments are based on one-month LIBOR. One-month
LIBOR was 1.84% on June 30, 2002.
In November 2002, the Authority modified the terms of its existing
interest rate collar and interest rate swap agreements. As a result of the
modifications, the interest rate collar was deemed to be a net written option
that did not qualify for hedge accounting. The negative fair market value at the
date of modification of approximately $212,000 will be reclassified from
accumulated other comprehensive loss to earnings as interest expense over the
life of the original terms of the hedge contract and future changes in the fair
market value of the modified interest rate collar will be recorded directly to
earnings as a component of interest expense. The Authority will reclassify
approximately $73,000 of the negative fair market value into earnings over the
next twelve months. The modification of the interest rate swap agreement did not
change the Authority's assessment of hedge effectiveness at June 30, 2002.
The aggregate fair market value change in all derivative instruments
was $172,000 and $1.6 million for the three and nine-months ended June 30, 2002,
respectively. In accordance with SFAS 133, the Authority recorded an unrealized
gain of $90,000 and $653,000 related to the derivative instruments as a
component of other comprehensive loss in the accompanying balance sheets and
recorded a gain of $82,000 and $972,000 as interest expense in the accompanying
statements of income for the three and nine months ended June 30, 2002,
respectively. As of June 20, 2002 and 2001, the fair market values of the
Authority's derivative instruments is included in other long-term liabilities in
the accompanying balance sheets.
Senior Notes
On March 3, 1999, the Authority issued $200.0 million Senior Notes with
fixed interest payable at a rate of 8.125% per annum (the "Senior Notes"). The
proceeds from this financing were used to extinguish or defease existing debt,
pay transaction costs and fund initial costs related to Project Sunburst.
Interest on the Senior Notes is payable semi-annually on January 1 and July 1.
The Senior Notes mature on January 1, 2006. The Senior Notes are
uncollateralized general obligations of the Authority and rank pari passu in
right of payment with all current and future uncollateralized senior
indebtedness of the Authority. Borrowings under the 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), that are then due and owing, and rank senior to the
remaining 50% of the Authority's payment obligations under the Relinquishment
Agreement, that are then due and owing, the 1999 Senior Subordinated Notes, the
2001 Senior Subordinated Notes and the 2002 Senior Subordinated Notes. As of
June 30, 2002, accrued interest on the Senior Notes was $8.1 million.
9
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
1999 Senior Subordinated Notes
On March 3, 1999, the Authority issued $300.0 million Senior
Subordinated Notes with fixed interest payable at a rate of 8.75% per annum (the
"1999 Senior Subordinated Notes"). The proceeds from this financing were used to
extinguish or defease existing debt, pay transaction costs and fund initial
costs related to Project Sunburst. Interest on the 1999 Senior Subordinated
Notes is payable semi-annually on January 1 and July 1. The 1999 Senior
Subordinated Notes mature on January 1, 2009. The 1999 Senior Subordinated Notes
are uncollateralized general obligations of the Authority and are subordinated
to the Bank Credit Facility, the Senior Notes and in a liquidation, bankruptcy
or similar proceeding 50% of the Authority's payment obligations under the
Relinquishment Agreement (see Note 6) 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 (see Note 6) that are
then due and owing, the 2001 Senior Subordinated Notes and the 2002 Senior
Subordinated Notes. As of June 30, 2002, accrued interest on the 1999 Senior
Subordinated Notes was $13.1 million.
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 (see Note 6) 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 (see Note 6)
that are then due and owing. As of June 30, 2002, accrued interest on the 2001
Senior Subordinated Notes was $6.3 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. On June 28, 2002, the Authority successfully
consummated its offer to exchange all outstanding 2002 Senior Subordinated Notes
that it had issued on February 20, 2002 for $250.0 million of its fully
registered 8.0% Senior Subordinated Notes due 2012. The terms of such fully
registered exchange notes issued are identical to the terms of the 2002 Senior
Subordinated Notes (such exchange notes are also referred to as the "2002 Senior
Subordinated Notes"). The Authority did not receive any additional proceeds from
this exchange offer. Interest on the 2002 Senior Subordinated Notes is payable
semi-annually on April 1 and October 1, with the first interest payment
scheduled for October 1, 2002. The 2002 Senior Subordinated Notes mature on
April 1, 2012. The 2002 Senior Subordinated Notes are uncollateralized general
obligations of the Authority and are subordinated to the Bank Credit Facility,
the Senior Notes and, in a liquidation, bankruptcy or similar proceeding, 50% of
the Authority's payment obligations under the Relinquishment Agreement (see Note
6) 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 (see Note 6) that are then due and owing. As of June
30, 2002, accrued interest on the 2002 Senior Subordinated Notes was $7.2
million.
Letters of Credit
The Authority maintains letters of credit in order to satisfy potential
workers compensation liabilities that may arise. The Authority has available a
$250,000 uncollateralized letter of credit that will expire in August 2002. The
Authority also has a $550,000 letter of credit that expires in April 2003. The
Authority is currently negotiating a reduction in the required amounts covered
by letters of credit. The $550,000 letter of credit was reduced from $1,000,000
on April 13, 2001. As of June 30, 2002, no amounts were drawn on the letters of
credit.
10
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 4 - RELATED PARTY TRANSACTIONS:
The Tribe provides governmental and administrative services to the
Authority in conjunction with the operation of Mohegan Sun. For the quarters
ended June 30, 2002 and 2001, expenses associated with these services were $2.9
million and $2.7 million, respectively, and $7.0 million and $8.2 million for
the nine months ended June 30, 2002 and 2001, respectively.
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 the quarters ended June 30, 2002 and 2001,
expenses related to these agreements totaled $89,000 and $97,000, respectively.
Expenses related to these agreements totaled $283,000 and $278,000 for the nine
months ended June 30, 2002 and 2001, respectively.
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
Project Sunburst
During the quarter ended March 31, 2002, the Tribe received a
notification from Trading Cove Associates ("TCA") the developer of Project
Sunburst, indicating that the cost of completing Project Sunburst is estimated
to be $1.0 billion, excluding capitalized interest, which represents an increase
of $40.0 million over the previous estimate of $960.0 million. TCA indicated
that the $40.0 million increase relates to scope changes to the Mohegan Sun
retail program amounting to $10.0 million and acceleration costs related to the
early opening of the Casino of the Sky and the extended hotel tower completion
date in the amount of $12.0 million. The balance of the increase relates to
theming and quality improvements and claims reserves in the amount of $18.0
million. As of June 30, 2002, the Authority had spent $996.4 million, excluding
capitalized interest, on Project Sunburst. The remaining $3.6 million is
anticipated to be spent during the remainder of fiscal year 2002.
As of June 30, 2002, cumulative capitalized interest for Project
Sunburst construction expenses totaled $63.5 million. Capitalized interest
totaled $2.2 million and $11.5 million for the quarters ended June 30, 2002 and
2001, respectively. Capitalized interest totaled $12.4 million and $28.2 million
for the nine months ended June 30, 2002 and 2001, respectively.
The Mohegan Compact
In May 1994, the Tribe and the State of Connecticut entered into a
Memorandum of Understanding ("MOU") which sets forth certain matters regarding
implementation of the Mohegan Compact. The MOU stipulates that a portion of the
revenues earned on slot machines must be paid to the State of Connecticut ("Slot
Win Contribution"). The Slot Win Contribution payments will not be required if
the State of Connecticut legalizes any other gaming operations with slot
machines or other commercial casino table games within Connecticut, except those
consented to by the Tribe and the Mashantucket Pequot Tribe. For each 12-month
period commencing July 1, 1995, the Slot Win Contribution shall be the lesser of
(a) 30% of gross revenues from slot machines, or (b) the greater of (i) 25% of
gross revenues from slot machines or (ii) $80.0 million. For the quarters ended
June 30, 2002 and 2001, the Authority reflected expenses associated with the
Slot Win Contribution totaling $45.6 million and $37.6 million, respectively,
For the nine months ended June 30, 2002 and 2001, expenses associated with the
Slot Win Contribution totaled $129.8 million and $104.4 million, respectively.
As of June 30, 2002, outstanding Slot Win Contribution payments to the State of
Connecticut totaled $15.4 million.
Expansion Construction Management Agreement with Perini Building Company, Inc.
The Authority engaged Perini Building Company, Inc. ("Perini") as
construction manager to provide construction management services for Project
Sunburst. As construction manager, Perini is receiving a fee of $25.5 million
for services including, but not limited to, pre-construction review and
construction phase contract administration. In addition, the Authority has
agreed to pay Perini $1.3 million in construction management fees relating to
the Indian Summer Garage and $500,000 relating to the Thames Garage. As of June
30, 2002, Perini had received $26.0 million of the $27.3 million fee, of which
$24.6 million had been paid. All amounts incurred have been reflected in the
property, plant and equipment section of the accompanying balance sheets. For
the quarters ended June 30, 2002 and 2001, the Authority incurred $2.1 million
and $1.5 million, respectively, related to the Construction Management
Agreement. The Authority incurred $10.0 million and $4.5 million in fees for the
nine months ended June 30, 2002
11
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
and 2001, respectively. As of June 30, 2002, the Authority owed $1.4 million to
Perini related to the Construction Management Agreement.
Radio Station Guarantee
The Authority entered into an agreement with AAA Entertainment, LLC
("AAA") to operate the radio station WMOS on the premises of Mohegan Sun. In the
event WMOS's annual net revenue is less than $600,000, the Authority agrees to
reimburse AAA $600,000 less the actual net revenue. AAA will retain 100% of
WMOS's annual net revenues between $600,000 and $750,000, and the Authority will
share one-half of annual net revenues that exceed $750,000. Amounts to be
reimbursed are assessed monthly, but payments are calculated on a cumulative
annual basis. Payments to AAA for the quarter and nine months ended June 30,
2002 totaled $44,000 and $104,000, respectively. These amounts represent the
revenue shortfall from October 1, 2001 through June 30, 2002. As of June 30,
2002, amounts accrued totaled $44,000.
Litigation
The Authority is a defendant in certain litigation incurred in the
normal course of business. In the opinion of management, based on the advice of
counsel, the aggregate liability, if any, arising from such litigation will not
have a materially adverse effect on the Authority's financial position, results
of operations or cash flows.
NOTE 6 - TCA AGREEMENTS:
Relinquishment Agreement
In February 1998, the Authority and TCA entered into an agreement (the
"Relinquishment Agreement"). Effective January 1, 2000 (the "Relinquishment
Date"), the Relinquishment Agreement superseded the September 30, 1995 Amended
and Restated Gaming Facility Management Agreement (the "Management Agreement"),
and provides that the Authority is to make certain payments to TCA out of, and
determined as a percentage of, Revenues, as defined, generated by the Mohegan
Sun over a 15-year period commencing on the Relinquishment Date. The payments
("Senior Relinquishment Payments" and "Junior Relinquishment Payments") have
separate payment schedules and priority. 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 January 25, 2015. 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 January
25, 2015. 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 the convention center, Mohegan Sun Arena and all rental or other
receipts from lessees and concessionaires but not the gross receipts of such
lessees, licenses and concessionaires).
The Authority, in accordance with SFAS No. 5, "Accounting for
Contingencies," has recorded a relinquishment liability of the estimated present
value of its obligations under the Relinquishment Agreement. A relinquishment
liability of $549.1 million was established at September 30, 1998 based on the
present value of the estimated future Mohegan Sun revenues utilizing the
Authority's risk free investment rate. At June 30, 2002, the carrying amount of
the relinquishment liability was $588.6 million as compared to $592.0 million at
September 30, 2001. The decrease is due to $30.7 million in relinquishment
payments, partially offset by $27.3 million in accretion of relinquishment
liability discount. Of the $30.7 million in relinquishment payments for the nine
months ended June 30, 2002, $8.1 million represents principal amounts and the
remaining $22.6 million is payment for the accretion of interest. Of the $26.1
million in relinquishment payments made during the nine months ended June 30,
2001, $6.9 million represents principal amounts and the remaining $19.2 million
is for the accretion of interest. This accretion resulted from the impact on the
discount for the time value of money due to the passage of time. As of June 30,
2002, relinquishment payments earned but unpaid were $20.4 million.
12
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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 June 30, 2002, the
Authority had incurred $13.5 million related to the TCA development fee, of
which $12.9 million had been paid. All amounts incurred have been included in
the property and equipment, net section 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.
NOTE 7 - RESTATEMENT AND RECLASSIFICATIONS:
The Authority has restated its financial statements for the quarter
ended June 30, 2002 to reflect the effects of the following adjustments: (i) to
record additional capitalized interest pertaining to Project Sunburst in
accordance with SFAS No. 34 "Capitalization of Interest Cost", (ii) to record
Project Sunburst related capital expenditures incurred in the quarter and nine
months ended June 30, 2002, (iii) to record depreciation expense associated with
placing additional fixed assets in service prior to June 30, 2002, and (iv) to
record adjustments necessary to account for the Authority's derivative
instruments in accordance with SFAS 133. The aggregate effect of recording
these adjustments resulted in the Authority increasing its net income by
$792,000 and $8.9 million for the quarter and nine months ended June 30, 2002,
respectively, and increasing its total assets by $32.5 million as of June 30,
2002.
In addition, the Authority also has reclassified certain other costs,
expenses and balances in the financial statements. These reclassifications have
no effect of the Authority's net income.
The financial statements as of and for the quarter and nine months
ended June 30, 2002 contained herein have been updated to reflect these
restatements and reclassifications. The following tables summarize the impact of
these adjustments on the Authority's financial statements, as restated (in
thousands):
13
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Mohegan Tribal Gaming Authority
Condensed Balance Sheet
(in thousands)
Previously
Reported Restated
June 30, Restatement June 30,
2002* Reclassifications Adjustments 2002
------------- ----------------- ----------- ----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 57,273 - $ 57,273
Receivables, net 14,712 (2,320) a,b 12,392
Due from Tribe - 10 b 10
Inventories 15,513 - 15,513
Other current assets 16,798 2,310 a 19,108
---------- ------------- ------------ ----------
Total current assets 104,296 - - 104,296
Non-current assets:
Property and equipment, net 1,409,583 - (28,797) f.5,g.1 1,380,786
Construction in process 18,944 - 61,328 g.2,h.5 80,272
Trademark, net 119,692 - 119,692
Other assets, net 27,371 - - 27,371
---------- ------------- ------------ ----------
Total assets $1,679,886 $ - $ 32,531 $1,712,417
========== ============= ============ ==========
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of
long-term debt - 20,000 o - 20,000
Current portion of
relinquishment liability 77,188 1,446 c - 78,634
Accounts payable and
accrued expenses 76,580 106 d - 76,686
Construction payables 35,133 (106) d 25,531 g 60,558
Accrued interest payable 34,876 - - 34,876
---------- ------------- ------------ ----------
Total current liabilities 223,777 21,446 25,531 250,754
Non-current liabilities:
Long-term debt, net of
current portion 1,120,000 (20,000) o - 1,100,000
Relinquishment liability,
net of current portion 511,389 (1,446) c - 509,943
Other long-term liabilities 3,652 - - 3,652
---------- ------------- ------------ ----------
Total liabilities 1,858,818 - 25,531 1,884,349
---------- ------------- ------------ ----------
Capital:
Retained deficit (175,411) - 4,817 f.5,h.5,i.5 (170,594)
Accumulated other
comprehensive loss (3,521) - 2,183 i.5 (1,338)
---------- ------------- ------------ ----------
Total capital (178,932) - 7,000 (171,932)
---------- ------------- ------------ ----------
Total liabilities and capital $1,679,886 $ - $ 32,531 $1,712,417
========== ============= ============ ==========
* Previously reported in Form 10-Q filed by the Authority on August 19, 2002.
See page _ of the notes to the Authority's financial statements for the
footnotes to this restatement schedule.
14
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Mohegan Tribal Gaming Authority
Condensed Statements of Income
(in thousands)
Previously Reported Restated
For the For the
Quarter Ended Reclassifi- Restatement Quarter Ended
June 30, 2002* cations Adjustments June 30, 2002
--------------- ----------- ----------- -------------
Revenues:
Net revenues $ 263,743 $ - - $ 263,743
--------------- ----------- ----------- -------------
Operating costs and expenses:
Gaming 131,787 (19,245)e - 112,542
Food and beverage 11,023 - - 11,023
Hotel 1,392 - - 1,392
Retail, entertainment and other 5,167 3,683 e - 8,850
Marketing, general and administrative 39,068 15,562 e - 54,630
Pre-opening costs and expenses 4,092 - - 4,092
Depreciation and amortization 20,841 - 848 f.1 21,689
--------------- ----------- ----------- -------------
Total operating costs and expenses 213,370 - 848 214,218
--------------- ----------- ----------- -------------
Income from operations 50,373 - (848) 49,525
--------------- ----------- ----------- -------------
Other income (expense):
Accretion of relinquishment liability
discount (9,083) - - (9,083)
Interest income 95 - - 95
Interest expense, net of capitalized
interest (23,395) - 1,663 h.1,i.1,j.1 (21,732)
Other expense, net (50) - - (50)
Change in fair value of derivative
instruments 23 - (23)j.1 -
--------------- ----------- ----------- -------------
Total other income (expense) (32,410) - 1,640 (30,770)
--------------- ----------- ----------- -------------
Net income $ 17,963 - $ 792 $ 18,755
============== =========== =========== =============
* Previously reported in Form 10-Q filed by the Authority on August 19, 2002.
See page 20 of the notes to the Authority's financial statements for the
footnotes to these restatement schedules.
15
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Mohegan Tribal Gaming Authority
Condensed Statements of Income
(in thousands)
Previously
Reported Restated
For the For the
Nine Months Ended Restatement Nine Months Ended
June 30, 2002* Reclassifications Adjustments June 30, 2002
------------------- ----------------- ----------- -----------------
Revenues:
Net revenues $ 739,901 $ - - $ 739,901
------------ --------- --------- ------------
Operating costs and expenses:
Gaming 386,518 (66,290)e - 320,228
Food and beverage 30,037 - - 30,037
Hotel 1,392 - - 1,392
Retail, entertainment and other 20,133 8,964 e - 29,097
Marketing, general and administrative 108,007 57,326 e - 165,333
Pre-opening costs and expenses 7,755 - - 7,755
Depreciation and amortization 55,419 - 1,568 f.2 56,987
------------ --------- --------- ------------
Total operating costs and expenses 609,261 - 1,568 610,830
------------ --------- --------- ------------
Income from operations 130,640 - (1,568) 129,071
------------ --------- --------- ------------
Other income (expense):
Accretion of relinquishment liability
discount (27,250) - - (27,250)
Interest income 335 - - 335
Interest expense, net of capitalized
interest (63,014) - 10,490 h.2,i.2,j.2 (52,524)
Other expense, net (137) - - (137)
Change in fair value of derivative
instruments 18 - (18)j.2 -
------------ --------- --------- ------------
Total other income (expense) (90,048) - 10,472 (79,576)
------------ --------- --------- ------------
Net income $ 40,592 - $ 8,903 $ 49,495
============ ========= ========= ============
* Previously reported in Form 10-Q filed by the Authority on August 19, 2002.
See page 20 to the Authority's financial statements for the footnotes to this
restatement schedule.
16
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Mohegan Tribal Gaming Authority
Condensed Statement of Changes in Capital
(in thousands)
Restated
Previously Reported For the
For the Nine Months
Nine Months Ended Restatement Ended
June 30, 2002* Adjustments June 30, 2002
---------------------------- ------------------------------- --------------------------------
Comprehensive Comprehensive Comprehensive
Capital Income Capital Income Capital Income
----------- --------------- -------------- --------------- -------------- --------------
Retained deficit at
October 1 $(188,091) $ (4,086) f.3,h.3,i.3 $ (192,177)
Net income 40,592 $ 40,592 8,903 $ 8,903 h.2,i.2,j.2 49,495 $ 49,495
----------- -------
---------
Distributions to
Tribe (27,912) - (27,912)
---------- ----------- ------------
Retained deficit at
June 30 (175,411) 4,817 (170,594)
---------- ----------- ------------
Accumulated other
comprehensive
income (loss)at
October 1 (5,127) 3,136 i.3 (1,991)
Unrealized gain(loss)
on derivative
instruments 1,606 (953) i.2 653
---------- ------- -----------
Other comprehensive
income (loss) 1,606 1,606 (953) (953) 653 653
---------- ---------- ----------- ------- ------------ -----------
Comprehensive
income $ 42,198 $7,950 $ 50,148
========== ======= ===========
Accumulated other
comprehensive
income (loss)
at June 30 (3,521) 2,183 (1,338)
---------- ----------- ------------
Total capital
ending balance
at June 30 $(178,932) $ 7,000 $ (171,932)
========== =========== ============
* Previously reported in Form 10-Q filed by the Authority on August 19, 2002.
See page 20 to the Authority's financial statements for the footnotes to this
restatement schedule.
17
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Mohegan Tribal Gaming Authority
Statement of Changes in Capital
(in thousands)
Restated
Previously Reported For the
For the Quarter
Quarter Ended Restatement Ended
June 30, 2002* Adjustments June 30, 2002
-------------------------- -------------------------------------- --------------------------------
Comprehensive Comprehensive Comprehensive
Capital Income Capital Income Capital Income
--------- -------------- ---------- ------------- ------------ --------------
Retained deficit at
October 1 $(182,153) $ 4,025 f.4,h.4,i.4 $ (178,128)
Net income 17,963 $ 17,963 792 $ 792 f.1,h.1,i.1 18,755 $ 18,755
-------------- -------- --------------
Distributions to Tribe (11,221) - (11,221)
--------- ---------- ------------
Retained deficit at
December 31 (175,411) 4,817 (170,594)
--------- ---------- ------------
Accumulated other
comprehensive income
(loss) at October 1 (3,669) 2,241 i.4 (1,428)
Unrealized gain (loss) on
derivative instruments 148 (58) i.1 90
-------------- -------- --------------
Other comprehensive
income (loss) 148 148 (58) (58) 90 90
--------- -------------- ---------- -------- ------------ --------------
Comprehensive income $ 18,111 $ 734 $ 18,845
============== ======== ==============
Accumulated other
comprehensive income
(loss) at December 31 (3,521) 2,183 (1,338)
--------- ---------- ------------
Total capital ending
balance at December 31 $(178,932) $ 7,000 $ (171,932)
========= ========== ============
* Previously reported in Form 10-Q filed by the Authority on August 19, 2002.
See page 20 to the Authority's financial statements for the footnotes to this
restatement schedule.
18
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Mohegan Tribal Gaming Authority
Condensed Statement of Cash Flows
(in thousands)
Previously
Reported Restated
For the Nine For the Nine
Months Ended Restatement Months Ended
June 30, 2002* Reclassifications Adjustments June 30, 2002
-------------- ----------------- ----------- -------------
(unaudited) (unaudited)
Cash flows provided by (used in) operating
activities:
Net income $ 40,592 $ - $ 8,903 f.2,h.2,i.2 $ 49,495
Adjustments to reconcile net income to net
cash flow provided by operating activities:
Depreciation and amortization 55,419 - 1,568 f.2 56,987
Loss on early extinguishment of debt 6 - - 6
Loss on disposition of assets 130 - - 130
Provision for losses on receivables 633 - - 633
Accretion of relinquishment liability
discount 27,250 - - 27,250
Cash paid for accretion of relinquishment
liability discount (22,583) - - (22,583)
Change in fair value of derivative
instruments (18) - (953) i.2 (971)
Amortization of debt issuance costs - 5,039 k - 5,039
Changes in operating assets and liabilities:
Increase in receivables and other assets (12,017) (3,377) k,l,m - (15,394)
Increase in accounts payable and accrued
expenses 24,845 106 d 1 24,952
------------ ---------- ---------- ----------
Net cash flows provided by operating
activities 114,257 1,768 9,519 125,544
------------ ---------- ---------- ----------
Cash flows (used in) investing activities:
Purchase of property and equipment, net of
change in construction payables (495,075) 195,370 d,l,n (9,519) h.2 (309,224)
Increase in construction in process, net 196,120 (196,120) n - -
Proceeds from asset sale 148 - - 148
Issuance of tenant loans - (1,181) m - (1,181)
Tenant loan payments - 163 m - 163
------------ ---------- ---------- ----------
Net cash flows used in investing activities (298,807) (1,768) (9,519) (310,094)
------------ ---------- ---------- ----------
Cash flows provided by (used in) financing
activities:
Proceeds from issuance of long-term debt 250,000 - - 250,000
Bank Credit Facility borrowings 205,000 - - 205,000
Bank Credit Facility payments (243,000) - - (243,000)
Principal portion of relinquishment liability
payments (8,098) - - (8,098)
Distributions to Tribe (27,912) - - (27,912)
Capitalized financing fees (6,975) - - (6,975)
Payments on capital lease obligations (1,520) - - (1,520)
Increase in other long-term liabilities 44 - - 44
------------ ---------- ---------- ----------
Net cash flows provided by financing
activities 167,539 - - 167,539
------------ ---------- ---------- ----------
Net increase in cash and cash equivalents (17,011) - - (17,011)
Cash and cash equivalents at beginning of
period 74,284 - - 74,284
------------ ---------- ---------- ----------
Cash and cash equivalents at end of period $ 57,273 $ - $ - $ 57,273
============ ========== ========== ==========
* Previously reported in Form 10-Q filed by the Authority on August 19, 2002.
See page _ to the Authority's financial statements for the footnotes to this
restatement schedule.
19
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Adjustment footnotes (in thousands):
a. Reclassified an amount pertaining to Deferred Compensation Plan of $2,310
from receivables, net to other current assets.
b. Reclassified amounts due from Tribe of $10 from receivables, net to Due from
Tribe.
c. Reclassified long-term relinquishment liability of $1,446 to current portion
of relinquishment liability.
d. Reclassified construction payables of $106 to accounts payable and accrued
expenses from construction payables.
e. Reclassified gaming expenses to retail, entertainment and other and
marketing, general and administrative expenses.
f. Recorded depreciation on additional Project Sunburst and utilities facility
costs placed into service:
1. $848 for the quarter ended June 30, 2002.
2. $1,568 for the nine months ended June 30, 2002.
3. $1,080 for the year ended September 30, 2001.
4. $1,801 for the period from October 1, 2000 through March 31, 2002.
5. $2,648 for the period from October 1, 2000 through June 30, 2002.
g. Recorded an adjustment to accruals for construction payables of $25,531
pertaining to Project Sunburst for work completed by March 31, 2002, but
paid subsequent to March 31, 2002:
1. ($26,147) to Property and equipment, net
2. $51,678 to Construction in process
h. Recorded additional capitalized interest pertaining to Project Sunburst, net
of amounts previously recorded in Form 10-Q for the quarter and nine months
ended June 30, 2002 filed by the Authority on August 19, 2002:
1. $1,583 for the quarter ended June 30, 2002.
2 $9,519 for the nine months ended June 30, 2002.
3. $131 for the year ended September 30, 2001.
4. $8,067 for the period from October 1, 2000 through March 31, 2002.
5. $9,650 for the period from October 1, 2000 through June 30, 2002.
i. In accordance with SFAS 133, recorded amounts related to unrealized loss
(gain) on derivative instrument, to other comprehensive loss:
1. ($58) for the quarter ended June 30, 2002.
2 ($953) for the nine months ended June 30, 2002.
3. $3,136 for the year ended September 30, 2001.
4. $2,241 for the period from October 1, 2000 through March 31, 2002.
5. $2,183 for the period from October 1, 2000 through June 30, 2002.
j. Reclassified change in fair value of derivative instruments to interest
expense, net of capitalized interest:
1. ($23) for the quarter ended June 30, 2002.
2. ($18) for the nine months ended June 30, 2002.
k. Reclassified amortization of debt issuance costs of $5,039 to amortization
of debt interest costs from change in receivables and other assets.
l. Reclassified construction payables of $644 from other assets to
construction in process.
m. Reclassified issuance of tenant loans of $1,018, net of payments of $163,
from increase in receivables and other assets to issuance of tenant loans
and tenant loan payments.
n. Reclassified increase in construction in process, net to purchase of
property and equipment, net of change in construction payables.
o. Reclassified current portion of long-term debt from long-term debt.
NOTE 8 - SUBSEQUENT EVENTS:
The Authority also received the requisite consent of its lenders to
Amendment No. 5 to the Bank Credit Facility (the "Amendment") on August 14,
2002. The Amendment (i) expanded the definition of "approved swap
20
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS -- (Continued)
agreements" and increased the amount of approved swap agreements and other swap
agreements that may be used to secure other indebtedness of the Authority from
the notional amount of $200 million to the notional amount of $300 million and
(ii) waived, for a period of 90 days from the date of the Amendment, (a) the
delivery of audited statements for the fiscal year ended September 30, 2001 and
reviewed financial statements for the quarterly periods ended December 31, 2000,
March 31, 2001, June 30, 2001, December 31, 2001 and March 31, 2002, (b) the
requirement to file amended Quarterly Reports on Form 10-Q for the quarterly
periods ended December 31, 2000, March 31, 2001, June 30, 2001, December 31,
2001 and March 31, 2002 and an amended Annual Report on Form 10-K for the fiscal
year ended September 30, 2001, (c) any defaults which may have arisen by reason
of any of the inaccuracies in the financial statements which are described above
and (d) any resulting technical non-compliance with a requirement of law. The
reports described in the foregoing clauses (a) and (b) are all being filed on
the same date as this Form 10-Q/A.
On August 28, 2002, the Authority entered into a $25.0 million
revolving loan agreement with Fleet National Bank. At the Authority's option,
each advance shall bear interest at either the bank's Prime rate or on the basis
of a one-month, two-month or three-month LIBOR plus the applicable spread.
Borrowings under this facility are unsecured obligations of the Authority. The
facility expires in March 2004.
21
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/A which has been updated to reflect the restatements
and reclassifications more fully described in Note 7 to the Authority's
financial statements.
Forward Looking Statements
Some information included in this Amended Quarterly Report and other
materials filed by the Authority with the Securities and Exchange Commission
("SEC") contain forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such statements include information relating to plans for future
expansion and other business development activities, as well as other capital
spending, financing sources and the effects of regulation (including gaming and
tax regulation) and competition. These statements can sometimes be identified by
our use of forward-looking words such as "may," "will," "anticipate,"
"estimate," "expect," or "intend" and similar expressions. Such forward-looking
information involves important risks and uncertainties that could significantly
affect anticipated results in the future and, accordingly, such results may
differ materially from those expressed in any forward-looking statements made by
or on behalf of the Authority. These risks and uncertainties include, but are
not limited to, those relating to development and construction activities,
dependence on existing management, leverage and debt service, domestic or global
economic conditions, pending litigation, changes in federal tax laws or the
administration of such laws and changes in gaming laws or regulations (including
the legalization of gaming in certain jurisdictions). Additional information
concerning potential factors that could affect the Authority's financial results
are included in the Authority's Annual Reports on Forms 10-K and 10-K/A for the
fiscal year ended September 30, 2001 as well as the Authority's other reports
and filings with the SEC. The forward-looking statements included in this
Quarterly Report on Form 10-Q/A are made only as of the date of this report. The
Authority does not have and the Authority does not undertake any obligation to
publicly update any forward-looking statements to reflect subsequent events or
circumstances. The Authority cannot 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 adjacent to Uncasville, Connecticut. The Authority is governed by a
Management Board, consisting of the same nine members of the Mohegan Tribal
Council.
Mohegan Sun
In October 1996, the Authority opened a gaming and entertainment
complex known as Mohegan Sun. Mohegan Sun is situated in southeastern
Connecticut on a 240-acre site on the Tribe's reservation overlooking the Thames
River with direct access from Routes I-395 and 2A via a four-lane access road
constructed by the Authority. Mohegan Sun is located approximately 125 miles
from New York City and approximately 100 miles from Boston, Massachusetts. The
Authority has recently completed a major expansion of Mohegan Sun known as
Project Sunburst. The first phase of Project Sunburst, the Casino of the Sky,
including increased gaming, restaurant and retail space and an entertainment
arena, opened on September 25, 2001. The remaining components, including the
majority of a 1,200-room luxury hotel and approximately 100,000 square feet of
convention space, opened in April 2002, with substantial completion of
construction occurring in June 2002.
Mohegan Sun operates in an approximately 3.0 million square foot
facility which, at June 30, 2002, includes the following two casinos:
22
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 3,638 slot machines, 164 table games (including
blackjack, roulette, craps and baccarat) and 42 poker tables;
. food and beverage amenities, including three full-service themed
fine dining restaurants, a 610-seat buffet, a New York
style delicatessen, a 24-hour coffee shop, a ten-station food
court featuring international and domestic cuisine and multiple
service bars for a total of approximately 1,800 restaurant seats;
. an approximately 10,000 square foot, 440-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
Mohegan Sun logo souvenirs to clothing to cigars.
Casino of the Sky. The Casino of the Sky has approximately 119,000
square feet of gaming space and offers:
. approximately 2,560 slot machines and 82 table games (including
blackjack, roulette, craps and baccarat);
. food and beverage amenities, including two full-service
restaurants, three quick-service restaurants, a 350-seat buffet
and five lounges operated by Mohegan Sun, as well as four
full-service and three quick-service restaurants operated by
third-parties, for a total of approximately 2,200 restaurant
seats;
. the Mohegan Sun Arena with seating for up to 10,000;
. a 300-seat cabaret;
. a child care facility and an arcade-style recreation area;
. the Shops at Mohegan Sun containing approximately 30 different
retail shops, five of which are owned by the Authority;
. an approximately 1,200-room luxury hotel;
. a 20,000 square foot spa; and
. approximately 100,000 square feet of convention space.
As of June 30, 2002, Mohegan Sun has parking spaces for approximately
13,000 guests and 3,100 employees. In addition, the Authority operates an
approximately 4,000 square foot, 20-pump gasoline and convenience center located
adjacent to Mohegan Sun.
Additional Mohegan Sun Enhancements
In addition to Project Sunburst, the Authority has completed the
following capital improvements to the Mohegan Sun facility:
Parking Garages. Capital expenditures for the $65.0 million Indian
Summer Garage, a 2,700-space patron parking garage, totaled $50.8 million for
the nine months ending June 30, 2002. Cumulative expenditures totaled $60.5
million as of June 30, 2002. The Authority expects that the remaining $4.5
million will be spent in the fourth quarter of fiscal year 2002. The Indian
Summer Garage opened in June 2002. Capital expenditures for the $25.0 million,
1,700-space Thames Garage totaled $22.7 million for the nine months ended June
30, 2002, and the remaining $2.3 million will be spent in the fourth quarter of
fiscal year 2002. The Thames Garage opened in April 2002.
23
Project Sunburst Utilities. The Authority has constructed various
utility upgrades and enhancements needed to support Project Sunburst. These
improvements originally were to be financed entirely by the Tribe from the
proceeds of tax-exempt financing. The Tribe, however, subsequently received an
opinion from its outside legal counsel advising it that a portion of the costs
for these improvements would not qualify for tax-exempt financing. Therefore,
the Authority will pay for this portion of the total costs, which we expect will
equal the budget of approximately $35.0 million. These improvements were
completed concurrently with the opening of certain components of Project
Sunburst in April 2002.
Other Reservation Enhancements
Child Development Center. The Tribe is constructing a 36,000 square
foot employee day care facility which will enhance the benefits and services
provided to employees of both the Tribe and of the Authority. The project is
expected to cost approximately $13.0 million. The Authority originally paid $1.1
million of the facility's cost; however, that amount later was fully reimbursed
by the Tribe. The Tribe will pay all future expenditures related to this
project. Construction began in November 2001, and the Tribe anticipates that the
project will be completed in January 2003.
Explanation of Key Financial Statement Captions
Gross revenues. The Authority's gross revenues are derived mostly from
the following four sources:
. Gaming revenues, which include revenues from slot machines, table
games, poker, keno and racebook;
. Food and beverage sales;
. Hotel revenues; and
. Retail, entertainment and other revenues, which include revenues
from the Mohegan Sun managed retail outlets and the Mohegan Sun
Arena.
The table below summarizes the Authority's percentage of gross revenues
from each of these sources:
For the Quarter For the Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
--------- --------- ------- -------
Gaming .............................. 85% 88% 87% 88%
Food and beverage ................... 7% 6% 6% 6%
Hotel ............................... 2% 0% 1% 0%
Retail, entertainment and other ..... 6% 6% 6% 6%
--------- --------- ------- -------
Total ..................... 100% 100% 100% 100%
========= ========= ======= =======
Slot win. Gross slot win represents all amounts played in the slot
machines reduced by both (1) the winnings paid out and (2) all amounts deposited
by the Authority into the slot machines to ensure sufficient coins in each
machine to pay out the winnings. Progressive slot machines retain some of each
amount wagered and aggregate these amounts with similar amounts from other slot
machines in order to create one-time winnings that are substantially larger than
those paid in the ordinary course. The Authority refers to such aggregated
amounts as progressive jackpots. In-house progressive jackpot amounts are
accrued by the 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 weekly payment to
the vendor, which is deducted from gross slot win.
Casino revenues and promotional allowances. The Authority recognizes
casino revenue as gaming wins less gaming losses. Revenues from food and
beverages, hotel, retail, entertainment events and other are recognized at the
time the service is performed. The Authority operates the Mohegan Sun
complimentary program in which food, beverages, hotel, retail, entertainment and
other services are provided to guests based on points that are earned through
the Mohegan Sun Player's Club. The retail value of these complimentary items is
included in gross revenue
24
and then deducted as promotional allowances, except for the redemption at third
party retail tenants at the Shops at Mohegan Sun and from a catalog program, the
Sun Select Catalog, which includes vacations, electronics and gift items, to
arrive at net revenues. The estimated cost of providing these promotional
allowances is charged to the casino department in the following amounts (in
thousands):
For the For the For the For the
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------ ------------- ----------------- ----------------
Food and beverage ................. $ 5,261 $ 6,565 $ 19,883 $ 18,879
Hotel ............................. 1,885 - 1,885 -
Retail, entertainment and other ... 6,581 8,697 18,358 22,437
------------ ------------- ----------------- ----------------
Total ............................. $ 13,727 $ 15,262 $ 40,126 $ 41,316
============ ============= ================= ================
Mohegan Sun Player's Club. The Mohegan Sun Player's Club is a voluntary
program, without membership fees, which awards points to members based on their
gaming activities. These points may be used to purchase items at restaurants
located within Mohegan Sun, and the Mohegan Sun gasoline and convenience center
and the Sun Select Catalog, as well as to purchase tickets to entertainment
events held at the Mohegan Sun facilities. 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
marketing, general and administrative 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, table games, poker, keno and racebook
and promotional expenses for the redemption of the Mohegan Sun Player's Club
points in third party locations, including the Shops at Mohegan Sun and the Sun
Select Catalog.
EBITDA and Adjusted EBITDA. EBITDA represents earnings before interest,
income taxes, depreciation and amortization. The EBITDA margin is calculated as
EBITDA as a percentage of net revenue. Adjusted EBITDA represents further
adjustments to EBITDA to remove the effects of pre-opening costs and expenses,
accretion of the relinquishment liability discount on the relinquishment
liability to Trading Cove Associates ("TCA") pursuant to the Relinquishment
Agreement, discontinued operations and other non-operating income/expense. The
Adjusted EBITDA margin is calculated as Adjusted EBITDA as a percentage of net
revenue. Adjusted EBITDA should not be considered as an alternative to any
measure of performance as promulgated under accounting principles generally
accepted in the United States of America (such as operating income or net
income), nor should it be considered as an indicator of the Authority's overall
financial performance. The Authority's calculation of Adjusted EBITDA is likely
to be different from the calculation of EBITDA or similar measurements used by
other companies and therefore comparability may be limited. EBITDA and Adjusted
EBITDA are computed as follows (in thousands):
25
For the For the For the For the
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------- ---------- ------------- ------------
(restated - (restated -
see note 7 to see note 7 to
the the
Authority's Authority's
financial financial
statements) statements)
EBITDA
Net income $ 18,755 $ 45,289 $ 49,495 $ 118,862
Add back:
Interest expense, net of capitalized
interest 21,732 3,219 52,525 13,524
Interest income (95) (648) (335) (2,389)
Income taxes -- -- -- --
Depreciation and amortization 21,689 7,404 56,987 18,938
--------- --------- --------- ---------
EBITDA $ 62,081 $ 55,264 $ 158,672 $ 148,935
--------- --------- --------- ---------
EBITDA Margin 23.5% 27.6% 21.4% 26.1%
Adjustments to EBITDA to
reconcile to Adjusted EBITDA
Pre-opening costs and expenses $ 4,092 $ 3,724 $ 7,755 $ 7,040
Accretion of relinquishment liability
discount 9,083 8,958 27,250 26,874
Other non-operating expense 50 114 137 113
Discontinued operations -- 64 -- 591
--------- --------- --------- ---------
Adjusted EBITDA $ 75,306 $ 68,124 $ 193,814 $ 183,553
========= ========= ========= =========
Adjusted EBITDA Margin 28.6% 34.0% 26.2% 32.1%
Accretion of 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 recognizing
amounts due 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 and quarterly to reflect the impact
on time value of money due to the passage of time. In addition, the Authority
has capitalized $130.0 million of this relinquishment liability in connection
with the trademark value of the Mohegan Sun brand name. The Authority adopted
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142") on October 1, 2001. Under SFAS 142, the
Mohegan Sun
26
trademark is no longer subject to amortization over its estimated useful life as
it has been deemed to have an indefinite useful life. However, SFAS 142 requires
the trademark to be evaluated at least annually for impairment by applying a
fair-value based test and, if impairment occurs, the amount of impaired
trademark must be written off immediately. With the adoption of SFAS 142, the
Authority no longer records amortization of the trademark. See Note 6 to the
Authority's financial statements for a further discussion of how the
relinquishment liability and related reassessments are calculated.
Results of Operations
Comparison of Operating Results for the Quarters Ended June 30, 2002
and 2001:
Net revenues for the quarter ended June 30, 2002 increased by $63.2
million, or 31.5%, to $263.7 million from $200.5 million reported for the same
period of the prior year. This increase primarily is attributable to an increase
in gaming, food and beverage, and hotel revenues due to the opening of the
Casino of the Sky on September 25, 2001 and the opening of the convention center
and the hotel in April 2002.
Adjusted EBITDA for the quarter ended June 30, 2002 increased by $7.2
million, or 10.5%, to $75.3 million from $68.1 million for the quarter ended
June 30, 2001. Mohegan Sun achieved a 28.6% Adjusted EBITDA margin for the
quarter ended June 30, 2002 compared to a 34.0% Adjusted EBITDA margin for the
quarter ended June 30, 2001. The decline in the margin was the result of
increased labor, marketing and operating expenses related to operating the
expanded facility increasing at a greater rate than revenues. The Authority
expects revenues to increase and operating expenses to decrease as a percentage
of revenues as the facility matures and as the remaining Project Sunburst
amenities are opened. However, the Authority relies heavily on drive-in traffic,
and the Authority believes that its ability to host events in the arena on
weekends and to otherwise accommodate guests during peak periods have been
limited until recently when the parking enhancements provided by the Thames
Garage and the Indian Summer Garage were fully completed in April and June 2002,
respectively. Accordingly, operating revenues and margins have been negatively
impacted during the quarter ended June 30, 2002. See "Overview - Additional
Mohegan Sun Enhancements - Parking Garages" and "Liquidity, Capital Resources
and Capital Spending - Capital Expenditures" for a discussion of parking
enhancements.
The Connecticut slot market grew at a rate of 10.4% for the quarter
ended June 30, 2001 as compared to the quarter ended June 30, 2002. The State of
Connecticut reported a gross slot win of $382.9 million and $346.7 million for
the quarters ended June 30, 2002 and 2001, respectively. Mohegan Sun exceeded
the market's growth in slot win as it experienced an increase of gross slot
revenues of 21.2% in the quarter ended June 30, 2002 over the quarter ended June
30, 2001 due to expanded capacity as described below. Gross slot revenues were
$182.4 million and $150.5 million for the quarters ended June 30, 2002 and 2001,
respectively. Gross slot win per unit per day was $323 and $466 for the
respective periods. The decrease in gross slot win per unit was due to an
increase in the weighted average number of slot machines from approximately
3,546 in the quarter ended June 30, 2001 to approximately 6,199 in the quarter
ended June 30, 2002. The increase in weighted average slot machines is
attributable primarily to the opening of the Casino of the Sky, which added a
total of approximately 2,560 slot machines to Mohegan Sun.
Gaming revenues for the quarter ended June 30, 2002 increased by $50.4
million, or 26.2%, to $242.4 million from $192.1 million for the quarter ended
June 30, 2001. This increase is due to a 21.0% growth in net slot machine
revenues and a 45.1% increase in table game revenues as a result of the opening
of the Casino of the Sky.
Food and beverage revenues for the quarter ended June 30, 2002
increased by $6.6 million, or 51.1%, to $19.4 million from $12.8 million for the
quarter ended June 30, 2001. This increase is attributable principally to a
40.9% increase in food covers for the quarter ended June 30, 2002, as compared
to the same period in the prior year, and a higher average sale per check. The
increases in food covers and higher average sale per check are associated
primarily with the new Project Sunburst restaurants which include the 350-seat
Sunburst Buffet, the Rising Moon Gallery of Eateries, Fidelia's, Rain and
Tuscany.
Hotel revenues for the quarter ended June 30, 2002 were $6.8 million
due to the opening of the Mohegan Sun hotel in April 2002. Average daily room
rates were $178 for the quarter ended June 30, 2002 with an occupancy rate of
69%. Revenue per available room was $119. There were no hotel revenues for the
quarter ended June 30, 2001.
27
Retail, entertainment and other revenues increased $1.6 million, or
11.2%, to $15.6 million for the quarter ended June 30, 2002 from $14.0 million
for the same period in the prior year. Entertainment revenue increased by $1.6
million or 131.2% primarily due to the opening of the Mohegan Sun Arena on
September 25, 2001. There were 18 Mohegan Sun Arena events and 72 Cabaret events
held during the quarter. Average ticket price for the Mohegan Sun Arena events
was $26, while the average ticket price for Cabaret events was $13. Additional
increases are attributable to an increase in other revenue associated with the
rental income earned from third party retail tenants in the Shops at Mohegan
Sun. Theses increases are partially offset by a decrease in retail revenues from
Mohegan Sun operated outlets. Retail revenues decreased by $2.0 million or 16.1%
to $10.7 million for the quarter ended June 30, 2002 from $12.7 million for the
same period in the prior year.
Promotional allowances for the quarter ended June 30, 2002 increased by
$2.1 million, or 11.3%, to $20.5 million from $18.4 million for the quarter
ended June 30, 2001. The increase is attributable to the addition of hotel
complimentaries of $2.7 million, partially offset by decreases in retail and gas
complimentaries. The decrease in retail and gas complimentaries is due to the
shift in patronage from Mohegan Sun retail outlets, including the Mohegan Sun
gasoline and convenience center, to the third party retail tenants in the Shops
at Mohegan Sun. These expenses related to the Shops at Mohegan Sun are included
in gaming expenses. Effective with the opening of the first phase of Project
Sunburst, members of the Mohegan Sun Player's Club were eligible to redeem
points at third party tenants in the Shops at Mohegan Sun.
Total operating costs and expenses for the quarter ended June 30, 2002
increased by $70.7 million, or 49.2%, to $214.2 million from $143.5 million for
the quarter ended June 30, 2001. The majority of the increase is attributable to
the additional operating costs resulting from the opening of Project Sunburst
and a $14.3 million increase in depreciation and amortization expense due to the
opening of the Casino of the Sky.
Gaming costs and expenses for the quarter ended June 30, 2002 increased
by $25.6 million, or 29.4%, to $112.5 million from $87.0 million for the quarter
ended June 30, 2001. The majority of the increase is attributable to additional
labor costs associated with the approximately 90-unit increase in table games
and the addition of approximately 2,500 slot machines associated with the
opening of the Casino of the Sky. The Slot Win Contribution payments to the
State of Connecticut also have contributed to the increase in gaming costs and
expenses. The Authority reflected expenses associated with the Slot Win
Contribution totaling $45.6 million and $37.6 million, respectively, for the
quarters ended June 30, 2002 and 2001. Also, the point redemption by Mohegan Sun
Player's Club patrons in the third party retail tenants Shops at Mohegan Sun
and in the restaurants resulted in an increase in Mohegan Sun's gaming expenses
for the quarter ended June 30, 2002. Gaming costs and expenses as a percentage
of gaming revenues were 46.4% in the quarter ended June 30, 2002 compared to
45.3% in the same period of the prior year.
Food and beverage costs and expenses for the quarter ended June 30,
2002 increased by $4.6 million, or 71.1%, to $11.0 million from $6.4 million in
expenses for the quarter ended June 30, 2001. These increases are the result of
higher food and beverage operating costs, particularly labor costs and other
operating expenses related to the opening of the Rising Moon Gallery of
Eateries, a 350-seat Sunburst Buffet, Fidelia's, Rain and Tuscany. Also
contributing to the food and beverage costs were banquets and room service
associated with the opening of the Mohegan Sun hotel. The opening of these
additional outlets resulted in an increase in the number of meals served, or
food covers, from 997,000 in the quarter ended June 30, 2001 to 1.4 million in
the quarter ended June 30, 2002, a 40.9% increase. The net cost of sales for
food calculated as a percentage of food revenue was 33.1% for the quarter ended
June 30, 2002 compared to 34.9% for the quarter ended June 30, 2001.
Hotel costs and expenses for the quarter ended June 30, 2002 were $1.4
million due to the opening of the Mohegan Sun hotel in April 2002.
Retail, entertainment and other costs and expenses for the quarter
ended June 30, 2002 increased by $1.8 million, or 26.4%, to $8.9 million from
$7.0 million for the quarter ended June 30, 2001. The increase mainly is
attributable to a $2.2 million increase in entertainment costs associated with
events held in the Mohegan Sun Arena during the quarter ended June 30, 2002.
Some of these events included an HBO boxing match with Arturo Gatti vs. Micky
Ward, concerts by Brooks and Dunn, ZZ Top, Alan Jackson and Cher, Summer Music
Mania, a special televised by the Fox network, a CBS television special by Marc
Anthony, a stand-up comedy performance by Steve Harvey, seven Arena Football
games and World Wrestling Entertainment event. The increase in entertainment
costs is partially offset by a decrease in retail and gas station expenses of
$1.2 million for the quarter ended June 30, 2002 compared to the prior year.
This decrease was primarily attributable to lower retail sales in Mohegan Sun
operated retail shops as a result of the addition of the Shops at Mohegan Sun.
During the quarter ended June 30, 2002,
28
Mohegan Sun added two retail shops including a Joseph Abboud Menswear and Sun
Shoes.
Marketing, general and administrative costs and expenses for the
quarter ended June 30, 2002 increased by $22.6 million, or 70.7%, to $54.6
million from the $32.0 million for the quarter ended June 30, 2001. This
increase is primarily associated with costs to operate the expanded facility
such as utilities, engineering, risk management and maintenance services, and
advertising expenses targeted to promote Mohegan Sun through all major media
outlets.
Pre-opening costs and expenses during the quarter substantially
associated with the June 2002 grand opening celebration were $4.1 million for
the quarter ended June 30, 2002 compared to $3.7 million in pre-opening costs
and expenses (relating to the opening of the first phase of Project Sunburst)
for the quarter ended June 30, 2001. The grand opening weekend celebration of
the approximately 1,200-room, luxury Mohegan Sun hotel included performances by
Cher, The Blues Brothers, Rosie O'Donnell, Ray Charles and Aretha Franklin.
Depreciation and amortization for the quarter ended June 30, 2002
increased by $14.3 million, or 192.9%, to $21.7 million from $7.4 million for
the quarter ended June 30, 2001. This increase was a result of $1.0 billion of
assets related to Project Sunburst, including $63.5 million of capitalized
interest, being placed in service between the opening of the first phase of
Project Sunburst in September 2001 and the completion of the second phase of
Project Sunburst in June 2002.
Income from operations for the quarter ended June 30, 2002 decreased by
$7.5 million, or 13.1%, to $49.5 million from $57.0 million for the quarter
ended June 30, 2001. This decrease is attributable to increases in costs and
expenses associated with the expansion of Mohegan Sun and increases in
depreciation and amortization associated with the completion of Project
Sunburst, which included the opening of the Casino of the Sky, the Shops at
Mohegan Sun, the 10,000-seat Mohegan Sun Arena and the 1,200 room hotel.
Accretion of the discount associated with the relinquishment liability
reassessment for the quarter ended June 30, 2002 increased by $125,000, or 1.4%,
to $9.1 million from $9.0 million for the quarter ended June 30, 2001. This
increase is due to the Authority's quarterly accretion of the relinquishment
liability to reflect the impact of time on the value of money, discounted to
present value using the Authority's current risk free rate of investment.
Interest income for the quarter ended June 30, 2002 decreased by
$553,000, or 85.3%, to $95,000 from $648,000 in income for the quarter ended
June 30, 2001. The decrease in interest income resulted from the liquidation of
investments to fund Project Sunburst plus a decline in return on the invested
assets. The weighted average invested cash was $17.5 million and $39.3 million
for the quarters ended June 30, 2002 and June 30, 2001, respectively. The
Authority invests in investment-grade commercial paper having maturities of not
more than six months from the date of acquisition.
Interest expense for the quarter ended June 30, 2002 increased by $18.5
million, or 575.1%, to $21.7 million from $3.2 million in expense for the
quarter ended June 30, 2001. Included in interest expense for the quarter ended
June 30, 2002 is a net gain of $82,000 due to the change in fair value of the
Authority's derivative instruments. For the quarter ended June 30, 2001,
interest expense included a net loss of $85,000 due to the change in the fair
value of the Authority's derivative instruments. This increase mainly is
attributable to higher average debt outstanding and a decrease in the amount of
capitalized interest as a result of the decrease in the weighted average
cumulative expenditures for the period due to the opening of the first phase of
Project Sunburst in September 2001 and the completion of the second phase of
Project Sunburst in June 2002. The weighted average outstanding debt was $1.1
billion for the quarter ended June 30, 2002, compared to $730.7 million for the
quarter ended June 30, 2001. Capitalized interest was $2.2 million for the
quarter ended June 30, 2002 compared to $11.5 million for the same period in the
prior year. The weighted average interest rate for the quarter ended June 30,
2002 was 7.59%, compared to 7.67% for the quarter ended June 30, 2001.
Loss from discontinued operations associated with the conversion of the
bingo hall into the Hall of the Lost Tribes smoke-free slot machine venue
totaled $64,000 for the quarter ended June 30, 2001. There was no loss from
discontinued operations for the quarter ended June 30, 2002.
Net income for the quarter ended June 30, 2002 decreased by $26.5
million, or 58.6%, to $18.8 million from $45.3 million for the quarter ended
June 30, 2001. The decrease in net income primarily is due to the decrease
29
in operating income as more fully described above and an increase in interest
expense. The increase in interest expense is mainly attributable to higher
average debt outstanding due to the completion of the first phase of Project
Sunburst in September 2001 and the completion of the second phase of Project
Sunburst in June 2002. The weighted average outstanding debt was $1.1 billion
for the quarter ended June 30, 2002, compared to $730.7 million for the quarter
ended June 30, 2001.
Comparison of Operating Results for the Nine Months Ended June 30, 2002
and 2001:
Net revenues for the nine months ended June 30, 2002 increased by
$168.5 million, or 29.5%, to $739.9 million from $571.4 million reported for the
same period of the prior year. This increase primarily is attributable to an
increase in gaming, food and beverage, and hotel revenues due to the opening of
the first phase of Project Sunburst in September 2001 and the completion of the
second phase of Project Sunburst in June 2002.
Adjusted EBITDA for the nine months ended June 30, 2002 increased by
$10.3 million, or 5.6%, to $193.8 million from $183.6 million for the nine
months ended June 30, 2001. Mohegan Sun achieved a 26.2% Adjusted EBITDA margin
for the nine months ended June 30, 2002 compared to a 32.1% Adjusted EBITDA
margin for the nine months ended June 30, 2001. The decline in the margin was
the result of increased labor, marketing and operating expenses related to
operating the expanded Mohegan Sun facility increasing at a greater rate than
revenues. Additionally, the unfavorable variance can be attributed to the
national recession and the tragic events of September 11, 2001. The Authority
relies heavily on drive-in traffic, and the Authority believes that its ability
to host events in the arena on weekends and to otherwise accommodate guests
during peak periods has been limited until recently when the parking
enhancements provided by the Thames Garage and the Indian Summer Garage were
fully completed in April and June 2002, respectively. See "Overview-Additional
Mohegan Sun Enhancements-Parking Garages" and "Liquidity, Capital Resources and
Capital Spending-Capital Expenditures" for a discussion of parking enhancements.
The Connecticut slot market grew at a rate of 13.1% for the nine months
ended June 30, 2002 as compared to the nine months ended June 30, 2001. The
State of Connecticut reported a gross slot win of $1.1 billion and $973.5
million for the nine months ended June 30, 2002 and 2001, respectively. Mohegan
Sun exceeded the market's growth in slot win as it experienced an increase in
gross slot revenues of 24.3% in the nine months ended June 30, 2002 over the
nine months ended June 30, 2001 due to expanded capacity as described below.
Mohegan Sun gross slot revenues were $519.0 million and $417.7 million for the
nine months ended June 30, 2002 and 2001, respectively. Gross slot win per unit
per day was $306 and $478 for the respective periods. The decrease in gross slot
win per unit was due to an increase in the weighted average number of slot
machines from approximately 3,204 in the nine months ended June 30, 2001 to
approximately 6,206, in the nine months ended June 30, 2002. The increase in
weighted average slot machines primarily is attributable to the opening of the
Casino of the Sky, which added a total of approximately 2,500 slot machines to
Mohegan Sun and the Hall of the Lost Tribes smoke free slot machine venue.
Gaming revenues for the nine months ended June 30, 2002 increased by
$142.9 million, or 26.1%, to $690.5 million from $547.6 million for the nine
months ended June 30, 2001. This increase is due to a 23.6% growth in net slot
machine revenues and a 35.0% increase in table game revenues as a result of the
opening of the Casino of the Sky.
Food and beverage revenues for the nine months ended June 30, 2002
increased by $16.8 million, or 48.7%, to $51.5 million from $34.6 million for
the nine months ended June 30, 2001. This increase in food and beverage revenues
is attributable to a 36.6% increase in meals served for the nine months ended
June 30, 2002, as compared to the same period in the prior year and a higher
average sale per check. The increases in meals served and higher average sale
per check are associated primarily with the new Project Sunburst restaurants
which include the 350-seat Sunburst Buffet, the Rising Moon Gallery of Eateries,
Fidelia's, Rain and Tuscany.
Hotel revenues for the nine months ended June 30, 2002 were $6.8
million. The Mohegan Sun hotel opened in April 2002. Average daily room rates
were $178 for the nine months ended June 30, 2002 with an occupancy rate of 69%.
Revenue per available room was $119. There were no hotel revenues for the nine
months ended June 30, 2001.
Retail, entertainment and other revenues for the nine months ended June
30, 2002 increased by $579,000, or 1.4%, to $43.2 million from $42.6 million for
the nine months ended June 30, 2001. Entertainment revenue
30
increased by $3.0 million primarily due to the opening of the Mohegan Sun Arena
on September 25, 2001. Additional increases are attributable to an increase in
other revenue of $2.8 million primarily associated with the rental income earned
from third party retail tenants in the Shops at Mohegan Sun. These increases are
partially offset by a $5.3 million decrease in retail revenue due to a shift in
patronage from Mohegan Sun operated outlets, including the Mohegan Sun Citgo, to
the third party retail tenants in the Shops at Mohegan Sun.
Promotional allowances for the nine months ended June 30, 2002
decreased by $1.4 million, or 2.6%, to $52.0 million from $53.4 million for the
nine months ended June 30, 2001. The decrease is attributable to the shift in
patronage from Mohegan Sun retail outlets to the third party retail tenants in
the Shops at Mohegan Sun. The expenses related to the Shops at Mohegan Sun are
included in gaming expenses. Effective with the opening of the first phase of
Project Sunburst on September 25, 2001, members of the Mohegan Sun Player's Club
were eligible to redeem points at these tenant outlets.
Total operating costs and expenses for the nine months ended June 30,
2002 increased by $197.0 million, or 47.6%, to $610.8 million from $413.8
million during the nine months ended June 30, 2001. The majority of the increase
is attributable to additional operating costs and expenses resulting from the
opening of Project Sunburst and a $38.0 million increase in depreciation and
amortization expense due to the opening of the Casino of the Sky.
Gaming costs and expenses for the nine months ended June 30, 2002
increased by $77.1 million, or 31.7%, to $320.2 million from $243.1 million for
the nine months ended June 30, 2001. The majority of the increase is
attributable to additional labor costs associated with an approximately 82-unit
increase in table games and the addition of approximately 2,560 slot machines
associated with the opening of the first phase of Project Sunburst. The point
redemption by Mohegan Sun Player's Club patrons in the third party retail tenant
Shops at Mohegan Sun resulted in an increase in Mohegan Sun's gaming expenses
for the nine months ended June 30, 2002. Gaming costs and expenses as a
percentage of gaming revenues were 46.4% in the nine months ended June 30, 2002
compared to 44.4% in the same period of the prior year.
Food and beverage costs and expenses for the nine months ended June 30,
2002 increased by $11.6 million, or 62.7%, to $30.0 million from $18.5 million
for the nine months ended June 30, 2001. These increases are the result of
higher food and beverage operating costs, particularly labor costs and other
operating expenses due to the September 25, 2001 opening of the Rising Moon
Gallery of Eateries, a 350-seat Sunburst Buffet, Rain Fidelia's and Tuscany, the
arena concessions, the Cabaret bar and Leffingwell's bar located at the base of
Wombi Rock and the Sachem's Lounge. The opening of these additional outlets
resulted in an increase in the number of meals served, or food covers, from 2.8
million in the nine months ended June, 2001 to 3.8 million in the nine months
ended June 30, 2002, a 36.6% increase. The net cost of sales for food as
calculated as a percentage of food revenue was 34.2% in the nine months ended
June 30, 2002, compared to 35.1% for the nine months ended June 30, 2001.
Hotel costs and expenses for the nine months ended June 30, 2002 were
$1.4 million due to the opening of the Mohegan Sun hotel in April 2002.
Retail, entertainment and other costs and expenses for the nine months
ended June 30, 2002 increased by $6.6 million, or 29.5%, to $29.1 million from
$22.5 million for the nine months ended June 30, 2001. This increase mainly is
attributable to an increase in entertainment costs associated with events held
in the Mohegan Sun Arena in the nine months ended June 30, 2002. The first event
held in the Mohegan Sun Arena on October 26, 2001 was a pre-season NBA
basketball game with Michael Jordan and the Washington Wizards. Additional
events included the National Women's Basketball League Championships, concerts
with Tim McGraw, Gloria Estefan, Aerosmith, Bob Dylan, Janet Jackson, Anne
Murray, Julio Iglesis, Toby Keith, Brooks and Dunn, ZZ Top, Alan Jackson, Cher
and Marc Anthony, Summer Music Mania, ESPN Bowling, an exhibition tennis match
with Martina Navritolova and Monica Seles, Showtime Boxing, Polkapalooza and an
HBO boxing event with Arturo Gatti vs. Micky Ward. Also contributing to the
increase are expenses associated with the Cabaret, an intimate 300-seat theater
that plays host to entertainers from singers, such as Tony Bennett, Betty
Buckley, Shirley Jones and Jack Jones, to comics, such as Phyllis Diller, Nell
Carter and the Amazing Kreskin.
Marketing, general and administrative costs and expenses for the nine
months ended June 30, 2002 increased by $61.5 million, or 59.3%, to $165.3
million from the $103.8 million for the nine months ended June 30, 2001. This
increase is associated primarily with costs to operate the expanded facility
such as utilities, engineering,
31
risk management and maintenance services and marketing expenses targeted to
promote Mohegan Sun through all major media outlets.
Pre-opening costs and expenses associated with the opening of the
Mohegan Sun hotel were $7.8 million for the nine months ended June 30, 2002
compared to pre-opening costs and expenses (relating to the opening of the first
phase of Project Sunburst) of $7.0 million for the nine months ended June 30,
2001.
Depreciation and amortization for the nine months ended June 30, 2002
increased by $38.0 million, or 200.9%, to $57.0 million for the nine months
ended June 30, 2002 from $18.9 million for the nine months ended June 30, 2001.
This increase was a result of $1.0 billion of assets related to Project
Sunburst, including $63.5 million of capitalized interest, being placed in
service.
Income from operations for the nine months ended June 30, 2002
decreased by $28.5 million, or 18.1%, to $129.1 million from $157.6 million for
the nine months ended June 30, 2001. This decrease is attributable to increases
in costs and expenses associated with the expansion of Mohegan Sun, including
increased staffing levels and depreciation and amortization of the expanded
facility.
Accretion of the discount associated with the relinquishment liability
reassessment for the nine months ended June 30, 2002 increased by $376,000, or
1.4%, to $27.3 million from $26.9 million for the same period in the prior year.
This increase is due to the Authority's quarterly accretion of the
relinquishment liability to reflect the impact of time on the value of money,
discounted to present value using the Authority's current risk free rate of
investment.
Interest and other income for the nine months ended June 30, 2002
decreased by $2.1 million, or 86.0%, to $335,000 from $2.4 million for the nine
months ended June 30, 2001. The decrease in interest income resulted from the
liquidation of investments to fund Project Sunburst plus a decline in the return
on the invested assets. The weighted average invested cash was $25.8 million and
$34.1 million for the nine months ended June 30, 2002 and 2001, respectively.
The Authority invests in investment-grade commercial paper having maturities of
not more than six months from the date of acquisition.
Interest expense for the nine months ended June 30, 2002 increased
$39.0 million, or 288.4%, to $52.5 million from $13.5 million for the nine
months ended June 30, 2001. Included in interest expense for the nine months
ended June 30, 2002 is a net gain of $972,000 due to the change in the fair
value of the Authority's derivative instruments. For the nine months ended June
30, 2001, interest expense included a net loss of $2.4 million due to the change
in the fair value of the Authority's derivative instruments. This increase is
attributable mainly to higher average debt outstanding and a decrease in
capitalized interest as a result of the decrease in the weighted average
cumulative expenditures for the period due to the opening of the first phase of
Project Sunburst in September 2001 and the completion of the second phase of
Project Sunburst in June 2002. The weighted average outstanding debt was $1.1
billion for the nine months ended June 30, 2002, compared to $610.5 million for
the nine months ended June 30, 2001. Capitalized interest was $12.4 million for
the nine months ended June 30, 2002 compared to $28.2 million for the same
period in the prior year. The weighted average interest rate for the nine months
ended June 30, 2002 was 7.39%, compared to 8.03% for the nine months ended June
30, 2001.
Loss from discontinued operations associated with the conversion of the
bingo hall into the Hall of the Lost Tribes smoke-free slot machine venue
totaled $591,000 for the nine months ended June 30, 2001. There was no loss from
discontinued operations for the nine months ended June 30, 2002.
Net income for the nine months ended June 30, 2002 decreased by $69.4
million, or 58.4%, to $49.5 million from $118.9 million for the same period in
the prior year. The decrease in net income primarily is due to the decrease in
operating income as more fully described above and an increase in interest
expense. The increase in interest expense is mainly attributable to higher
average debt outstanding due to the completion of the first phase of Project
Sunburst in September 2001 and the completion of the second phase of Project
Sunburst in June 2002. The weighted average outstanding debt was $1.1 billion
for the nine months ended June 30, 2002, compared to $610.5 million for the nine
months ended June 30, 2001.
32
Liquidity, Capital Resources and Capital Spending
As of June 30, 2002, the Authority held cash and cash equivalents of
$57.3 million, a decrease of $17.0 million from $74.3 million as of September
30, 2001. This decrease is mainly attributable to the decrease in investments
held at June 30, 2002 due to liquidation of the investments for construction
payments. Cash provided by operating activities for the nine months ended June
30, 2002 decreased by $13.6 million, or 9.8%, to $125.5 million from $139.2
million for the nine months ended June 30, 2001. This decrease in cash provided
by operating activities is attributable to a decrease in net income, partially
offset by lower working capital needs.
Operating activities are the principal source of the Authority's cash
flows. The principal application of these funds was capital expenditures
incurred in connection with the construction and development of Project Sunburst
and other real property improvements. While the Authority does not believe that
there is any trend or a likelihood of an event that would adversely impact the
level of cash generated by its activities, there are numerous potential factors
which may cause a substantial reduction in the amount of cash flow, including,
but not limited to the following:
. downturn in the economy and lack of consumer confidence, which
would result in reduced spending on discretionary items such as
gaming activities;
. an act of terrorism on the United States of America;
. operating expenses increasing at a greater rate than revenue; and
. increased competition in the gaming industry, or the legalization
of gaming activities in the State of Connecticut, which may result
in a substantial decrease in revenue.
In addition to cash generated by operating activities, the Authority
has relied on external sources of liquidity to meet its operating and investing
requirements.
External Sources of Liquidity
Bank Credit Facility
As of June 30, 2002, the Authority had $220.0 million outstanding under
the $400.0 million reducing, revolving, collateralized Bank 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),
which will mature in March 2004. 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, or LIBOR, plus, in
either case, the applicable spread (based on the Authority's Total Leverage
Ratio as defined in the Bank Credit Facility). As of June 30, 2002, one-month
LIBOR was 1.84% and the applicable spread on a LIBOR loan was 2.625%. Interest
on each LIBOR loan that is for a term of three months 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 three months is due and payable on the
date which is three months after the date such LIBOR loan was made, every three
months thereafter and on the last day of the related interest period. Interest
on each base rate loan is due and payable quarterly in arrears. As of June 30,
2002, the Authority had no base rate loans. Accrued interest on the Bank Credit
Facility was $178,000 at June 30, 2002.
Pursuant to the terms of the Bank Credit Facility, the commitment (or
the maximum amount that may be borrowed under the Bank Credit Facility) will be
automatically reduced on September 30, 2002, and on the last day of each fiscal
quarter thereafter, by 10% of the commitment as in effect immediately prior to
the first such reduction.
33
During the nine months ended June 30, 2002, the Authority reduced the
balance of the Bank Credit Facility by $243.0 million and borrowed $205.0
million. The outstanding balance under the Bank Credit Facility as of June 30,
2002 was $220.0 million. The Bank Credit Facility contains various provisions
that require the Authority to maintain specified financial ratios. If the
Authority's revenue declines due to economic or competitive factors, it is
possible that these financial ratios may be violated. If this were to happen,
the Authority would not be able to borrow additional funds under the Bank Credit
Facility and it may even result in an event of default, which could accelerate
the payment of any outstanding balance. In addition, while the Authority has
entered into some hedging transactions to mitigate against its exposure to
interest rate fluctuations on the Bank Credit Facility, the majority of the
outstanding balance is subject to interest rate fluctuations. As the economy
rebounds, it is possible that the interest rate will start to increase, which
would mean that the Authority's interest cost may increase significantly. A
substantial increase in interest expense could have a negative effect on the
Authority's liquidity. For a further discussion on hedging transactions that
mitigate against this exposure, see "Quantitative and Qualitative Disclosure of
Market Risk" and Note 3 to the Authority's unaudited financial statements as of
June 30, 2002.
Recent Amendments to the Bank Credit Facility. On June 21, 2002, the
Authority received the requisite consent of its lenders to Amendment No. 4 to
its Bank Credit Facility. The amendment revised the total leverage ratio
permitted as of June 30, 2002 to 5.25 to 1.00 from 5.00 to 1.00 and increased
the construction budget from $960.0 million to $1.0 billion.
The Authority also received the requisite consent of its lenders to
Amendment No. 5 to the Bank Credit Facility (the "Amendment") on August 14,
2002. The Amendment (i) expanded the definition of "approved swap agreements"
and increased the amount of approved swap agreements and other swap agreements
that may be used to secure other indebtedness of the Authority from the notional
amount of $200 million to the notional amount of $300 million and (ii) waived,
for a period of 90 days from the date of the Amendment, (a) the delivery of
audited statements for the fiscal year ended September 30, 2001 and reviewed
financial statements for the quarterly periods ended December 31, 2000, March
31, 2001, June 30, 2001, December 31, 2001 and March 31, 2002, (b) the
requirement to file amended Quarterly Reports on Form 10-Q for the quarterly
periods ended December 31, 2000, March 31, 2001, June 30, 2001, December 31,
2001 and March 31, 2002 and an amended Annual Report on Form 10-K for the fiscal
year ended September 30, 2001, (c) any defaults which may have arisen by reason
of any of the inaccuracies in the financial statements which are described above
and (d) any resulting technical non-compliance with a requirement of law.
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.
Exchange Offer. On June 28, 2002, the Authority successfully
consummated its offer to exchange all outstanding 2002 Senior Subordinated Notes
that it had issued on February 20, 2002 for $250.0 million of its fully
registered 8.0% Senior Subordinated Notes due 2012. The terms of such fully
registered exchange notes are identical to the terms of the 2002 Senior
Subordinated Notes. The Authority did not receive any additional proceeds from
this exchange offer.
Capital Expenditures
Capital Expenditures Incurred to Date. Capital expenditures totaled
$205.8 million including capitalized interest for the nine months ended June 30,
2002, versus $428.0 million for the same period in the prior year. These capital
expenditures were an aggregate of the following:
. Cumulative Project Sunburst construction expenses totaled $1.055
million, including $63.5 million in capitalized interest and net
of $5.0 million expensed or recorded as inventory, through June
30, 2002. During the nine months ending June 30, 2002,
expenditures totaled $143.3 million, including $12.4 million in
capitalized interest and net of $3.7 million expensed or recorded
as inventory, versus $421.5 million, including $28.2 million in
capitalized interest, expended during the nine months ended June
30, 2001. The Mohegan Sun hotel and convention center opened in
June 2002.
. Property maintenance capital expenditures for furniture, fixtures
and equipment totaled $22.1 million and $14.7 million for the nine
months ended June 30, 2002 and June 30, 2001, respectively.
34
. Capital expenditures on the Authority's electrical and water systems
infrastructure improvements totaled $2.8 million and $6.7 million for
the nine months ended June 30, 2002 and June 30, 2001, respectively.
Cumulative infrastructure improvements totaled $35.0 million as of
June 30, 2002. The total estimated cost of the infrastructure
improvements is $35.0 million. The infrastructure improvements will
handle the increased utility demands of the expanded facility that are
attributable to the Project Sunburst expansion.
. Capital expenditures for the $65.0 million Indian Summer Garage, a
2,700-space patron parking garage, totaled $50.8 million for the nine
months ended June 30, 2002. The Authority did not incur any capital
expenditures for the Indian Summer Garage for the nine months ended
June 30, 2001. Cumulative expenditures totaled $60.5 million as of
June 30, 2002. The Indian Summer Garage opened in June 2002.
. Capital expenditures for the $25.0 million, 1,700-space Thames Garage
have totaled $22.7 million to date, all of which have been spent
during the nine months ended June 30, 2002. The Authority did not
incur any capital expenditures for the construction of the Thames
Garage for the nine months ending June 30, 2001. The Thames Garage
opened in April 2002.
. Capital expenditures for the construction of the Hall of the Lost
Tribes, the 637-unit smoke-free slot machine venue which opened on
April 18, 2001, were $523,000 for the nine months ended June 30, 2002.
Expenditures for the construction of the Hall of the Lost Tribes for
the nine months ended June 30, 2001 totaled $12.1 million. Cumulative
expenditures for the Hall of the Lost Tribes totaled $15.4 million as
of June 30, 2002. Construction is now complete.
. The Authority, in conjunction with the Project Sunburst expansion,
commenced construction on the employee parking center in March 1999.
The employee parking center includes 2,550 parking spaces and
amenities such as a dry cleaning service, on-site banking, an employee
computer/training center and a 15,000 square foot exercise facility. A
portion of the employee parking center opened in June 2000 with the
remainder opening in January 2001. The total cost of the Employee
Parking Center was $25.0 million. The Authority did not incur any
capital expenditures for the employee parking center for the nine
months ended June 30, 2002 as construction of the facility is
complete. Capital expenditures associated with the Employee Parking
Garage were $1.2 million for the nine months ended June 30, 2001.
Other Reservation Enhancements
. Capital expenditures for the construction of the employee day care
facility were $554,000 during the nine months ended June 30, 2002 and
cumulative expenditures on the employee day care facility reached $1.1
million as of June 30, 2002. The Authority did not incur any
construction expenses in conjunction with the employee day care
facility for the nine months ended June 30, 2001. The Authority's
expenditure of $1.1 million has been fully reimbursed by the Tribe.
The Tribe will pay all future expenditures related to this project and
will operate it when opened.
In keeping with standard practice in the construction industry, the
Authority retains a portion of the construction expenditures until satisfactory
completion of individual contracts. As of June 30, 2002, construction retainage
totaled $10.3 million, which has been included in construction 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
$13.3 million and to be allocated as follows:
. $2.9 million on maintenance capital expenditures.
. $3.6 million on Project Sunburst construction.
35
. $4.5 million on the Indian Summer parking garage.
. $2.3 million on the Thames Garage.
Project Sunburst
The Tribe received a notification from TCA, the developer of Project
Sunburst, indicating that the cost of completing Project Sunburst is estimated
to be $1.0 billion, excluding capitalized interest, which represents an increase
of $40.0 million over the previous estimate of $960.0 million. TCA indicated
that the $40.0 million increase relates to scope changes to the Mohegan Sun
retail program amounting to $10.0 million and acceleration costs related to the
early opening of the Casino of the Sky and the extended hotel tower completion
date in the amount of $12.0 million. The balance of the increase relates to
theming and quality improvements and claims reserves in the amount of $18.0
million. Mohegan Sun currently anticipates funding the cost overrun from the
Bank Credit Facility. As of June 30, 2002, the Authority has spent $996.4
million, excluding capitalized interest, on Project Sunburst. The remaining $3.6
million is anticipated to be spent during the remainder of fiscal year 2002.
As of June 30, 2002, cumulative capitalized interest for Project
Sunburst construction expenses totaled $63.5 million. Capitalized interest
totaled $2.2 million and $11.5 million for the quarter ended June 30, 2002 and
2001, respectively. Capitalized interest totaled $12.4 million and $28.2 million
for the nine months ended June 30, 2002 and 2001, respectively.
Sources of funding for capital expenditures. The Authority will rely
primarily on cash generated from its operations and amounts available to be
drawn under the Bank Credit Facility to finance these capital expenditures.
However, the Authority's ability to finance sufficiently the anticipated capital
expenditures from these sources depends on its ability to maintain a stable
level of cash generation from its operations and its ability to draw down on the
Bank Credit Facility.
Relinquishment Agreement
Under the terms of the Relinquishment Agreement, TCA continued to
manage Mohegan Sun under the Management Agreement until January 1, 2000, when
the Management Agreement terminated, and the Authority assumed day-to-day
management of Mohegan Sun. As a result of the termination of the Management
Agreement, the Authority has agreed to pay TCA five percent of gross revenues
(as defined in the Relinquishment Agreement) generated from Mohegan Sun
including Project Sunburst, beginning January 1, 2000 and ending December 31,
2014. The Authority refers to these payments as the relinquishment payments. The
Authority initially recorded a relinquishment liability of $549.1 million in
September 1998. The present value of this liability is estimated at $588.6
million as of June 30, 2002. The Authority reassesses the relinquishment
liability when necessary to account for material increases or decreases in
projected revenues and quarterly to reflect the impact on the time value of
money due to the passage of time. The Authority has capitalized $130.0 million
of the relinquishment liability associated with the trademark value of the
Mohegan Sun brand name. The Authority paid $30.7 million in Senior
Relinquishment Payments during the nine months ended June 30, 2002. Of the $30.7
million in relinquishment payments for the nine months ended June 30, 2002, $8.1
million represents principal amounts and the remaining $22.6 million is payment
for the accretion of interest. As of June 30, 2002, relinquishment payments
earned but unpaid were $20.4 million. During the nine months ended June 30,
2001, the Authority paid $26.1 million in Senior Relinquishment Payments,
consisting of $6.9 million in principal amounts and $19.2 million for the
accretion of interest.
Distributions to the Tribe
During the three and nine months ending June 30, 2002, the Authority
distributed $11.2 million and $27.9 million, respectively, to the Tribe. The
Authority distributed $20.0 million and $40.0 million, respectively, to the
Tribe for the three and nine months ended June 30, 2001.
Debt Service Costs
For the quarter and nine months ended June 30, 2002 and June 30, 2001
the Authority incurred the following debt service costs (in thousands):
36
For the For the For the For the
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
---------------------- --------------- ---------------------- ---------------
(restated - see note 7 (restated - see note 7
to the Authority's to the accompanying
financial statements) financial statements)
Bank Credit Facility $ 3,776 $ 2,795 $ 12,337 $ 3,882
$200M 8.125% Senior Notes 4,063 4,063 12,187 12,187
$300M 8.75% Senior Subordinated Notes 6,563 6,563 19,688 19,688
$150M 8.375% Senior Subordinated Notes 3,141 - 9,422 -
$250M 8% Senior Subordinated Notes 5,000 - 7,167 -
Financing Fees 1,515 1,163 5,039 3,257
Capital lease obligations - 47 9 236
Derivative instruments (82) 85 (972) 2,488
Capitalized interest (2,244) (11,497) (12,353) (28,214)
---------------------- --------------- ---------------------- ---------------
Total Interest Expense $ 21,732 $ 3,219 $ 52,524 $ 13,524
====================== =============== ====================== ===============
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.
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
Contractual Obligations Year
(in thousands) 2002 (1) 2-3 years 4-5 years After 5 years
---------------------------------------------------------------------------------------------
Long-term debt (2) $ 22,000 $236,000 $200,000 $700,000
Construction obligations (3) 157,239 - - -
Development obligations (4) 4,718 - - -
------------------------------------------------------
Total $183,957 $236,000 $200,000 $700,000
======================================================
(1) Amounts due within one year represent obligations expected to be incurred
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 in connection with Project Sunburst and related
construction enhancements. 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.
37
(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. The amounts included in the table below are estimates and, while
some agreements are perpetual in term, for the purposes of calculating these
amounts the Authority has prepared the information for only ten years.
Fiscal
Contractual Commitments Year
(in thousands) 2002 (1) 2-3 years 4-5 years 5-10 years
------------------------------------------------------------------------------------------------
Slot winning payment commitments (2) 180,381 392,963 425,029 1,184,902
Relinquishment commitments (3) 55,935 128,675 139,162 578,699
Priority distributions (4) 14,882 31,282 33,420 93,889
-------------------------------------------------------
Total $251,198 $552,920 $597,611 $1,857,490
=======================================================
(1) Amounts due within one year represent payment commitments from
October 1, 2001 to September 30, 2002.
(2) Slot winning payment commitments are a portion of the revenues
earned on slot machines that must be paid by the Authority to the
State of Connecticut pursuant to the Mohegan Compact. The payment
commitment is the lesser of (a) 30% of gross revenues from slot
machines, or (b) the greater of (i) 25% of gross revenues from slot
machines or (ii) $80.0 million. For the fiscal years ended
September 30, 2001, 2000 and 1999, the Slot Win Contribution
totaled $144.6 million, $135.1 million and $121.1 million,
respectively. The amounts shown in this table are estimates of the
required payments for the next ten 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 relinquishment
commitment is calculated as five percent of revenues, as defined in
the Relinquishment Agreement. The amounts shown in this table are
estimates of the required payments for the next ten years and have
been calculated in accordance with the Relinquishment Agreement See
Note 6 to the Authority's financial statements.
(4) Priority distributions are monthly payments required to be made
by the Authority to the Tribe pursuant to the Priority
Distribution Agreement. The payments are calculated based on net
cash flow and are limited to a maximum amount of $14.0 million,
which maximum amount is subject to an annual adjustment based on
Consumer Price Index, or CPI. During the fiscal year ended
September 30, 2001, the Authority paid $14.0 million in priority
distributions to the Tribe. In addition, for the nine months
ended June 30, 2002, the Authority paid $11.4 million in priority
distributions to the Tribe. The amounts included in the table are
estimates of the required payments for the next ten years and,
while this agreement is perpetual in term, for the purposes of
calculating these amounts, the Authority has assumed that it will
pay the maximum amount in each of the years covered by the table,
as adjusted by an annual CPI adjustment of 3.361%.
Critical Accounting Policies and Estimates
Management has identified the following critical accounting policies
that affect the Authority's more significant judgments and estimates used in the
preparation of the Authority's financial statements. The preparation of the
Authority's financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Authority's
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, management evaluates
those estimates, including those related to asset impairment, accruals for
Player's Club points, self-insurance, compensation and related benefits, revenue
recognition, allowance for doubtful accounts, contingencies and 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
38
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
Statement of Financial Accounting Standards ("SFAS") No. 5 "Accounting for
Contingencies", has recorded a relinquishment liability of the estimated present
value of its obligations under the Relinquishment Agreement. The Authority
reassesses the relinquishment liability when necessary to account for material
increases or decreases in projected revenues and quarterly to reflect the impact
on the time value of money due to the passage of time. Since there is a high
level of estimates and judgments used with respect to calculating this
liability, future events that affect 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. Minimum rental revenues in the Shops at Mohegan Sun are
recognized on a straight-line basis over the terms of the related leases.
Percentage rents are recognized in the period in which the tenants exceed their
respective percentage rent thresholds. Recoveries from tenants for operating
expenses related to the Shops at Mohegan Sun are recognized as offsetting
expenses in the period billed, which approximates the period in which the
applicable costs are incurred.
The Authority maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments, which results in bad debt expense. Management determines the adequacy
of this allowance by continually evaluating individual customer receivables,
considering the customer's financial condition, credit history and current
economic conditions. If the financial condition of customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
The Authority's trademark is no longer subject to amortization over its
estimated useful life as it has been deemed to have an indefinite useful life.
The trademark is evaluated periodically for impairment by applying a fair-value
based test and, if impairment occurs, the amount of impaired trademark will be
written off immediately. During the nine months ended June 30, 2002, the
Authority applied the initial fair value test and determined that no impairment
existed.
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 January 2001, the Emerging Issues Task Force ("EITF") reached a
consensus on certain issues within Issue No. EITF 00-22, "Accounting for Points
and Certain Other Time-Based or Volume-Based Sales Incentive Offers." In April
2002, the Authority adopted EITF 00-22, which requires that cash or equivalent
amounts provided or returned to customers as part of a transaction not be shown
as an expense, but instead as an offset to the related
39
revenue. The Authority offers cash inducements in certain circumstances and has
reflected $227,000 for the nine months ended June 30, 2002 as an offset to
gaming revenues for these incentives.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 modifies the
rules for accounting for the impairment or disposal of long-lived assets. The
new rules become effective for fiscal years beginning after December 15, 2001,
with earlier application encouraged. The Authority has not yet adopted and has
not yet quantified the impact of implementing SFAS 144 on the Authority's
financial statements, but does not anticipate a negative effect on the
Authority's financial position, results of operations or cash flows upon
adoption of the standard.
The Authority adopted SFAS No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142") on October 1, 2001. Under SFAS 142, the trademark is no longer
subject to amortization over its estimated useful life as it has been deemed to
have an indefinite useful life. However, SFAS 142 requires the trademark to be
evaluated at least annually for impairment by applying a fair-value based test
and, if impairment occurs, the amount of impaired trademark must be written off
immediately. With the adoption of SFAS 142, the Authority no longer records
amortization of the trademark. For the quarter and nine months ended June 30,
2001, the Authority recorded $859,000 and $2.6 million, respectively, related to
the amortization of the trademark. The Authority applied the initial fair value
test and determined that no impairment existed at March 31, 2002. Had SFAS 142
been in effect in these periods, the Authority's results would have been as
follows (in thousands):
For the Quarter For the Quarter For the Nine For the Nine
Ended Ended Months Ended Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
-------------------- ----------------- -------------------- -----------------
(restated - see (restated - see
note 7 to the note 7 to the
Authority's Authority's
financial financial
statements) statements)
Net income $ 18,755 $ 45,289 $ 49,495 $ 118,862
Trademark amortization - 859 - 2,577
-------------------- ----------------- -------------------- -----------------
As adjusted net income $ 18,755 $ 46,148 $ 49,495 $ 121,439
==================== ================= ==================== =================
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections as of
April 2002" ("SFAS 145"). The key provision of SFAS 145 which will affect the
Authority rescinds the existing rule that all gains or losses from the
extinguishment of debt should be classified as extraordinary items. Instead,
such gains and losses must be analyzed to determine if they meet the criteria
for extraordinary item classification based on the event being both unusual and
infrequent. The Authority will adopt SFAS 145 beginning October 1, 2002. Prior
period gains and losses must be analyzed to determine if they meet the criteria
to be classified as extraordinary items. If they fail to meet the criteria,
prior period gains and losses must be reclassified. The Authority has not yet
quantified the impact of implementing SFAS 145.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan, as previously required under EITF Issue 94-3. Examples of costs covered by
the standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. SFAS 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Authority will adopt SFAS 146 beginning January 1, 2003 and does not believe
the adoption will have a significant impact on results of operations, financial
position and cash flows.
40
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. The Authority's primary exposure to market risk is interest
rate risk associated with its $400.0 million Bank Credit Facility in which
interest will accrue on the basis of a base rate formula or a LIBOR-based
formula, plus applicable spreads. See Note 3 to the Authority's financial
statements for further details relating to the terms and conditions of the Bank
Credit Facility. As of June 30, 2002, the Authority had drawn down $220.0
million from the Bank Credit Facility. The Authority uses derivative
instruments, including an interest rate cap, interest rate collar and an
interest rate swap as its strategy to manage interest rate risk associated with
the variable interest rates applicable to advances under the Bank Credit
Facility.
Derivative instruments held by the Authority at June 30, 2002 are as
follows:
Notional Estimated
Maturity Date Value Fair Value
------------- -------- ----------
Interest Rate Cap
Strike Rate - 8% October 1, 2003 $ 63,715,200 $200
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% March 1, 2004 73,374,200 (2,283,753)
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable March 1, 2004 36,687,100 (1,241,450)
------------ -----------
Total $173,776,500 ($3,525,003)
============ ===========
All derivative instruments are based upon one-month LIBOR, which was
1.84% on June 30, 2002.
41
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index filed herewith is incorporated herein by reference.
(b) Reports on Form 8-K
On April 5, 2002, the Authority filed a Current Report on Form 8-K
regarding its decision to dismiss its independent auditors, Arthur
Andersen LLP and to engage the services of PricewaterhouseCoopers LLP
as it new independent auditors.
On June 24, 2002, the Authority filed a Current Report on Form 8-K
regarding Amendment No. 4 to its Bank Credit Facility. The amendment
revised the total leverage ratio permitted as of June 30, 2002 to 5.25
to 1.0 from 5.00 to 1.00 and increased the construction budget from
$960.0 million to $1.0 billion.
42
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOHEGAN TRIBAL GAMING AUTHORITY
Date: November 12, 2002 By: /s/ Mark F. Brown
---------------------- ---------------------------------------
Mark F. Brown
Chairman, Management Board
Date: November 12, 2002 By: /s/ William J. Velardo
---------------------- ---------------------------------------
William J. Velardo
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ Jeffrey E. Hartmann
---------------------- ---------------------------------------
Jeffrey E. Hartmann, Executive Vice President
Finance/Chief Financial Officer
(Principal Financial and Accounting Officer)
43
CERTIFICATION
I, William J. Velardo, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of the
Mohegan Tribal Gaming Authority;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
Date: November 12, 2002 /s/ William J. Velardo
------------------------------
William J. Velardo
President and Chief Executive Officer
44
CERTIFICATION
I, Jeffrey E. Hartmann, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of the
Mohegan Tribal Gaming Authority;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
Date: November 12, 2002 /s/ Jeffrey E. Hartmann
---------------------------------------
Jeffrey E. Hartmann
Executive Vice President, Finance and
Chief Financial Officer
45
Exhibit Index
Exhibit
No. Exhibit Description
3.1 Constitution of the Mohegan Tribe of Indians of Connecticut
(filed as Exhibit 3.1 to the Registration Statement on Form S-1,
File No. 33-80655, filed with the SEC on December 21, 1995 (the
"1996 Form S-1"), and incorporated by reference herein).
3.2 Ordinance No. 95-2 of the Tribe for Gaming on Tribal Lands,
enacted on July 15, 1995 (filed as Exhibit 3.2 to the 1996 Form
S-1 and incorporated by reference herein).
4.1 Relinquishment Agreement dated February 7, 1998 by and among the
Mohegan Tribal Gaming Authority, The Mohegan Tribe of Indians of
Connecticut and Trading Cove Associates (filed as Exhibit 10.14
to Form 10-K for the Authority's fiscal year ended September 30,
1998, File No. 33-80653, and incorporated by reference herein).
4.2 Indenture dated March 3, 1999 among the Mohegan Tribal Gaming
Authority, the Mohegan Tribe of Indians of Connecticut and First
Union National Bank, as Trustee, relating to the 8 1/8% Senior
Notes Due 2006 of the Mohegan Tribal Gaming Authority (filed as
Exhibit 4.3 to Registration Statement on Form S-4, File No.
333-76753, filed with the SEC on April 21, 1999 (the "1999 Form
S-4"), and incorporated by reference herein).
4.3 Form of Global 8 1/8% Senior Note Due 2006 of the Mohegan Tribal
Gaming Authority (contained in the Indenture filed as Exhibit
4.3 to the 1999 Form S-4 and incorporated by reference herein).
4.4 Senior Registration Agreement dated March 3, 1999 among the
Mohegan Tribal Gaming Authority, Salomon Smith Barney Inc.,
NationsBanc Montgomery Securities, LLC, SG Cowen Securities
Corporation, Bear, Sterns & Co. Inc., BankBoston Robertson
Stephens Inc. and Fleet Securities, Inc. (filed as Exhibit 4.5
to the 1999 Form S-4 and incorporated by reference herein).
4.5 Indenture dated as of March 3, 1999 among the Mohegan Tribal
Gaming Authority, the Mohegan Tribe of Indians of Connecticut
and State Street Bank and Trust Company, as Trustee, relating to
the 8 3/4% Senior Subordinated Notes Due 2009 of the Mohegan
Tribal Gaming Authority (filed as Exhibit 4.6 to the 1999 Form
S-4 and incorporated by reference herein).
4.6 Form of Global 8 3/4% Senior Subordinated Notes Due 2009 of the
Mohegan Tribal Gaming Authority (contained in the Indenture
filed as Exhibit 4.6 to the 1999 Form S-4 and incorporated by
reference herein).
4.7 Senior Subordinated Registration Agreement dated March 3, 1999
among the Mohegan Tribal Gaming Authority, Salomon Smith Barney
Inc., NationsBanc Montgomery Securities LLC, SG Cowen Securities
Corporation, Bear, Stearns & Co. Inc., BankBoston Robertson
Stephens Inc. and Fleet Securities, Inc. (filed as Exhibit 4.8
to the 1999 Form
46
S-4 and incorporated by reference herein).
4.8 Indenture dated as of July 26, 2001 among the Mohegan Tribal
Gaming Authority, the Mohegan Tribe of Indians of Connecticut
and State Street Bank and Trust Company, as Trustee, relating to
the 8 3/8% Senior Subordinated Notes Due 2011 of the Mohegan
Tribal Gaming Authority (filed as Exhibit 4.9 to Registration
Statement on Form S-4, File No. 333-69472, filed with the SEC on
September 14, 2001 (the "2001 Form S-4") and incorporated by
reference herein).
4.9 Form of Global 8 3/8% Senior Subordinated Notes Due 2011 of the
Mohegan Tribal Gaming Authority (contained in the Indenture
filed as Exhibit 4.9 to the 2001 Form S-4 and incorporated by
reference herein).
4.10 Registration Rights Agreement dated July 26, 2001 among the
Mohegan Tribal Gaming Authority, Salomon Smith Barney Inc., Banc
of America Securities LLC, Fleet Securities, Inc., SG Cowen
Securities Corporation, Commerzbank Capital Markets Corp.,
McDonald Investments Inc. and Wells Fargo Brokerage Services,
LLC (filed as Exhibit 4.11 to the 2001 Form S-4 and incorporated
by reference herein).
4.11 Indenture dated as of February 20, 2002 among the Mohegan Tribal
Gaming Authority, the Mohegan Tribe of Indians of Connecticut
and State Street Bank and Trust Company, as Trustee, relating to
the 8% Senior Subordinated Notes Due 2012 of the Mohegan Tribal
Gaming Authority (filed as Exhibit 4.12 to Registration
Statement on Form S-4, File No. 333-84984, filed with the SEC on
March 27, 2002 (the "2002 Form S-4") and incorporated by
reference herein.
4.12 Form of Global 8% Senior Subordinated Notes Due 2012 of the
Mohegan Tribal Gaming Authority (contained in the Indenture
filed as Exhibit 4.12 to the 2002 Form S-4 and incorporated by
reference herein).
4.13 Registration Rights Agreement dated February 20, 2002 among the
Mohegan Tribal Gaming Authority, Banc of America Securities LLC,
Salomon Smith Barney Inc., Fleet Securities, Inc., SG Cowen
Securities Corporation, Commerzbank Securities, McDonald
Investments Inc., Wells Fargo Brokerage Services, LLC, and
Credit Lyonnais Securities (filed as Exhibit 4.14 to the 2002
Form S-4 and incorporated by reference herein).
10.1 Amendment No. 4 to Loan Agreement entered into as of June 21,
2002 by and among the Mohegan Tribal Gaming Authority, the
Mohegan Tribe of Indians of Connecticut and Bank of America
National Trust and Savings Association (filed as Exhibit 99.1 to
the Form 8-K filed on June 24, 2002, and incorporated by
reference herein).
99.1* Certification of President and Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2* Certification of Executive Vice President, Finance and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
47