-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ORHeWUUj40EGw3aZ3DUNVN7CiwQi8F4uDTXtn4gLLIorWz7Hql+5SJIXCTyOB4k3 q5oHBcgEADBxpBt1PxVqrw== 0000928385-02-003557.txt : 20021112 0000928385-02-003557.hdr.sgml : 20021111 20021112171348 ACCESSION NUMBER: 0000928385-02-003557 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOHEGAN TRIBAL GAMING AUTHORITY CENTRAL INDEX KEY: 0001005276 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEMBERSHIP SPORTS & RECREATION CLUBS [7997] IRS NUMBER: 061436334 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-80655 FILM NUMBER: 02817906 BUSINESS ADDRESS: STREET 1: 27 CHURCH LANE CITY: UNCASVILLE STATE: CT ZIP: 06382 BUSINESS PHONE: 2038480545 10-Q/A 1 d10qa.txt FORM 10-Q/A 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 EX-99.1 3 dex991.txt WRITTEN STATEMENT Exhibit 99.1 Written Statement of President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) The undersigned, the President and Chief Executive Officer of the Mohegan Tribal Gaming Authority (the "Authority"), hereby certifies that, to his knowledge, on the date hereof: (a) the Quarterly Report on Form 10-Q/A of the Authority for the Quarter Ended June 30, 2002 filed on the date hereof with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Authority. /s/ William J. Velardo --------------------------------- William J. Velardo President and Chief Executive Officer November 12, 2002 48 EX-99.2 4 dex992.txt WRITTEN STATEMENT Exhibit 99.2 Written Statement of Executive Vice President, Finance and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) The undersigned, the Executive Vice President, Finance and Chief Financial Officer of the Mohegan Tribal Gaming Authority (the "Authority"), hereby certifies that, to his knowledge, on the date hereof: (a) the Quarterly Report on Form 10-Q/A of the Authority for the Quarter Ended June 30, 2002 filed on the date hereof with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Authority. /s/ Jeffrey E. Hartmann ------------------------------------- Jeffrey E. Hartmann Executive Vice President, Finance and Chief Financial Officer November 12, 2002 49 -----END PRIVACY-ENHANCED MESSAGE-----