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EX-31.2 - EXHIBIT 31.2 - MOHEGAN TRIBAL GAMING AUTHORITYdex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2009

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)

 

 

 

Not Applicable   06-1436334

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

One Mohegan Sun Boulevard, Uncasville, CT   06382
(Address of principal executive offices)   (Zip Code)

(860) 862-8000

(Registrant’s telephone number, including area code)

 

 

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 has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨    Accelerated filer  ¨
Non-accelerated filer  x    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

 

 

 


Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

INDEX TO FORM 10-Q

 

         Page
Number
PART I.   

FINANCIAL INFORMATION

 
Item 1.    Financial Statements  
  

Condensed Consolidated Balance Sheets as of December 31, 2009 and September 30, 2009 (unaudited)

  3
  

Condensed Consolidated Statements of Income (Loss) for the Three Months Ended December 31, 2009 and 2008 (unaudited)

  4
  

Condensed Consolidated Statements of Changes in Capital for the Three Months Ended December 31, 2009 and 2008 (unaudited)

  5
  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December  31, 2009 and 2008 (unaudited)

  6
  

Notes to the Condensed Consolidated Financial Statements (unaudited)

  7
  

Report of Independent Registered Public Accounting Firm

  26
  

Non Wholly-Owned Guarantor Subsidiary Financial Statements (unaudited)

  27
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  36
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

  59
Item 4T.   

Controls and Procedures

  60
PART II.   

OTHER INFORMATION

 
Item 1.   

Legal Proceedings

  61
Item 1A.   

Risk Factors

  61
Item 6.   

Exhibits

  61
Signatures.   

Mohegan Tribal Gaming Authority

  62


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

     December 31,
2009
   September 30,
2009
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 84,878    $ 64,664

Restricted cash

     1,962      1,899

Receivables, net

     24,864      23,360

Inventories

     16,045      15,521

Other current assets

     28,730      25,578
             

Total current assets

     156,479      131,022

Non-current assets:

     

Property and equipment, net

     1,660,206      1,676,763

Goodwill

     39,459      39,459

Other intangible assets, net

     390,568      389,914

Other assets, net

     62,559      57,925
             

Total assets

   $ 2,309,271    $ 2,295,083
             
LIABILITIES AND CAPITAL      

Current liabilities:

     

Current portion of long-term debt

   $ 22,489    $ 26,430

Current portion of relinquishment liability

     78,837      71,912

Due to Mohegan Tribe

     10,000      —  

Current portion of capital lease

     839      919

Trade payables

     14,297      19,900

Construction payables

     16,544      18,959

Accrued interest payable

     26,276      16,356

Other current liabilities

     135,476      124,834
             

Total current liabilities

     304,758      279,310

Non-current liabilities:

     

Long-term debt, net of current portion

     1,625,636      1,593,185

Long-term debt, due to Mohegan Tribe

     —        10,000

Relinquishment liability, net of current portion

     216,094      226,511

Capital lease, net of current portion

     5,862      6,030

Other long-term liabilities

     383      362
             

Total liabilities

     2,152,733      2,115,398

Commitments and Contingencies

     

Capital:

     

Retained earnings

     152,966      175,855
             

Mohegan Tribal Gaming Authority capital

     152,966      175,855

Non-controlling interests

     3,572      3,830
             

Total capital

     156,538      179,685
             

Total liabilities and capital

   $ 2,309,271    $ 2,295,083
             

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(in thousands)

(unaudited)

 

     For the
Three Months Ended
December 31, 2009
    For the
Three Months Ended
December 31, 2008
 

Revenues:

    

Gaming

   $ 309,839      $ 326,690   

Food and beverage

     23,315        23,888   

Hotel

     9,542        10,842   

Retail, entertainment and other

     27,438        33,671   
                

Gross revenues

     370,134        395,091   

Less—Promotional allowances

     (28,323     (31,060
                

Net revenues

     341,811        364,031   
                

Operating costs and expenses:

    

Gaming

     200,818        221,346   

Food and beverage

     11,184        11,726   

Hotel

     3,610        3,763   

Retail, entertainment and other

     7,954        12,631   

Advertising, general and administrative

     50,613        54,782   

Corporate expenses

     4,329        5,009   

Pre-opening costs and expenses

     42        241   

Depreciation and amortization

     25,431        26,526   
                

Total operating costs and expenses

     303,981        336,024   
                

Income from operations

     37,830        28,007   
                

Other income (expense):

    

Accretion of discount to the relinquishment liability

     (3,856     (5,106

Interest income

     732        989   

Interest expense, net of capitalized interest

     (28,549     (27,665

Loss on early extinguishment of debt

     (1,584     —     

Write-off of debt issuance costs

     (338     —     

Other expense, net

     (344     (633
                

Total other expense

     (33,939     (32,415
                

Net income (loss)

     3,891        (4,408

Loss attributable to non-controlling interests

     513        631   
                

Net income (loss) attributable to Mohegan Tribal Gaming Authority

   $ 4,404      $ (3,777
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL

(in thousands)

(unaudited)

 

     Total     Mohegan Tribal Gaming
Authority
    Non-controlling
Interests
 

Balance, September 30, 2009

   $ 179,685      $ 175,855      $ 3,830   

Contributions from members

     255        —          255   

Net income (loss)

     3,891        4,404        (513

Distributions to Tribe

     (27,293     (27,293     —     
                        

Balance, December 31, 2009

   $ 156,538      $ 152,966      $ 3,572   
                        

Balance, September 30, 2008

   $ 131,269      $ 128,011      $ 3,258   

Contributions from members

     11        —          11   

Net loss

     (4,408     (3,777     (631

Distributions to Tribe

     (14,931     (14,931     —     
                        

Balance, December 31, 2008

   $ 111,941      $ 109,303      $ 2,638   
                        

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the
Three Months Ended
December 31, 2009
    For the
Three Months Ended
December 31, 2008
 

Cash flows provided by (used in) operating activities:

    

Net income (loss)

   $ 3,891      $ (4,408

Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:

    

Depreciation and amortization

     25,431        26,526   

Accretion of discount to the relinquishment liability

     3,856        5,106   

Cash paid for accretion of discount to the relinquishment liability

     (2,553     (3,386

Loss on early extinguishment of debt

     1,584        —     

Accretion of discount on amendment to the purchase agreement for Mohegan Sun at Pocono Downs

     —          (262

Net loss on disposition of assets

     32        305   

Non-cash asset write-offs related to Project Horizon

     221        —     

Provision for losses on receivables

     717        1,988   

Amortization of debt issuance costs

     1,836        1,448   

Amortization of bond discount

     100        —     

Amortization of net deferred gain on settlement of derivative instruments

     (117     114   

Write-off of debt issuance costs

     338        —     

Changes in operating assets and liabilities:

    

(Increase) decrease in receivables

     (1,949     12,415   

Increase in inventories

     (524     (961

Increase in other assets

     (4,450     (2,728

Decrease in trade payables

     (5,603     (1,076

Increase in other liabilities

     21,045        3,799   
                

Net cash flows provided by operating activities

     43,855        38,880   
                

Cash flows provided by (used in) investing activities:

    

Purchases of property and equipment, net of decrease in construction payables of $2,415 and $47,725, respectively

     (12,389     (80,492

Proceeds from amendment to the purchase agreement for Mohegan Sun at Pocono Downs

     —          7,000   

Proceeds from Commonwealth of Pennsylvania’s facility improvement grant

     1,000        —     

Issuance of third-party loans and advances

     (489     (2,081

Proceeds from asset sales

     2        75   

Payments received on third-party loans

     47        73   

(Increase) decrease in restricted cash

     (63     369   
                

Net cash flows used in investing activities

     (11,892     (75,056
                

Cash flows provided by (used in) financing activities:

    

Bank Credit Facility borrowings—revolving loan

     106,000        406,000   

Bank Credit Facility repayments—revolving loan

     (119,000     (176,000

Bank Credit Facility repayments—term loan

     (147,000     (150,750

Salishan Credit Facility borrowings—revolving loan

     500        1,250   

Line of Credit borrowings

     116,255        147,038   

Line of Credit repayments

     (120,696     (149,975

Proceeds from issuance of Second Lien Senior Secured Notes, net of discount

     192,468        —     

Principal portion of relinquishment liability payments

     (4,795     (4,912

Distributions to Tribe

     (27,293     (14,931

Capitalized debt issuance costs

     (8,195     (9,647

Payments on capital lease obligations

     (248     (156

Non-controlling interest contributions

     255        11   
                

Net cash flows provided by (used in) financing activities

     (11,749     47,928   
                

Net increase in cash and cash equivalents

     20,214        11,752   

Cash and cash equivalents at beginning of period

     64,664        83,200   
                

Cash and cash equivalents at end of period

   $ 84,878      $ 94,952   
                

Supplemental disclosure:

    

Cash paid during the period for interest

   $ 16,931      $ 15,005   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION:

The Mohegan Tribe of Indians of Connecticut (the “Mohegan Tribe” or 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 and the non-exclusive authority to conduct such activities elsewhere. The Tribe is a federally-recognized Indian tribe with an approximately 507-acre reservation situated in Southeastern Connecticut, adjacent to Uncasville, Connecticut. Under the Indian Gaming Regulatory Act of 1988, 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 compact with the affected state. The Tribe and the State of Connecticut have entered into such a compact (the “Mohegan Compact”), which has been approved by the United States Secretary of the Interior. The Authority is primarily engaged in the ownership, operation and development of gaming facilities. In October 1996, the Authority opened a gaming and entertainment complex known as Mohegan Sun. The Authority is governed by a nine-member Management Board, whose members also comprise the Mohegan 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 following subsidiaries are wholly-owned by the Authority: Mohegan Basketball Club, LLC (“MBC”), Mohegan Golf, LLC (“Mohegan Golf”), Mohegan Commercial Ventures-PA, LLC (“MCV-PA”), Mohegan Ventures-Northwest, LLC (“Mohegan Ventures-NW”), Mohegan Ventures Wisconsin, LLC (“MVW”) and MTGA Gaming, LLC (“MTGA Gaming”). MBC owns and operates a professional basketball team in the Women’s National Basketball Association (“WNBA”), the Connecticut Sun, and owns approximately 3.6% of the membership interest in WNBA, LLC. Mohegan Golf owns and operates the Mohegan Sun Country Club at Pautipaug (“Mohegan Sun Country Club”) golf course in Southeastern Connecticut.

MCV-PA holds a 0.01% general partnership interest in Downs Racing, L.P., Backside, L.P., Mill Creek Land, L.P. and Northeast Concessions, L.P. (collectively, the “Pennsylvania Entities”), while the Authority holds a 99.99% limited partnership interest in each such entity. Downs Racing, L.P. (“Downs Racing”) owns and operates Mohegan Sun at Pocono Downs, a gaming and entertainment facility offering slot machines and harness racing in Plains Township, Pennsylvania, and several off-track wagering (“OTW”) facilities located elsewhere in Pennsylvania. The Authority views Mohegan Sun and the properties owned by the Pennsylvania Entities as two separate operating segments.

Mohegan Ventures-NW and the Tribe hold 49.15% and 7.85% membership interests in Salishan-Mohegan, LLC (“Salishan-Mohegan”), respectively, which was formed with an unrelated third-party to participate in a proposed development and management of a casino to be owned by the federally-recognized Cowlitz Indian Tribe of Washington (the “Cowlitz Tribe”) and to be located in Clark County, Washington (the “Cowlitz Project”).

MVW and Mohegan Ventures, LLC (“MV”), a wholly-owned subsidiary of the Tribe, hold 85.4% and 14.6% membership interests in Wisconsin Tribal Gaming, LLC (“WTG”), respectively, which was formed to participate in a proposed development of a casino to be owned by the federally-recognized Menominee Indian Tribe of Wisconsin (the “Menominee Tribe”) and to be located in Kenosha, Wisconsin (the “Menominee Project”).

MTGA Gaming and the Tribe hold 49% and 51% membership interests in Mohegan Gaming & Hospitality, LLC (“MG&H”), respectively. MG&H holds a 100% membership interest in Mohegan Resorts, LLC (“Mohegan Resorts”). It is anticipated that certain of the Authority’s and the Tribe’s future diversification efforts will be conducted, either directly or indirectly, through MG&H and Mohegan Resorts. Mohegan Resorts currently holds a 100% membership interest in Mohegan Resorts Mass, LLC, which was formed to evaluate potential gaming opportunities in the Commonwealth of Massachusetts.

 

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Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with 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 condensed consolidated 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 consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement of the results for the interim period, have been included. Operating results for the three months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Authority’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009. In addition, certain amounts in the 2009 condensed consolidated financial statements have been reclassified to conform to the 2010 presentation.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Authority and its majority and wholly-owned subsidiaries and entities. In accordance with authoritative guidance issued by the Financial Accounting Standard Board (the “FASB”) pertaining to consolidation of variable interest entities, the accounts of Salishan-Mohegan are consolidated into the accounts of Mohegan Ventures-NW, and the accounts of MG&H, Mohegan Resorts and its subsidiaries are consolidated into the accounts of MTGA Gaming, as Mohegan Ventures-NW and MTGA Gaming are deemed to be the primary beneficiaries. In consolidation, all intercompany balances and transactions were eliminated.

Fair Value of Financial Instruments

The fair value amounts presented below are reported to satisfy the disclosure requirements pursuant to authoritative guidance issued by the FASB pertaining to disclosures about fair values of financial instruments, and are not necessarily indicative of the amounts that the Authority could realize in a current market exchange.

In October 2008, the Authority adopted fair value provisions in accordance with authoritative guidance issued by the FASB pertaining to financial assets and liabilities. The guidance clarifies how companies are required to use a fair value measure for recognition and disclosure by establishing a common definition of fair value, a framework for measuring fair value, and expanded disclosures about fair value measurements. The Authority applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels:

 

   

Level 1—Quoted prices for identical assets or liabilities in active markets;

 

   

Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or valuations based on models where the significant inputs are observable or can be corroborated by observable market data; and

 

   

Level 3—Valuations based on models where the significant inputs are not observable. The unobservable inputs reflect the Authority’s estimates or assumptions that market participants would use in pricing the asset or liability.

 

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Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

The Authority’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of financial assets and liabilities and their placement within the fair value hierarchy.

The carrying amount of cash and cash equivalents, receivables, trade payables and promissory notes approximates fair value. The fair value of the Authority’s financing facilities and notes were as follows (in thousands):

 

     December 31, 2009
   Carrying
Value
   Fair
Value

Bank Credit Facility

   $ 553,000    $ 458,326

2009 11 1/ 2% Second Lien Senior Secured Notes

   $ 192,568    $ 205,000

2005 6 1/ 8% Senior Unsecured Notes

   $ 250,000    $ 205,000

2001 8 3/ 8% Senior Subordinated Notes

   $ 2,010    $ 1,759

2002 8% Senior Subordinated Notes

   $ 250,000    $ 218,750

2004 7 1/ 8% Senior Subordinated Notes

   $ 225,000    $ 166,500

2005 6 7/ 8% Senior Subordinated Notes

   $ 150,000    $ 108,000

The estimated fair value of the Authority’s financing facilities and notes was based on quoted market prices or prices of similar instruments on or about December 31, 2009.

New Accounting Standards

In October 2009, the Authority adopted new guidance that requires entities to report non-controlling interests in subsidiaries as equity in the consolidated financial statements. Its adoption required the Authority to modify the presentation of its financial statements, including retrospective application to prior periods. The new guidance also requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values. It also requires additional disclosure of information surrounding a business combination, such that users of the entity’s financial statements can fully understand the nature and financial impact of the business combination. The new provisions related to business combinations will only impact the Authority if it is party to a business combination after the authoritative guidance has been adopted.

In October 2009, the Authority adopted guidance pertaining to fair value measurements for non-financial assets and liabilities. The new guidance clarifies how companies are required to use a fair value measure for recognition and disclosure by establishing a common definition of fair value, a framework for measuring fair value, and expanding disclosures about fair value measurements. Its adoption did not have a material impact on the Authority’s financial position, results of operations or cash flows.

In June 2009, the FASB issued guidance to address the elimination of the concept of a qualifying special purpose entity. The new guidance also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, it provides more timely and useful information about an enterprise’s involvement with a variable interest entity. The new guidance is effective for fiscal years beginning after November 15, 2009. The Authority is currently evaluating the potential impact, if any, that the new guidance may have on its financial position, results of operations or cash flows.

 

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Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Subsequent Events

In preparing the accompanying condensed consolidated financial statements, the Authority has evaluated events subsequent to December 31, 2009 through the issuance of the financial statements on February 12, 2010.

NOTE 3—FINANCING FACILITIES:

Financing facilities consisted of the following (in thousands):

 

     December 31,
2009
   September 30,
2009

Bank Credit Facility

   $ 553,000    $ 713,000

2009 11 1/ 2% Second Lien Senior Secured Notes

     192,568      —  

2005 6 1/ 8% Senior Unsecured Notes

     250,000      250,000

2001 8 3/ 8% Senior Subordinated Notes

     2,010      2,010

2002 8% Senior Subordinated Notes

     250,000      250,000

2004 7 1/ 8% Senior Subordinated Notes

     225,000      225,000

2005 6 7/ 8% Senior Subordinated Notes

     150,000      150,000

Line of Credit

     7,739      12,180

WNBA Promissory Note

     2,000      2,000

Salishan Credit Facility

     13,750      13,250

Mohegan Tribe Promissory Note

     10,000      10,000

Menominee Kenosha Gaming Authority Note Payable

     600      600
             

Subtotal

     1,656,667      1,628,040

Net deferred gain on derivative instruments sold

     1,458      1,575
             

Total debt, excluding capital leases

   $ 1,658,125    $ 1,629,615
             

Bank Credit Facility

In December 2008, the Authority entered into a Third Amended and Restated Loan Agreement (the “Bank Credit Facility”) originally providing for up to $850.0 million of borrowing capacity from a syndicate of 23 financial institutions and commercial banks, with Bank of America, N.A., serving as Administrative Agent. On October 26, 2009, the Authority entered into an amendment to the Bank Credit Facility. Among other things, the amendment: (a) modified the terms of the Authority’s total leverage ratio covenant to increase the covenant by 25 basis points for the quarterly periods ending March 31, 2010, June 30, 2010, June 30, 2011, September 30, 2011 and December 31, 2011, and by 50 basis points for the quarterly periods ending September 30, 2010, December 31, 2010 and March 31, 2011; (b) modified the terms of the Authority’s senior leverage ratio covenant to increase the covenant by 25 basis points for the quarterly periods ending March 31, 2010 and continuing through December 31, 2011; (c) provided the ability to obtain a release from liens securing the Bank Credit Facility of a portion of the land on which Mohegan Sun at Pocono Downs is sited to permit its sale or lease to a third-party in connection with the development of a potential hotel project, consisting of a minimum of 200 rooms, subject to the satisfaction of customary conditions; (d) modified the terms of the Authority’s covenant relating to its incurrence of permitted indebtedness to allow the Authority or its subsidiaries to incur additional debt (which may consist of capital lease obligations) in an aggregate amount not to exceed $55.0 million, at any one time outstanding, in connection with the development of the potential hotel project at Mohegan Sun at Pocono Downs; (e) modified the terms of the Authority’s permitted capital expenditures covenant to affirmatively allow for the existing $125.0 million of permitted capital expenditures to be utilized for Mohegan Sun at Pocono Downs in addition to Mohegan Sun and related businesses, including the payment of

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

licensing fees associated with those operations; and (f) modified the terms of the applicable pricing rates under the Bank Credit Facility as follows: (1) to between 1.25% and 2.75% for Base Rate loans; (2) to between 2.50% and 4.00% for Eurodollar Rate loans; and (3) to between 0.20% and 0.50% for commitment fees. The Authority also repaid its then existing $147.0 million term loan (which resulted in an automatic and permanent reduction in the total commitments under the Bank Credit Facility by such amount) with proceeds from the issuance of its 11 1/2% Second Lien Senior Secured Notes on October 26, 2009, as further discussed below, and permanently reduced its revolving commitments by $25.0 million. Upon the repayment of the term loan and the $25.0 million permanent reduction in revolving commitments, the total commitments under the Bank Credit Facility were reduced from $847.0 million to $675.0 million. The Bank Credit Facility has no mandatory amortization provisions and is payable in full at maturity on March 9, 2012.

As of December 31, 2009, there was $553.0 million drawn on the Bank Credit Facility. As of December 31, 2009, the amount under letters of credit issued pursuant to the Bank Credit Facility totaled $4.2 million, of which no amount was drawn. Inclusive of letters of credit, which reduce borrowing availability under the Bank Credit Facility, and after taking into account restrictive financial covenants under the Bank Credit Facility, line of credit and note indentures, the Authority had approximately $117.8 million of borrowing capacity under the Bank Credit Facility as of December 31, 2009.

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, six-month or twelve-month Eurodollar Rate, plus in either case, an Applicable Rate based on the Authority’s total leverage ratio, as each term is defined under the Bank Credit Facility. The Authority also pays commitment fees for the unused portion of the revolving loans on a quarterly basis equal to the product obtained by multiplying the Applicable Rate for commitment fees by the average daily unused commitment for that calendar quarter. The Base Rate is the higher of Bank of America’s announced Prime Rate, the Eurodollar Rate for one-month contracts plus 1.25% or the Federal Funds Rate plus 0.50%. Interest on Base Rate loans is payable quarterly in arrears. Interest on Eurodollar Rate loans is payable at the end of each applicable interest period or quarterly in arrears, if earlier. As of December 31, 2009, the Authority had $553.0 million in Eurodollar Rate loans and no Base Rate loan outstanding. The loans outstanding at December 31, 2009 were based on a one-month Eurodollar Rate of 0.23% plus an Applicable Rate of 3.75%. The Applicable Rate for commitment fees was 0.50% as of December 31, 2009. As of December 31, 2009 and September 30, 2009, accrued interest, including commitment fees, on the Bank Credit Facility was $1.1 million.

The Bank Credit Facility is collateralized by a first priority lien on substantially all of the Authority’s assets, including the assets that comprise Mohegan Sun at Pocono Downs and a leasehold mortgage on the land previously taken into trust by the federal government and improvements which comprise Mohegan Sun. The Authority also will be required to pledge additional assets as collateral for the Bank Credit Facility as it or its guarantor subsidiaries acquire them. The Authority’s obligations under the Bank Credit Facility are fully and unconditionally guaranteed, on a joint and several basis, by MBC, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, WTG and MTGA Gaming. The Bank Credit Facility subjects the Authority to a number of restrictive covenants, including financial covenants. These financial covenants relate to, among other things, the Authority’s maximum total leverage and senior leverage ratios, minimum fixed charge coverage ratio and maximum capital expenditures. The Bank Credit Facility includes non-financial covenants by the Authority and the Tribe of the type customarily found in loan agreements for similar transactions.

As of December 31, 2009, the Authority and the Tribe were in compliance with all of their respective covenant requirements under the Bank Credit Facility.

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Senior Notes

2009 11 1/2% Second Lien Senior Secured Notes

On October 26, 2009, the Authority issued $200.0 million Second Lien Senior Secured Notes with fixed interest payable at a rate of 11.50% per annum (the “2009 Second Lien Senior Secured Notes”). The 2009 Second Lien Secured Notes were issued at a price of 96.234% of par, to yield an effective interest rate of 12.25% per annum. The net proceeds from this financing were used to repay the Authority’s then existing term loan under the Bank Credit Facility in the aggregate principal amount of $147.0 million, to repay $41.0 million of revolving loans under the Bank Credit Facility and to pay related transaction costs and expenses associated with the issuance. The 2009 Second Lien Senior Secured Notes mature on November 1, 2017. The first call date for the 2009 Second Lien Senior Secured Notes is November 1, 2013. Interest on the 2009 Second Lien Senior Secured Notes is payable semi-annually on May 1st and November 1st, commencing May 1, 2010. The 2009 Second Lien Senior Secured Notes are collateralized by a second lien on substantially all of the Authority’s property and assets, and those of its existing and future guarantor subsidiaries, and are effectively subordinated to all of the Authority’s first lien secured debt, including borrowings under the Bank Credit Facility, to the extent of the collateral securing such debt. The 2009 Second Lien Senior Secured Notes rank equally in right of payment with all of the Authority’s and its existing and future guarantor subsidiaries’ senior indebtedness and with the Authority’s Senior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing, but, to the extent of the value of the collateral, rank effectively senior to all of the Authority’s unsecured senior indebtedness, including its 2005 Senior Unsecured Notes and payment obligations under the Relinquishment Agreement. The 2009 Second Lien Senior Secured Notes rank senior to all of the Authority’s and its existing and future guarantor subsidiaries’ subordinated indebtedness, including the 2001 Senior Subordinated Notes, the 2002 Senior Subordinated Notes, the 2004 Senior Subordinated Notes and the 2005 Senior Subordinated Notes. As of December 31, 2009, accrued interest on the 2009 Second Lien Senior Secured Notes was $4.1 million.

The 2009 Second Lien Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a second lien senior secured basis, by MBC, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, WTG and MTGA Gaming. Refer to Note 8 for condensed consolidating financial information of the Authority and its guarantor subsidiaries and non-guarantor entities.

The 2009 Second Lien Senior Secured Notes and guarantees have not been and will not be registered under the Securities Act of 1933 or the securities laws of any other jurisdiction and may not be offered or sold in the United States absent registration or an applicable exemption from such registration requirements.

2005 6 1/8% Senior Unsecured Notes

In February 2005, the Authority issued $250.0 million Senior Notes with fixed interest payable at a rate of 6.125% per annum (the “2005 Senior Unsecured Notes”). The 2005 Senior Unsecured Notes mature on February 15, 2013. The first call date for the 2005 Senior Unsecured Notes was February 15, 2009. Interest on the 2005 Senior Unsecured Notes is payable semi-annually on February 15th and August 15th. The 2005 Senior Unsecured Notes are uncollateralized general obligations of the Authority, which are effectively subordinated, to the extent of the collateral, to all of the existing and future senior secured indebtedness of the Authority, including the Bank Credit Facility and the 2009 Second Lien Senior Secured Notes. The 2005 Senior Unsecured Notes rank equally in right of payment with the 2009 Second Lien Senior Secured Notes and the Authority’s Senior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing and rank senior to the Authority’s Junior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing, the 2001 Senior Subordinated Notes, the 2002 Senior Subordinated Notes, the 2004 Senior Subordinated Notes and the 2005 Senior Subordinated Notes. As of December 31, 2009 and September 30, 2009, accrued interest on the 2005 Senior Unsecured Notes was $5.7 million and $1.9 million, respectively.

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

The 2005 Senior Unsecured Notes are fully and unconditionally guaranteed, on a joint and several basis, by MBC, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, WTG and MTGA Gaming. Refer to Note 8 for condensed consolidating financial information of the Authority and its guarantor subsidiaries and non-guarantor entities.

Senior Subordinated Notes

2001 8 3/8% Senior Subordinated Notes

In July 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 2001 Senior Subordinated Notes mature on July 1, 2011. The first call date for the 2001 Senior Subordinated Notes was July 1, 2006. Interest on the 2001 Senior Subordinated Notes is payable semi-annually on January 1st and July 1st.

In August 2004, the Authority completed a cash tender offer and consent solicitation and repurchase of $133.7 million aggregate principal amount of the 2001 Senior Subordinated Notes. As part of the tender offer, the Authority solicited and received requisite consents which substantially eliminated all of the restrictive covenants thereunder.

In March 2009, the Authority repurchased and extinguished an additional principal amount of $14.3 million of the outstanding 2001 Senior Subordinated Notes. An aggregate principal amount of approximately $2.0 million of the 2001 Senior Subordinated Notes remains outstanding as of December 31, 2009. As of December 31, 2009 and September 30, 2009, accrued interest on the 2001 Senior Subordinated Notes was $84,000 and $42,000, respectively.

The Authority or its affiliates may, from time to time, seek to purchase or otherwise retire the Authority’s remaining 2001 Senior Subordinated Notes or other indebtedness for cash in open market purchases, privately negotiated transactions or otherwise, to reduce the amount of the Authority’s outstanding indebtedness. Any such transactions will depend on prevailing market conditions, the Authority’s liquidity, covenant restrictions and other factors.

2002 8% Senior Subordinated Notes

In February 2002, the Authority issued $250.0 million Senior Subordinated Notes with fixed interest payable at a rate of 8.000% per annum (the “2002 Senior Subordinated Notes”). The 2002 Senior Subordinated Notes mature on April 1, 2012. The first call date for the 2002 Senior Subordinated Notes was April 1, 2007. Interest on the 2002 Senior Subordinated Notes is payable semi-annually on April 1st and October 1st. As of December 31, 2009 and September 30, 2009, accrued interest on the 2002 Senior Subordinated Notes was $5.0 million and $10.0 million, respectively.

2004 7 1/8% Senior Subordinated Notes

In August 2004, the Authority issued $225.0 million Senior Subordinated Notes with fixed interest payable at a rate of 7.125% per annum (the “2004 Senior Subordinated Notes”). The 2004 Senior Subordinated Notes mature on August 15, 2014. The first call date for the 2004 Senior Subordinated Notes was August 15, 2009. Interest on the 2004 Senior Subordinated Notes is payable semi-annually on February 15th and August 15th. As of December 31, 2009 and September 30, 2009, accrued interest on the 2004 Senior Subordinated Notes was $6.0 million and $2.0 million, respectively.

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

2005 6 7/8% Senior Subordinated Notes

In February 2005, the Authority issued $150.0 million Senior Subordinated Notes with fixed interest payable at a rate of 6.875% per annum (the “2005 Senior Subordinated Notes”). The 2005 Senior Subordinated Notes mature on February 15, 2015. The first call date for the 2005 Senior Subordinated Notes is February 15, 2010. Interest on the 2005 Senior Subordinated Notes is payable semi-annually on February 15th and August 15th. As of December 31, 2009 and September 30, 2009, accrued interest on the 2005 Senior Subordinated Notes was $3.9 million and $1.3 million, respectively.

The Authority’s senior subordinated notes are uncollateralized general obligations of the Authority and are subordinated to the Bank Credit Facility, the 2009 Second Lien Senior Secured Notes, the 2005 Senior Unsecured Notes and the Authority’s Senior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing. The senior subordinated notes rank equally with each other and the Authority’s Junior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing. The senior subordinated notes are fully and unconditionally guaranteed, on a joint and several basis, by MBC, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, WTG and MTGA Gaming, except for the 2001 Senior Subordinated Notes, which are fully and unconditionally guaranteed solely by MBC. Refer to Note 8 for condensed consolidating financial information of the Authority and its guarantor subsidiaries and non-guarantor entities.

The senior and senior subordinated note indentures contain certain financial and non-financial covenants with which the Authority and the Tribe must comply. The financial covenants include, among other things, limitations on restricted payments and the incurrence of indebtedness, while the non-financial covenants include, among other things, reporting obligations, compliance with laws and regulations and the continued existence of the Authority. As of December 31, 2009, both the Authority and the Tribe were in compliance with all of their respective covenant requirements under the senior and senior subordinated note indentures.

NOTE 4—RELATED PARTY TRANSACTIONS:

The Tribe provides governmental and certain administrative services to the Authority in conjunction with the operation of Mohegan Sun. For each of the three months ended December 31, 2009 and 2008, the Authority incurred $7.0 million of expenses for such services.

The Authority purchases the majority of its utilities, including electricity, gas, water and waste water services, from an instrumentality of the Tribe, the Mohegan Tribal Utility Authority. For the three months ended December 31, 2009 and 2008, the Authority incurred costs of $6.4 million and $6.3 million, respectively, for such utilities.

In September 2009, the Tribe loaned Salishan-Mohegan $10.0 million, which was used to repay revolving loans under the Salishan Credit Facility in connection with an amendment to the Salishan Credit Facility. The promissory note executed by Salishan-Mohegan in favor of the Tribe provides for the accrual of interest at an annual rate of 15.0% and matures on October 1, 2010. Accrued interest is paid at a monthly rate of 3.0%, with the remaining 12.0% due at maturity. For the three months ended December 31, 2009, the Authority incurred interest expense associated with this promissory note of $374,000.

In July 2008, the Authority entered into a land lease agreement with the Tribe, replacing a prior land lease agreement, for property located adjacent to the Tribe’s reservation that is used for Mohegan Sun employee parking. The new agreement requires the Authority to make monthly payments equaling $75,000 until maturity

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

on June 30, 2018. The Authority classified this lease as a capital lease for financial reporting purposes due to the existence of a bargain purchase option at the expiration of the lease.

In July 2009, the Authority entered into an additional land lease agreement with the Tribe relating to property located adjacent to the Tribe’s reservation that is used for parking and access to Mohegan Sun. The agreement requires the Authority to make monthly payments equaling $30,000 through June 30, 2010 and $100 subsequent to June 30, 2010 until maturity on June 30, 2018. The Authority classified this lease as a capital lease for financial reporting purposes due to the existence of a bargain purchase option at the expiration of the lease.

The Authority is a tenant under a land lease agreement with the Tribe for access to Mohegan Sun. For each of the three months ended December 31, 2009 and 2008, the Authority expensed $12,000 relating to this land lease agreement.

The Authority also leases the land on which Mohegan Sun is located from the Tribe pursuant to a long-term lease agreement. The Authority is required to pay to the Tribe a nominal annual rental fee under the lease agreement. The lease has an initial term of 25 years and is renewable for an additional 25-year term upon expiration.

In September 1995, the Tribe adopted the Mohegan Tribal Employment Rights Ordinance, as amended from time to time (the “TERO”), which sets forth hiring and contracting preference requirements for employers and entities conducting business on Tribal lands on or adjacent to the Mohegan Reservation. Pursuant to the TERO, the Authority and other covered employers are required to give hiring, promotion, training, retention and other employment-related preferences to Native Americans who meet the minimum qualifications for the applicable employment position. However, this preference requirement does not apply to key employees as such persons are defined under the TERO.

Similarly, any entity awarding a contract or subcontract valued up to $200,000 to be performed on Tribal lands must give preference, first, to certified Mohegan entities submitting commercially responsible bids, and second, to other certified Native American entities. This contracting preference is conditioned upon the bid by the preferred certified entity being within 5% of the lowest bid by a non-certified entity. Contracts in excess of $200,000 are awarded to the lowest commercially responsible bidder, on a competitive basis, with preference to certified Mohegan entities and then other certified Native American entities in the event of a matching bid. The TERO establishes procedures and requirements for certifying Mohegan entities and other Native American entities. Certification is based largely on the level of ownership and control exercised by the members of the Tribe or other Native American tribes, as the case may be, over the entity bidding on a contract.

NOTE 5—COMMITMENTS AND CONTINGENCIES:

Slot Win Contribution and Free Promotional Slot Play Contribution

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 revenues earned on slot machines must be paid to the State of Connecticut (“Slot Win Contribution”). Slot Win Contribution payments are not required if the State of Connecticut legalizes any other gaming operations with slot machines or other commercial casino games within the State of Connecticut, except those consented to by the Tribe and the Mashantucket Pequot Tribe (the “MPT”). For each 12-month period commencing July 1, 1995, Slot Win Contribution payments shall be the lesser of: (1) 30% of gross revenues from slot machines, or (2) the greater of (a) 25% of gross revenues from slot machines or (b) $80.0 million.

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

In September 2009, the Authority entered into a settlement agreement with the State of Connecticut regarding contribution payments on the Authority’s free promotional slot play program and the distribution of previously escrowed payments, following litigation between the State of Connecticut and MPT concerning similar issues. Under the terms of the settlement agreement, effective July 1, 2009, the State of Connecticut agreed that no value shall be attributed to free promotional slot plays utilized by patrons at Mohegan Sun for purposes of calculating monthly contribution payments, provided that the aggregate amount of such free promotional slot plays during any month does not exceed 5.5% of gross revenues from slot machines for such month. In the event free promotional slot plays exceed 5.5% of monthly gross revenues from slot machines, contribution payments are required on such excess face amount of free promotional slot plays at the same rate as Slot Win Contribution payments, or 25%.

The Authority reflected expenses associated with the combined Slot Win Contribution and free promotional slot play contribution totaling $45.3 million and $50.1 million for the three months ended December 31, 2009 and 2008, respectively. As of December 31, 2009 and September 30, 2009, the combined outstanding Slot Win Contribution and free promotional slot play contribution payments totaled $14.3 million and $14.9 million, respectively.

Pennsylvania Gaming Tax

Downs Racing holds a Category One slot machine license issued by the Pennsylvania Gaming Control Board (the “PGCB”) for the operation of slot machines at Mohegan Sun at Pocono Downs. This license permits Downs Racing to install and operate up to 3,000 slot machines at Mohegan Sun at Pocono Downs, expandable to up to a total of 5,000 slot machines upon request and approval of the PGCB. After the satisfaction of certain regulatory conditions and payment of a $50.0 million one-time slot machine license fee to the PGCB in October 2006, Downs Racing opened Phase I of its gaming and entertainment facility in November 2006.

The Pennsylvania Race Horse Development and Gaming Act stipulates that holders of Category One slot machine licenses must pay a portion of revenues earned on slot machines to the PGCB on a daily basis (“Pennsylvania Gaming Tax”), which includes local share assessments to be paid to the cities and municipalities hosting Mohegan Sun at Pocono Downs and amounts to be paid to the Pennsylvania Harness Horsemen’s Association, Inc. (the “PHHA”). The Pennsylvania Gaming Tax payable to the PGCB on a daily basis is currently 55% of gross revenues from slot machines, 2% of which is subject to a $10.0 million minimum annual threshold. Downs Racing must pay to the PGCB, on an annual basis, amounts necessary to ensure that the host cities and municipalities receive an annual minimum of $10.0 million from the local share assessments. As of December 31, 2009, Downs Racing maintained a $5.0 million escrow deposit in the name of the Commonwealth of Pennsylvania for Pennsylvania Gaming Tax payments to the PGCB, which was included in other assets, net, in the accompanying condensed consolidated balance sheets. In January 2010, the PGCB reduced the escrow deposit requirement from $5.0 million to $1.5 million.

The Authority reflected expenses associated with the Pennsylvania Gaming Tax totaling $30.3 million and $28.7 million for the three months ended December 31, 2009 and 2008, respectively. As of December 31, 2009 and September 30, 2009, outstanding Pennsylvania Gaming Tax payments to the PGCB totaled $6.4 million and $4.6 million, respectively.

Priority Distribution

In August 2001, the Authority and the Tribe entered into an agreement (the “Priority Distribution Agreement”), which obligates the Authority to make monthly payments to the Tribe to the extent of the Authority’s Net Cash Flow, as defined under the Priority Distribution Agreement. The Priority Distribution

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Agreement, which has a perpetual term, limits the maximum aggregate priority distribution payments by the Authority to the Tribe in each calendar year to $14.0 million, as adjusted annually in accordance with a formula specified in the Priority Distribution Agreement to reflect the effects of inflation. Payments pursuant to the Priority Distribution Agreement do not reduce the Authority’s obligations to make payments to reimburse the Tribe for governmental services provided by the Tribe or any payments under any other agreements with the Tribe. The monthly priority distribution payments under the Priority Distribution Agreement are limited obligations of the Authority payable only to the extent of its Net Cash Flow, as defined under the Priority Distribution Agreement, and are not secured by a lien or encumbrance on any assets or properties of the Authority. The Authority reflected payments associated with the Priority Distribution Agreement of $4.5 million and $4.4 million for the three months ended December 31, 2009 and 2008, respectively.

Horsemen’s Agreement

In January 2005, Downs Racing entered into an agreement with the PHHA, which represents owners, trainers and drivers at the Mohegan Sun at Pocono Downs’ harness racing facility. The agreement governs all live harness racing events and simulcasting and account wagering conducted at Mohegan Sun at Pocono Downs and the OTW facilities through December 31, 2010. As of December 31, 2009 and September 30, 2009, outstanding amounts to the PHHA for purses earned by horsemen but not yet paid and other fees totaled $9.7 million and $9.1 million, respectively.

Project Horizon Suspension

In September 2008, the Authority announced the suspension of the hotel, retail and new parking garage elements of Project Horizon due to a slowdown in business volumes and uncertainties in the financial markets resulting from the national economic recession. While the Authority is currently evaluating its options with respect to the development of the suspended elements, including the new hotel, it can provide no assurance as to if or when the suspended elements will resume. The specific factors that the Authority will consider in determining the feasibility of the suspended elements include the Authority’s financial performance, cash flow projections expected to be realized from the project, estimated project costs, ability to obtain financing, economic conditions, industry trends and competition. As of December 31, 2009 and September 30, 2009, assets related to the suspended elements totaled $76.4 million and $78.3 million, respectively, and were included in property and equipment, net, in the accompanying condensed consolidated balance sheets. The Authority currently believes that the assets related to the suspended elements have a future benefit.

The following information summarizes the contingencies with respect to the suspended elements of Project Horizon:

Severance

The Authority terminated certain construction-related employees due to the suspension of Project Horizon. The costs associated with such post-employment severance benefits were expensed at the time the termination was communicated to the employees. For the three months ended December 31, 2009 and 2008, the Authority incurred $104,000 and $586,000, respectively, of such expenses.

Construction Materials and Other Costs

Certain construction materials purchased and certain design and architectural work completed for Project Horizon may not be utilized if the suspended elements do not resume. The costs associated with these materials

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

will be expensed at the time such materials are determined to no longer have future benefit or value to the Authority. For the three months ended December 31, 2009, the Authority expensed $221,000 of such assets, which were recorded in other expense, net, in the accompanying respective condensed consolidated statement of income. For the three months ended December 31, 2008, the Authority did not expense any such asset.

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 material effect on the Authority’s financial position, results of operations or cash flows.

NOTE 6—RELINQUISHMENT AGREEMENT:

In February 1998, the Authority and Trading Cove Associates (“TCA”) entered into a relinquishment agreement (the “Relinquishment Agreement”). Effective January 1, 2000 (the “Relinquishment Date”), the Relinquishment Agreement superseded a then existing management agreement with TCA. The Relinquishment Agreement provides, among other things, that the Authority will make certain payments to TCA out of, and determined as a percentage of, Revenues, as defined under the Relinquishment Agreement, generated by Mohegan Sun over a 15-year period commencing on the Relinquishment Date. The payments (“Senior Relinquishment Payments” and “Junior Relinquishment Payments”) have separate schedules and priorities. Senior Relinquishment Payments commenced on April 25, 2000, 25 days following the end of the first three-month period after the Relinquishment Date and continue at the end of each three-month period thereafter until January 25, 2015. Junior Relinquishment Payments commenced on July 25, 2000, 25 days following the end of the first six-month period after the Relinquishment Date and continue at the end of each six-month period 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 under the Relinquishment Agreement as gross gaming revenues, other than Class II Gaming revenues, and all other revenues, as defined, including, without limitation, hotel revenues, room service revenues, food and beverage revenues, ticket revenues, fees or receipts from the convention/events center and all rental revenues or other receipts from lessees and concessionaires but not the gross receipts of such lessees, licenses and concessionaires, derived directly or indirectly from the facilities, as defined. Revenues under the Relinquishment Agreement exclude revenues generated from certain expansion areas of Mohegan Sun, such as Casino of the Wind, as such areas do not constitute facilities as defined under the Relinquishment Agreement.

In the event of any bankruptcy, liquidation, reorganization or similar proceeding relating to the Authority, the Relinquishment Agreement provides that each of the Senior and Junior Relinquishment Payments then due and owing are subordinated in right of payment to senior secured obligations, which include the Bank Credit Facility, the 2009 Second Lien Senior Secured Notes and capital lease obligations, and that the Junior Relinquishment Payments then due and owing are further subordinated to payment of all other senior obligations, including the Authority’s 2005 Senior Unsecured Notes. The Relinquishment Agreement also provides that all relinquishment payments are subordinated in right of payment to the minimum priority distribution payments, which are required monthly payments made by the Authority to the Tribe under the Priority Distribution Agreement, to the extent then due. The Authority, in accordance with authoritative guidance issued by the FASB pertaining to the accounting for contingencies, has recorded a relinquishment liability of the estimated present value of its obligations under the Relinquishment Agreement.

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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 December 31, 2009, the carrying amount of the relinquishment liability was $294.9 million as compared to $298.4 million at September 30, 2009. The decrease in the relinquishment liability during the three months ended December 31, 2009 was due to $7.4 million in relinquishment payments. This reduction in the liability was offset by $3.9 million representing the accretion of discount to the relinquishment liability.

Relinquishment payments consisted of the following (in millions):

 

     For the Three Months Ended
December 31,
           2009                2008      

Payments representing principal amounts

   $ 4.8    $ 4.9

Payments representing accretion of discount

     2.6      3.4
             

Total payments

   $ 7.4    $ 8.3
             

The accretion of discount to the relinquishment liability reflects the accretion of the discount to the present value of the relinquishment liability for the impact of the time value of money. As of December 31, 2009 and September 30, 2009, relinquishment payments earned but unpaid were $21.2 million and $14.7 million, respectively.

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

NOTE 7—SEGMENT REPORTING:

As of December 31, 2009, the Authority owns and operates Mohegan Sun, the Connecticut Sun WNBA franchise and the Mohegan Sun Country Club (collectively, the “Connecticut Entities”), and the Pennsylvania Entities. All of the Authority’s revenues are derived from these operations. The Connecticut Sun WNBA franchise and the Mohegan Sun Country Club are aggregated with the Mohegan Sun operating segment because these operations all share similar economic characteristics. The Authority’s executive officers review and assess the performance and operating results and determine the proper allocation of resources to the Connecticut Entities and the Pennsylvania Entities on a separate basis. The Authority, therefore, believes that it has two separate reportable segments due to the differing nature of their operations: (1) Mohegan Sun, which includes the operations of the Connecticut Entities, and (2) Mohegan Sun at Pocono Downs, which is comprised of the operations of the Pennsylvania Entities. The following tables provide financial information on each segment (in thousands):

 

     For the Three Months Ended
December 31,
 
       2009             2008      

Net revenues:

    

Mohegan Sun

   $ 282,091      $ 307,483   

Mohegan Sun at Pocono Downs

     59,720        56,548   
                

Total

     341,811        364,031   

Income (loss) from operations:

    

Mohegan Sun

     39,922        34,047   

Mohegan Sun at Pocono Downs

     2,257        (1,010

Corporate

     (4,349     (5,030
                

Total

     37,830        28,007   

Accretion of discount to the relinquishment liability

     (3,856     (5,106

Interest income

     732        989   

Interest expense, net of capitalized interest

     (28,549     (27,665

Loss on early extinguishment of debt

     (1,584     —     

Write-off of debt issuance costs

     (338     —     

Other expense, net

     (344     (633
                

Net income (loss)

     3,891        (4,408

Loss attributable to non-controlling interests

     513        631   
                

Net income (loss) attributable to Mohegan Tribal Gaming Authority

   $ 4,404      $ (3,777
                

 

     For the Three Months Ended
December 31,
   2009    2008

Capital expenditures:

     

Mohegan Sun

   $ 8,792    $ 30,501

Mohegan Sun at Pocono Downs

     1,182      2,266
             

Total

   $ 9,974    $ 32,767
             
     December 31,
2009
   September 30,
2009

Total assets:

     

Mohegan Sun

   $ 1,651,040    $ 1,636,007

Mohegan Sun at Pocono Downs

     584,745      587,860

Corporate

     73,486      71,216
             

Total

   $ 2,309,271    $ 2,295,083
             

 

20


Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

NOTE 8—SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION:

As of December 31, 2009, substantially all of the Authority’s outstanding debt, including its 2009 Second Lien Senior Secured Notes, 2005 Senior Unsecured Notes, 2002 Senior Subordinated Notes, 2004 Senior Subordinated Notes and 2005 Senior Subordinated Notes, is fully and unconditionally guaranteed, on a joint and several basis, by the following subsidiaries of the Authority: MBC, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, MTGA Gaming and WTG. The 2001 Senior Subordinated Notes are fully and unconditionally guaranteed by MBC, a wholly-owned subsidiary. Separate financial statements and other disclosures concerning MBC, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW and MTGA Gaming are not presented below because the Authority believes that the summarized financial information provided below and in Note 7 is adequate for investor analysis of these subsidiaries. Separate financial statements for WTG are provided as it is a non wholly-owned guarantor subsidiary. Condensed consolidating financial statement information for the Authority, its wholly-owned guarantor subsidiary, MBC, its other wholly-owned guarantor subsidiaries, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW and MTGA Gaming, its non wholly-owned guarantor subsidiary, WTG, and its non-guarantor entities, Salishan-Mohegan, MG&H and Mohegan Resorts and subsidiaries, as of December 31, 2009 and September 30, 2009 and for the three months ended December 31, 2009 and 2008 is as follows (in thousands):

CONDENSED CONSOLIDATING BALANCE SHEETS

 

    December 31, 2009
  Authority   Wholly-
Owned
Guarantor
Subsidiary-

MBC
  Other
Wholly-
Owned
Guarantor
Subsidiaries
  Non
Wholly-
Owned
Guarantor
Subsidiary-

WTG
    Total
Guarantor
Subsidiaries
  Total
Non-
Guarantor
Entities
  Consolidating/
Eliminating
Adjustments
    Consolidated
ASSETS                

Property and equipment, net

  $ 1,390,843   $ 70   $ 249,342   $ —        $ 249,412   $ 19,951   $ —        $ 1,660,206

Intercompany receivables

    451,265     —       16,550     —          16,550     —       (467,815     —  

Investment in subsidiaries

    127,590     —       9,862     —          9,862     —       (137,452     —  

Other intangible assets, net

    120,936     4,237     265,395     —          269,632     —       —          390,568

Other assets, net

    157,950     80     76,893     284        77,257     23,290     —          258,497
                                                   

Total assets

  $ 2,248,584   $ 4,387   $ 618,042   $ 284      $ 622,713   $ 43,241   $ (605,267   $ 2,309,271
                                                   
  LIABILITIES AND CAPITAL              

Total current liabilities

  $ 248,927   $ 1,873   $ 29,539   $ 38      $ 31,450   $ 14,381   $ —        $ 294,758

Long-term debt and capital leases, net of current portion

    1,629,898     1,000     —       600        1,600     —       —          1,631,498

Long-term debt, due to Mohegan Tribe

    —       —       —       —          —       10,000     —          10,000

Relinquishment liability, net of current portion

    216,094     —       —       —          —       —       —          216,094

Intercompany payables

    —       —       451,265     4,785        456,050     11,765     (467,815     —  

Other long-term liabilities

    383     —       —       —          —       —       —          383
                                                   

Total liabilities

    2,095,302     2,873     480,804     5,423        489,100     36,146     (467,815     2,152,733

Mohegan Tribal Gaming Authority capital

    153,282     1,514     137,238     (5,139     133,613     7,095     (141,024     152,966

Non-controlling interests

    —       —       —       —          —       —       3,572        3,572
                                                   

Total liabilities and capital

  $ 2,248,584   $ 4,387   $ 618,042   $ 284      $ 622,713   $ 43,241   $ (605,267   $ 2,309,271
                                                   

 

21


Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

    September 30, 2009
  Authority   Wholly-
Owned
Guarantor
Subsidiary-

MBC
  Other
Wholly-
Owned
Guarantor
Subsidiaries
  Non
Wholly-
Owned
Guarantor
Subsidiary-

WTG
    Total
Guarantor
Subsidiaries
  Total
Non-
Guarantor
Entities
  Consolidating/
Eliminating
Adjustments
    Consolidated
ASSETS                

Property and equipment, net

  $ 1,401,886   $ 73   $ 254,853   $ —        $ 254,926   $ 19,951   $ —        $ 1,676,763

Intercompany receivables

    446,321     —       16,080     —          16,080     —       (462,401     —  

Investment in subsidiaries

    138,607     —       10,070     —          10,070     —       (148,677     —  

Other intangible assets, net

    120,168     4,323     265,423     —          269,746     —       —          389,914

Other assets, net

    130,141     214     74,497     196        74,907     23,358     —          228,406
                                                   

Total assets

  $ 2,237,123   $ 4,610   $ 620,923   $ 196      $ 625,729   $ 43,309   $ (611,078   $ 2,295,083
                                                   
  LIABILITIES AND CAPITAL              

Total current liabilities

  $ 236,464   $ 1,878   $ 26,812   $ 35      $ 28,725   $ 14,121   $ —        $ 279,310

Long-term debt and capital leases, net of current portion

    1,597,615     1,000     —       600        1,600     —       —          1,599,215

Long-term debt, due to Mohegan Tribe

    —       —       —       —          —       10,000     —          10,000

Relinquishment liability, net of current portion

    226,511     —       —       —          —       —       —          226,511

Intercompany payables

    —       —       446,321     4,411        450,732     11,669     (462,401     —  

Other long-term liabilities

    362     —       —       —          —       —       —          362
                                                   

Total liabilities

    2,060,952     2,878     473,133     5,046        481,057     35,790     (462,401     2,115,398

Mohegan Tribal Gaming Authority capital

    176,171     1,732     147,790     (4,850     144,672     7,519     (152,507     175,855

Non-controlling interests

    —       —       —       —          —       —       3,830        3,830
                                                   

Total liabilities and capital

  $ 2,237,123   $ 4,610   $ 620,923   $ 196      $ 625,729   $ 43,309   $ (611,078   $ 2,295,083
                                                   

 

22


Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)

 

    For the Three Months Ended December 31, 2009  
    Authority     Wholly-
Owned
Guarantor
Subsidiary-

MBC
    Other
Wholly-
Owned
Guarantor
Subsidiaries
    Non
Wholly-
Owned
Guarantor
Subsidiary-

WTG
    Total
Guarantor
Subsidiaries
    Total
Non-

Guarantor
Entities
    Consolidating/
Eliminating
Adjustments
    Consolidated  

Net revenues

  $ 281,911      $ 21      $ 59,881      $ —        $ 59,902      $ (1   $ (1   $ 341,811   

Operating costs and expenses:

               

Gaming and other operations

    177,747        306        45,514        —          45,820        —          (1     223,566   

Advertising, general and administrative

    46,983        216        6,724        95        7,035        924        —          54,942   

Pre-opening costs and expenses

    42        —          —          —          —          —          —          42   

Depreciation and amortization

    19,420        89        5,922        —          6,011        —          —          25,431   
                                                               

Total operating costs and expenses

    244,192        611        58,160        95        58,866        924        (1     303,981   
                                                               

Income (loss) from operations

    37,719        (590     1,721        (95     1,036        (925     —          37,830   

Accretion of discount to the relinquishment liability

    (3,856     —          —          —          —          —          —          (3,856

Interest expense, net of capitalized interest

    (15,871     (9     (12,154     (194     (12,357     (668     347        (28,549

Loss on early extinguishment of debt

    (1,584     —          —          —          —          —          —          (1,584

Loss on interests in subsidiaries

    (11,398     —          (453     —          (453     —          11,851        —     

Other income (expense), net

    (606     —          334        —          334        669        (347     50   
                                                               

Net income (loss)

    4,404        (599     (10,552     (289     (11,440     (924     11,851        3,891   

Loss attributable to non-controlling interests

    —          —          42        —          42        —          471        513   
                                                               

Net income (loss) attributable to Mohegan Tribal Gaming Authority

  $ 4,404      $ (599   $ (10,510   $ (289   $ (11,398   $ (924   $ 12,322      $ 4,404   
                                                               

 

    For the Three Months Ended December 31, 2008  
    Authority     Wholly-
Owned
Guarantor
Subsidiary-

MBC
    Other
Wholly-
Owned
Guarantor
Subsidiaries
    Non
Wholly-
Owned
Guarantor
Subsidiary-

WTG
    Total
Guarantor
Subsidiaries
    Total
Non-
Guarantor
Entities
    Consolidating/
Eliminating
Adjustments
    Consolidated  

Net revenues

  $ 307,314      $ —        $ 56,723      $ —        $ 56,723      $ (3   $ (3   $ 364,031   

Operating costs and expenses:

               

Gaming and other operations

    204,411        297        44,761        —          45,058        —          (3     249,466   

Advertising, general and administrative

    50,376        257        6,961        695        7,913        1,502        —          59,791   

Pre-opening costs and expenses

    50        —          191        —          191        —          —          241   

Depreciation and amortization

    20,163        98        6,265        —          6,363        —          —          26,526   
                                                               

Total operating costs and expenses

    275,000        652        58,178        695        59,525        1,502        (3     336,024   
                                                               

Income (loss) from operations

    32,314        (652     (1,455     (695     (2,802     (1,505     —          28,007   

Accretion of discount to the relinquishment liability

    (5,106     —          —          —          —          —          —          (5,106

Interest expense, net of capitalized interest

    (14,978     (37     (12,350     (142     (12,529     (462     304        (27,665

Loss on interests in subsidiaries

    (15,686     —          (596     —          (596     —          16,282        —     

Other income (expense), net

    (321     —          7        234        241        740        (304     356   
                                                               

Net loss

    (3,777     (689     (14,394     (603     (15,686     (1,227     16,282        (4,408

Loss attributable to non-controlling interests

    —          —          —          —          —          10        621        631   
                                                               

Net loss attributable to Mohegan Tribal Gaming Authority

  $ (3,777   $ (689   $ (14,394   $ (603   $ (15,686   $ (1,217   $ 16,903      $ (3,777
                                                               

 

23


Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 

    For the Three Months Ended December 31, 2009  
    Authority     Wholly-
Owned
Guarantor
Subsidiary-

MBC
    Other
Wholly-
Owned
Guarantor
Subsidiaries
    Non
Wholly-
Owned
Guarantor
Subsidiary-

WTG
    Total
Guarantor
Subsidiaries
    Total
Non-
Guarantor
Entities
    Consolidating/
Eliminating
Adjustments
    Consolidated  

Net cash flows provided by (used in) operating activities

  $ 34,952      $ (352   $ 9,957      $ (91   $ 9,514      $ (611   $      $ 43,855   
                                                               

Cash flows provided by (used in) investing activities:

               

Purchases of property and equipment

    (11,099     —          (1,290     —          (1,290     —          —          (12,389

Other cash flows provided by (used in) investing activities

    7,346        —          620        (91     529        (398     (6,980     497   
                                                               

Net cash flows used in investing activities

    (3,753     —          (670     (91     (761     (398     (6,980     (11,892
                                                               

Cash flows provided by (used in) financing activities:

               

Bank Credit Facility borrowings—revolving loan

    106,000        —          —          —          —          —          —          106,000   

Bank Credit Facility repayments—revolving loan

    (119,000     —          —          —          —          —          —          (119,000

Bank Credit Facility repayments—term loan

    (147,000     —          —          —          —          —          —          (147,000

Line of Credit borrowings

    116,255        —          —          —          —          —          —          116,255   

Line of Credit repayments

    (120,696     —          —          —          —          —          —          (120,696

Proceeds from issuance of long-term debt

    192,468        —          —          —          —          —          —          192,468   

Principal portion of relinquishment liability payments

    (4,795     —          —          —          —          —          —          (4,795

Distributions to Tribe

    (27,293     —          —          —          —          —          —          (27,293

Capitalized debt issuance costs

    (8,195     —          —          —          —          —          —          (8,195

Other cash flows provided by (used in) financing activities

    (933     381        (7,044     180        (6,483     943        6,980        507   
                                                               

Net cash flows provided by (used in) financing activities

    (13,189     381        (7,044     180        (6,483     943        6,980        (11,749
                                                               

Net increase (decrease) in cash and cash equivalents

    18,010        29        2,243        (2     2,270        (66     —          20,214   

Cash and cash equivalents at beginning of period

    45,302        (75     18,680        196        18,801        561        —          64,664   
                                                               

Cash and cash equivalents at end of period

  $ 63,312      $ (46   $ 20,923      $ 194      $ 21,071      $ 495      $      $ 84,878   
                                                               

 

24


Table of Contents

MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

    For the Three Months Ended December 31, 2008  
    Authority     Wholly-
Owned
Guarantor
Subsidiary-

MBC
    Other
Wholly-
Owned
Guarantor
Subsidiaries
    Non
Wholly-Owned
Guarantor
Subsidiary-

WTG
    Total
Guarantor
Subsidiaries
    Total
Non-
Guarantor
Entities
    Consolidating/
Eliminating
Adjustments
    Consolidated  

Net cash flows provided by (used in) operating activities

  $ 36,611      $ (602   $ 6,566      $      $ 5,964      $ (3,695   $      $ 38,880   
                                                               

Cash flows provided by (used in) investing activities:

               

Purchases of property and equipment

    (58,465     —          (22,027     —          (22,027     —          —          (80,492

Other cash flows provided by (used in) investing activities

    (3,611     —          (1,954     (402     (2,356     (571     11,974        5,436   
                                                               

Net cash flows used in investing activities

    (62,076     —          (23,981     (402     (24,383     (571     11,974        (75,056
                                                               

Cash flows provided by (used in) financing activities:

               

Bank Credit Facility borrowings—revolving loan

    406,000        —          —          —          —          —          —          406,000   

Bank Credit Facility repayments—revolving loan

    (176,000     —          —          —          —          —          —          (176,000

Bank Credit Facility repayments—term loan

    (150,750     —          —          —          —          —          —          (150,750

Line of Credit borrowings

    147,038        —          —          —          —          —          —          147,038   

Line of Credit repayments

    (149,975     —          —          —          —          —          —          (149,975

Principal portion of relinquishment liability payments

    (4,912     —          —          —          —          —          —          (4,912

Distributions to Tribe

    (14,931     —          —          —          —          —          —          (14,931

Capitalized debt issuance costs

    (9,647     —          —          —          —          —          —          (9,647

Other cash flows provided by (used in) financing activities

    (3     601        9,568        430        10,599        2,483        (11,974     1,105   
                                                               

Net cash flows provided by financing activities

    46,820        601        9,568        430        10,599        2,483        (11,974     47,928   
                                                               

Net increase (decrease) in cash and cash equivalents

    21,355        (1     (7,847     28        (7,820     (1,783     —          11,752   

Cash and cash equivalents at beginning of period

    54,730        (13     26,322        172        26,481        1,989        —          83,200   
                                                               

Cash and cash equivalents at end of period

  $ 76,085      $ (14   $ 18,475      $ 200      $ 18,661      $ 206      $      $ 94,952   
                                                               

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Management Board of

Mohegan Tribal Gaming Authority:

We have reviewed the accompanying condensed consolidated balance sheet of the Mohegan Tribal Gaming Authority and its subsidiaries (the “Authority”) as of December 31, 2009, and the related condensed consolidated statements of income (loss) and of changes in capital for the three-month periods ended December 31, 2009 and 2008 and the condensed consolidated statement of cash flows for the three-month periods ended December 31, 2009 and 2008. These interim financial statements are the responsibility of the Authority’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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 condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of September 30, 2009, and the related consolidated statements of income, of changes in capital and of cash flows for the year then ended (not presented herein), and in our report dated December 28, 2009 we expressed an unqualified opinion on those consolidated financial statements. As discussed in note 2 to the condensed consolidated financial statements, the Authority changed the way it accounts for non-controlling interests as of October 1, 2009. The accompanying September 30, 2009 condensed consolidated balance sheet reflects this change.

/s/ PricewaterhouseCoopers LLP

Hartford, Connecticut

February 12, 2010

 

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NON WHOLLY-OWNED GUARANTOR SUBSIDIARY FINANCIAL STATEMENTS (UNAUDITED)

The Mohegan Tribal Gaming Authority (the “Authority”) is required to provide stand-alone financial statements for its non wholly-owned guarantor subsidiary, Wisconsin Tribal Gaming, LLC (“WTG”), pursuant to Rule 3-10 of Regulation S-X. WTG, along with substantially all of the Authority’s wholly-owned subsidiaries, guarantee certain of its outstanding debt obligations. In Note 8 of the accompanying condensed consolidated financial statements of the Authority, included under Item 1 of this Form 10-Q, the Authority has provided condensed consolidating financial information for WTG and its other subsidiaries that serve as guarantors. Stand-alone financial statements for WTG are as follows:

WISCONSIN TRIBAL GAMING, LLC (A DEVELOPMENT STAGE COMPANY)

INDEX TO CONDENSED FINANCIAL STATEMENTS

 

      Page
Number

Financial Statements

    

Condensed Balance Sheets as of December 31, 2009 and September 30, 2009 (unaudited)

   28
Condensed Statements of Loss for the Three Months Ended December  31, 2009 and 2008 and for the Period from Inception (February 27, 2007) through December 31, 2009 (unaudited)    29
Condensed Statements of Changes in Members’ Equity (Deficit) for the Three Months Ended December  31, 2009 and 2008 and for the Period from Inception (February 27, 2007) through December 31, 2009 (unaudited)    30
Condensed Statements of Cash Flows for the Three Months Ended December  31, 2009 and 2008 and for the Period from Inception (February 27, 2007) through December 31, 2009 (unaudited)    31

Notes to the Condensed Financial Statements (unaudited)

   32

 

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WISCONSIN TRIBAL GAMING, LLC (A DEVELOPMENT STAGE COMPANY)

CONDENSED BALANCE SHEETS (UNAUDITED)

 

     December 31,
2009
    September 30,
2009
 

ASSETS

    

Cash and cash equivalents

   $ 193,633      $ 196,050   

Option payment advances

     90,000        —     
                

Total assets

   $ 283,633      $ 196,050   
                

LIABILITIES AND MEMBERS’ DEFICIT

    

Liabilities:

    

Trade payables and accrued expenses

   $ 36,894      $ 34,360   

Due to member—Mohegan Ventures Wisconsin, LLC

     4,785,164        4,411,460   

Note Payable to Menominee Kenosha Gaming Authority

     600,000        600,000   
                

Total liabilities

     5,422,058        5,045,820   
                

Commitments and Contingencies

    

Members’ deficit:

    

Deficit accumulated during the development stage

     (12,658,711     (12,370,056

Member capital—Mohegan Ventures Wisconsin, LLC

     6,419,316        6,419,316   

Member capital—Mohegan Ventures, LLC

     1,100,970        1,100,970   
                

Total members’ deficit

     (5,138,425     (4,849,770
                

Total liabilities and members’ deficit

   $ 283,633      $ 196,050   
                

The accompanying notes are an integral part of these condensed financial statements.

 

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WISCONSIN TRIBAL GAMING, LLC (A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF LOSS (UNAUDITED)

 

     For the
Three Months
Ended
December 31, 2009
    For the
Three Months
Ended
December 31, 2008
    For the Period
from Inception
(February 27, 2007)
through
December 31, 2009
 

Operating costs and expenses:

      

Provision for loss on receivables

   $ 94,088      $ 694,574      $ 9,560,433   

Amortization of development rights

     —          —          3,689,287   

Other operating costs and expenses

     363        79        2,451   
                        

Total operating costs and expenses

     94,451        694,653        13,252,171   
                        

Loss from operations

     (94,451     (694,653     (13,252,171
                        

Other income (expense):

      

Interest income

     —          233,510        1,816,482   

Interest expense

     (194,204     (141,624     (1,223,022
                        

Total other income (expense)

     (194,204     91,886        593,460   
                        

Net loss

   $ (288,655   $ (602,767   $ (12,658,711
                        

The accompanying notes are an integral part of these condensed financial statements.

 

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WISCONSIN TRIBAL GAMING, LLC (A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY (DEFICIT) (UNAUDITED)

 

     Mohegan Ventures
Wisconsin, LLC
    Mohegan Ventures,
LLC
    Total Members’
Equity (Deficit)
 

Balances at September 30, 2009

   $ (4,139,763   $ (710,007   $ (4,849,770

Net loss

     (246,396     (42,259     (288,655
                        

Balances at December 31, 2009

   $ (4,386,159   $ (752,266   $ (5,138,425
                        

Balances at September 30, 2008

   $ (3,044,026   $ (522,078   $ (3,566,104

Net loss

     (514,522     (88,245     (602,767
                        

Balances at December 31, 2008

   $ (3,558,548   $ (610,323   $ (4,168,871
                        

Balances at inception (February 27, 2007)

   $ —        $ —        $ —     

Member capital contributions

     6,380,771        1,139,515        7,520,286   

Member capital adjustments

     38,545        (38,545     —     

Net loss

     (335,467     (57,536     (393,003
                        

Balances at September 30, 2007

   $ 6,083,849      $ 1,043,434      $ 7,127,283   
                        

Net loss

     (9,127,875     (1,565,512     (10,693,387
                        

Balances at September 30, 2008

   $ (3,044,026   $ (522,078   $ (3,566,104
                        

Net loss

     (1,095,737     (187,929     (1,283,666
                        

Balances at September 30, 2009

   $ (4,139,763   $ (710,007   $ (4,849,770
                        

Net loss

     (246,396     (42,259     (288,655
                        

Balances at December 31, 2009

   $ (4,386,159   $ (752,266   $ (5,138,425
                        

The accompanying notes are an integral part of these condensed financial statements.

 

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WISCONSIN TRIBAL GAMING, LLC (A DEVELOPMENT STAGE COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Three
Months Ended
December 31, 2009
    For the Three
Months Ended
December 31, 2008
    For the Period
from Inception
(February 27, 2007)
through
December 31, 2009
 

Cash flows provided by (used in) operating activities:

      

Net loss

   $ (288,655   $ (602,767   $ (12,658,711

Adjustments to reconcile net loss to net cash flows used in operating activities:

      

Provision for loss on receivables from Menominee Indian Tribe of Wisconsin

     94,088        694,574        9,560,433   

Amortization of development rights

     —          —          3,689,287   

Changes in operating assets and liabilities:

      

Increase in option payment advances

     (90,000     —          (90,000

Increase in interest receivables from Menominee Indian Tribe of Wisconsin

     —          (233,510     (1,816,482

Increase in interest due to member—Mohegan Ventures Wisconsin, LLC

     194,204        141,624        1,223,022   
                        

Net cash flows used in operating activities

     (90,363     (79     (92,451
                        

Cash flows used in investing activities:

      

Acquisition of Menominee Project development rights and other related assets

     —          —          (6,380,771

Increase in receivables from Menominee Indian Tribe of Wisconsin

     (91,554     (401,764     (3,276,058
                        

Net cash flows used in investing activities

     (91,554     (401,764     (9,656,829
                        

Cash flows provided by financing activities:

      

Advances from member—Mohegan Ventures Wisconsin, LLC

     179,500        430,056        3,562,142   

Member contributions—Mohegan Ventures Wisconsin, LLC

     —          —          6,380,771   
                        

Net cash flows provided by financing activities

     179,500        430,056        9,942,913   
                        

Net increase (decrease) in cash and cash equivalents

     (2,417     28,213        193,633   

Cash and cash equivalents at beginning of period

     196,050        171,787        —     
                        

Cash and cash equivalents at end of period

   $ 193,633      $ 200,000      $ 193,633   
                        

Supplemental disclosure:

      

Non-cash member contributions—Wisconsin Tribal Gaming, LLC Mohegan Ventures, LLC forgiveness of debt

   $ —        $ —        $ 1,139,515   
                        

Total non-cash member contributions

   $ —        $ —        $ 1,139,515   
                        

The accompanying notes are an integral part of these condensed financial statements.

 

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WISCONSIN TRIBAL GAMING, LLC (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1—FORMATION AND NATURE OF BUSINESS

In March 2007, Wisconsin Tribal Gaming, LLC (“WTG”) was formed to participate in a proposed development of a casino (“Menominee Project”) to be owned by the federally-recognized Menominee Indian Tribe of Wisconsin (“Menominee Tribe”) and to be located in Kenosha, Wisconsin. WTG consists of two members, a wholly-owned subsidiary of Mohegan Tribal Gaming Authority (the “Authority”), Mohegan Ventures Wisconsin, LLC (“MVW”), which holds an 85.4% membership interest in WTG, and a wholly-owned subsidiary of the Mohegan Tribe, Mohegan Ventures, LLC (“MV”), which holds the remaining 14.6% membership interest. The Authority has designated WTG as a restricted subsidiary, and therefore, WTG is a guarantor of the Authority’s debt obligations under its bank credit facility and certain of its note indentures (refer to Note 6).

In March 2007, WTG purchased the development rights for the Menominee Project under a development agreement with the Menominee Tribe and Menominee Kenosha Gaming Authority (“MKGA”), which was executed in October 2003, along with certain other assets, and assumed certain liabilities from Kenesah Gaming Development, LLC (“KGD”), for consideration of $6,380,771. As a result of the purchase, the Authority and the Mohegan Tribe, through MVW and MV, respectively, will receive development fees payable to WTG of 13.4% of Available Revenue Flow, as defined under the development agreement, which approximates net income from the Menominee Project over a period of seven years following the opening of the casino. Development of the Menominee Project is subject to certain governmental and regulatory approvals, including, but not limited to, the United States Department of the Interior accepting land into trust for the Menominee Tribe’s project site in Kenosha.

WTG paid $6,380,771 in cash for the casino development rights and other items acquired from KGD, which was allocated among the following assets and liabilities: (1) receivables at fair value from MKGA of $4,430,999 for project advances; (2) a development rights intangible asset valued at $3,689,287; (3) a note payable to MV of $1,139,515; and (4) a note payable to MKGA of $600,000. The purchase amount was contributed by MVW in return for its initial membership interest in WTG, and MV converted the $1.1 million receivable from WTG to capital in return for its initial membership interest in WTG. Pursuant to the development agreement, the receivables from MKGA and other advances for the project, and related accrued interest, generally are reimbursable to WTG upon receipt of necessary financing for the development of the proposed casino.

In January 2008, the U.S. Department of the Interior’s Bureau of Indian Affairs (“BIA”) rejected 11 applications from tribes with existing reservations to take new off-reservation land into trust in connection with gaming projects. While no decision was issued on the Menominee application at that time, the BIA did issue a memorandum addressing its policy on applications for off-reservation gaming projects in January 2008, which stated that the greater the distance between a proposed project and the tribe’s existing reservation, the greater the scrutiny that would be applied to the application, weighing the potential benefits to the tribe against concern for the commuting distance from the existing reservation, among other factors. The Menominee Tribe’s project site in Kenosha is approximately 200 miles from its reservation near Keshena, Wisconsin. In November 2008, the United States Department of the Interior rejected the Menominee Tribe’s request to suspend review of the Menominee Tribe’s application to take off-reservation land into trust in connection with the Menominee Project and a federal court subsequently refused to issue a temporary restraining order to prevent the United States Department of the Interior from taking further action on the application. WTG determined that those actions decreased the probability that the Menominee Tribe will obtain the necessary regulatory approvals in order to proceed with the Menominee Project. As a result of those developments, WTG fully reserved the WTG receivables pertaining to reimbursable development costs and expenses in connection with the Menominee Project and wrote-off the remaining related development rights intangible asset as of September 30, 2008.

In January 2009, the BIA informed the Menominee Tribe of the decision by the United States Secretary of the Interior to decline to take the Menominee Project site in Kenosha into trust for the tribe, based on the

 

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WISCONSIN TRIBAL GAMING, LLC (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

January 2008 guidance memorandum. In May 2009, the Menominee Tribe filed a lawsuit against the federal government in United States District Court challenging that rejection. As of December 31, 2009, that lawsuit remains pending and the WTG receivables remain fully reserved.

WTG is considered a development stage company as defined in the authoritative guidance issued by the Financial Accounting Standard Board (“FASB”). Since inception, WTG’s sole purpose has been the development of the proposed casino described above. WTG has incurred losses since inception and has an accumulated deficit of $12,658,711 at December 31, 2009. If WTG incurs additional expenditures in the future in connection with the development of the Menominee Project, such expenditures are funded through capital contributions of MVW and MV. WTG has received a commitment from MVW that it will not demand repayment of any amounts then due and owing prior to October 1, 2010.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with 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 condensed 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. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair statement of the results for the interim period, have been included. Operating results for the three months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2010.

The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Authority’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009. In addition, certain amounts in the 2009 condensed financial statements have been reclassified to conform to the 2010 presentation.

Management’s Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the Unites States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and accompanying notes and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Option Payment Advances

Option payment advances in the accompanying condensed balance sheets consist of amounts owed by the Menominee Tribe for payments made by WTG to the owners of the Dairyland Greyhound Park (“Dairyland”) in accordance with the option agreement discussed under Note 5. Option payment advances that were outstanding as of December 31, 2009 are expected to be reimbursed in full by the Menominee Tribe in three months or less.

Receivables from the Menominee Indian Tribe of Wisconsin

Receivables from the Menominee Tribe, net of allowances, in the accompanying condensed balance sheets, consist primarily of reimbursable costs and expenses advanced by WTG on behalf of the Menominee Tribe for

 

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WISCONSIN TRIBAL GAMING, LLC (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

the Menominee Project. The WTG receivables are payable upon receipt of necessary financing for the development of the proposed casino. As of September 2009, the Authority had fully reserved the WTG receivables, and as of December 31, 2009, the WTG receivables remain fully reserved.

As of December 31, 2009 and September 30, 2009, the reserve for doubtful accounts was $9,586,514 and $9,492,426, respectively. WTG accrues interest on optional advances, as defined under the development agreement, to the Menominee Tribe at a rate of 17% with the ultimate rate to be set upon financing of the project. On July 1, 2009, WTG suspended the accrual of interest income on the optional advances to the Menominee Tribe and will recognize interest income on a cash basis for future periods. As of December 31, 2009 and September 30, 2009, receivables from the Menominee Tribe totaled $9,586,514 and $9,492,426, respectively, including accrued interest of $1,816,481 and $1,816,481, respectively.

Intangible Assets

In March 2007, WTG purchased the development rights for the Menominee Project, along with certain other assets, and assumed certain liabilities from KGD. The development rights were determined by management to be an intangible asset with an estimated fair value of $3.7 million. At acquisition, the development rights intangible asset was determined to be amortized on a straight-line basis over its estimated useful life of seven years, which was anticipated to commence upon the opening of the proposed casino. However, during 2008, an impairment charge was recorded to reduce the development rights intangible asset to $0 following the issuance of new guidance in January 2008 from the BIA on its policy for taking off-reservation land into trust for gaming purposes and a related unfavorable decision by the United States Department of the Interior and federal court decision concerning the Menominee Tribe’s application to take off-reservation land into trust in connection with the Menominee Project. While WTG continues to pursue the Menominee Project, it believes these actions and the subsequent rejection of the Menominee Tribe’s application in January 2009 decreased the probability that the Menominee Tribe will obtain the necessary regulatory approvals in order to proceed with the Menominee Project. The $3.7 million loss associated with the write-off is reflected in the accompanying condensed statement of loss for the period from February 27, 2007 (date of inception) to December 31, 2009 under amortization of development rights.

Subsequent Events

WTG has evaluated events subsequent to December 31, 2009 through the issuance of the condensed financial statements on February 12, 2009 and has not identified any events for disclosure.

NOTE 3—MENOMINEE KENOSHA GAMING AUTHORITY NOTE PAYABLE

Upon formation, WTG assumed a note payable in the amount of $600,000. The note payable does not accrue interest until a gaming facility is opened, if not repaid earlier, and the note does not become due until the advances to the Menominee Tribe are repaid. Based on the unfavorable events that took place in connection with the Menominee Project as discussed in Note 1, the estimated fair value of the note payable is $0 compared to a carrying value of $600,000 as of December 31, 2009 and September, 30 2009, respectively.

NOTE 4—DUE TO MOHEGAN VENTURES WISCONSIN, LLC

WTG has recorded a payable of $4,785,164 and $4,411,460 due to MVW at December 31, 2009 and September 30, 2009, respectively, which primarily includes a loan in connection with the funding of development costs incurred for the Menominee Project. WTG accrues interest on its outstanding payables balance to MVW at a rate of 17%, compounded monthly, with the ultimate rate to be set upon financing of the project. Total interest expense charged to WTG from MVW was $194,204, $141,624, and $1,223,022 for the

 

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WISCONSIN TRIBAL GAMING, LLC (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

 

three months ended December 31, 2009 and 2008, and for the period from February 27, 2007 (date of inception) to December 31, 2009, respectively. The outstanding payables balance, including accrued interest, is due on demand; however, WTG has received a commitment from MVW that it will not demand repayment of any amounts then due and owing prior to January 1, 2011.

NOTE 5—MATERIAL AGREEMENTS

In November 2006, KGD amended an option agreement (“Option Agreement”) with Dairyland that originally was scheduled to expire on December 31, 2006. The Option Agreement permitted the option period to be extended for up to seventeen additional three month periods, ending March 31, 2011 (“Additional Option Periods”). The Option Agreement was assigned to WTG in connection with the March 2007 purchase (refer to Note 1). Under the Option Agreement, as amended, WTG assumed the right to extend the option for the Dairyland property upon payment to Dairyland of: (1) $100,000, for each of the first five Additional Option Periods, (2) $200,000 payable on the first day of the sixth through ninth Additional Option Periods, (3) $225,000 payable on the first day of the tenth through thirteenth Additional Option Periods, and (4) $250,000 payable on the first day of the fourteenth through seventeenth Additional Option Periods requested by WTG. Such options payments are nonrefundable unless the facility is purchased, in which case, option payments for periods prior to April 1, 2009 will be fully credited against the purchase price and option payments for periods on or after April 1, 2009 will be partially credited against the purchase price. In June 2009, the Option Agreement was amended a second time to allow for extension and payment of the option fee on a monthly basis. Since WTG has already made all required pre-financing advances for the project under the development agreement, WTG and the Menominee Tribe have made separate arrangements regarding the reimbursement from the Menominee Tribe to WTG for all or one-half of the option payments made in 2009 as optional advances by WTG. The Menominee Tribe fully reimbursed WTG for the January 2009 and April 2009 quarterly option payments and has reimbursed or prefunded one-half of the monthly option payments for the months of July, August, September and October 2009. Option payment amounts not reimbursed are recorded as receivables from the Menominee Tribe, to be reimbursed upon financing of the project. In November 2009, the Option Agreement was amended a third time and the option payments were adjusted, subject to various conditions. Pursuant to that third amendment, WTG made payments, on behalf of the Menominee Tribe, to Dairyland in November and December 2009 in the amount of $90,000 and received reimbursements of $65,000 for such advances in January 2010. WTG expects to be reimbursed for the balance of these advances by the Menominee Tribe in three months or less subsequent to December 31, 2009. Option payments made on behalf of the Menominee Tribe were recorded as option payment advances in the accompanying condensed balance sheet as of December 31, 2009. Furthermore, WTG consented to the cessation of operations at Dairyland Greyhound Park, and the current owners ceased active operations and closed the kennels at the facility in January 2010.

NOTE 6—COMMITMENTS AND CONTINGENCIES

As of December 31, 2009, WTG has provided a full and unconditional guarantee of certain debt issued by the Authority, including the Authority’s $250.0 million 2005 6 1/8% senior notes due 2013, $250.0 million 2002 8% senior subordinated notes due 2012, $225.0 million 2004 7 1 /8% senior subordinated notes due 2014, $150.0 million 2005 6 7/8% senior subordinated notes due 2015, and $200.0 million 11 1/2% second lien senior secured notes due 2017, as well as the Authority’s $675.0 million bank credit facility. Based on the current financial condition of the Authority, WTG considers the likelihood of it incurring a liability resulting from the guarantee to be remote. The total amount of the Authority’s debt guaranteed by WTG is $1.6 billion and $1.6 billion as of December 31, 2009 and September 30, 2009, respectively.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Some information included in this Quarterly Report on Form 10-Q and other materials filed by us with the Securities and Exchange Commission, or the SEC, contains 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, or Exchange Act. Such statements include information relating to business development activities, as well as capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and increased 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 future results, and accordingly, such results may differ materially from those expressed in any forward-looking statements made by or on our behalf. These risks and uncertainties include, but are not limited to, those relating to the following:

 

   

the financial performance of Mohegan Sun and Mohegan Sun at Pocono Downs and the Pennsylvania off-track wagering facilities;

 

   

the local, regional, national or global economic climate, including the economic recession, which has affected our revenues and earnings;

 

   

increased competition, including the legalization or expansion of gaming in New England, New York, New Jersey or Pennsylvania;

 

   

our suspension of the hotel, retail and new parking garage elements of Project Horizon;

 

   

our leverage and ability to meet our debt service obligations and maintain compliance with financial debt covenants;

 

   

the continued availability of financing;

 

   

our dependence on existing management;

 

   

our ability to integrate new amenities from our Project Horizon expansion into Mohegan Sun’s current operations and manage the expanded resort;

 

   

our ability to integrate and operate new amenities from our Project Sunrise expansion and the planned addition of table games at Mohegan Sun at Pocono Downs;

 

   

changes in federal or state tax laws or the administration of such laws;

 

   

changes in gaming laws or regulations, including the limitation, denial or suspension of licenses required under gaming laws and regulations;

 

   

changes in applicable laws pertaining to the service of alcohol, smoking or other amenities offered at Mohegan Sun and Mohegan Sun at Pocono Downs;

 

   

our ability to implement successfully our diversification strategy; and

 

   

an act of terrorism on the United States.

Additional information concerning potential factors that could affect our financial results is included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as well as our other reports and filings with the SEC. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent events or circumstances, except as required by law. We cannot assure you that projected results or events will be achieved or will occur.

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes beginning on page 3 of this Quarterly Report on Form 10-Q.

 

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Overview

The Tribe and the Authority

The Mohegan Tribe of Indians of Connecticut, or the Mohegan Tribe or the Tribe, is a federally-recognized Indian tribe with an approximately 507-acre reservation situated in Southeastern Connecticut, adjacent to Uncasville, Connecticut. Under the Indian Gaming Regulatory Act of 1988, or the IGRA, federally-recognized Indian tribes are permitted to conduct full-scale casino gaming operations on tribal lands, 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, the Mohegan Compact, which has been approved by the United States Secretary of the Interior. We were established as an instrumentality of the Tribe, with the exclusive power to conduct and regulate gaming activities on tribal lands and the non-exclusive authority to conduct such activities elsewhere. Our gaming operation at Mohegan Sun is one of only two legally authorized gaming operations in New England offering traditional slot machines and table games. Through our subsidiary, Downs Racing, L.P., or Downs Racing, we also own and operate Mohegan Sun at Pocono Downs, a gaming and entertainment facility offering slot machines and harness racing situated on a 400-acre site in Plains Township, Pennsylvania, and several off-track wagering facilities, or OTW, located elsewhere in Pennsylvania, collectively the Pennsylvania entities. We are governed by a nine-member Management Board, whose members also comprise the Mohegan Tribal Council, the governing body of the Tribe. Any change in the composition of the Mohegan Tribal Council results in a corresponding change in our Management Board.

Mohegan Sun

In October 1996, we opened a gaming and entertainment complex known as Mohegan Sun. Mohegan Sun is located on a 185-acre site on the Tribe’s reservation overlooking the Thames River with direct access from Interstate 395 and Connecticut Route 2A. Mohegan Sun is approximately 125 miles from New York City, New York and approximately 100 miles from Boston, Massachusetts. In 2002, we completed a major expansion of Mohegan Sun known as Project Sunburst, which included increased gaming, restaurant and retail space, an entertainment arena, an approximately 1,200-room luxury Sky Hotel Tower and approximately 100,000 square feet of convention space. In 2007 and 2008, we completed the Sunrise Square and Casino of the Wind components of Project Horizon, respectively.

Mohegan Sun operates in an approximately 3.1 million square-foot facility, which includes the following:

Casino of the Earth

As of December 31, 2009, Casino of the Earth had approximately 188,000 square feet of gaming space and offered:

 

   

approximately 3,700 slot machines and 190 table games (including blackjack, roulette, craps and baccarat);

 

   

food and beverage amenities, including: Birches Bar & Grill, an approximately 200-seat full-service restaurant, three full-service themed fine dining restaurants, with a fourth area featuring cuisine from all three adjacent restaurant themes, a 630-seat buffet, a Hong Kong-style food outlet offering authentic Southeast Asian cuisine, an 87-seat Bobby Flay’s Bobby’s Burger Palace and multiple service bars, all operated by us, as well as Frank Pepe Pizzeria Napoletana, operated by a third-party, and the recently opened Fidelia’s Market, a 123-seat multi-station food court, operated by us and third parties, for a total seating of approximately 2,000;

 

   

the Wolf Den, an approximately 10,000-square-foot, 400-seat lounge featuring live entertainment seven days a week;

 

   

an approximately 9,000-square-foot simulcasting Racebook facility;

 

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four retail shops providing shopping opportunities ranging from Mohegan Sun logo souvenirs to cigars; and

 

   

Sunrise Square, a 9,800-square-foot Asian-themed gaming area offering 46 table games.

Casino of the Sky

As of December 31, 2009, Casino of the Sky had approximately 119,000 square feet of gaming space and offered:

 

   

approximately 2,300 slot machines and 110 table games (including blackjack, roulette and craps);

 

   

food and beverage amenities, including: two full-service restaurants (Todd English’s Tuscany and Bobby Flay’s Bar Americain), a 24-hour coffee shop, a 330-seat buffet and five lounges and bars, all operated by us, as well as five full-service restaurants, three quick-service restaurants and a multi-station food court, operated by third parties, for a total seating of approximately 2,900;

 

   

Mohegan After Dark, consisting of Ultra 88, a nightclub, Lucky’s Lounge and Dubliner, an Irish pub, all operated by a third-party;

 

   

the Mohegan Sun Arena with seating for up to 10,000;

 

   

The Shops at Mohegan Sun containing 32 retail shops, seven of which we own;

 

   

an approximately 1,200-room luxury Sky Hotel Tower with a private high-limit table games suite;

 

   

an approximately 20,000-square-foot spa operated by a third-party;

 

   

approximately 100,000 square feet of convention space; and

 

   

a child care facility and an arcade-style entertainment area operated by a third-party.

Casino of the Wind

As of December 31, 2009, Casino of the Wind had approximately 45,000 square feet of gaming space and offered:

 

   

approximately 700 slot machines, 30 table games (including blackjack, roulette and craps) and a 42-table themed poker room; and

 

   

20,000 square feet of dining and retail amenities, including a two-level, 16,000-square-foot Jimmy Buffett’s Margaritaville Restaurant, operated by a third-party, and Chief’s Deli, a casual dining restaurant operated by us.

Mohegan Sun has parking spaces for approximately 13,000 guests and 3,900 employees. In addition, we operate a gasoline and convenience center, an approximately 3,600-square-foot, 20-pump facility located adjacent to Mohegan Sun.

Project Horizon

Project Horizon, Mohegan Sun’s second major expansion, was initially planned to include four major components: Sunrise Square, Casino of the Wind, Property Infrastructure, including a new parking garage, additional surface parking lots, site development and road improvements, and the Earth Expansion, including a new hotel and related retail areas, as well as improvements to the existing Winter Parking Garage and Winter Entrance. As of December 31, 2009, Sunrise Square, Casino of the Wind and the Winter Parking Garage and infrastructure improvements were completed.

In September 2008, we announced the suspension of the hotel, retail and new parking garage elements of Project Horizon due to a slowdown in business volumes and uncertainties in the financial markets resulting from the national economic recession.

 

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The Winter Entrance of the Earth Expansion, which connects the Winter Parking Garage to Casino of the Earth, opened in July 2009. The renovated Winter Entrance incorporates new food and beverage facilities, including: Bobby Flay’s Bobby’s Burger Palace, Frank Pepe Pizzeria Napoletana and Fidelia’s Market, a quick-serve dining area featuring Jasper White’s Summer Shack Express, Woodland Wok and Chief’s Bagels, Subs & Sweets. Additionally, Bobby Flay’s Bar American and The Original SoupMan were opened in November 2009. Bobby Flay’s Bar Americain is located in the area previously occupied by Fidelia’s Restaurant. The Original SoupMan is located in Fidelia’s Market.

Mohegan Basketball Club

In January 2003, we formed a wholly-owned subsidiary, Mohegan Basketball Club, LLC, or MBC, for the purpose of owning and operating a professional basketball team in the Women’s National Basketball Association, or WNBA. MBC entered into a membership agreement with the WNBA permitting it to operate the Connecticut Sun basketball team. The team plays its home games in the Mohegan Sun Arena.

Mohegan Golf

In November 2006, we formed a wholly-owned subsidiary, Mohegan Golf, LLC, or Mohegan Golf, to purchase and operate a golf course in Southeastern Connecticut. In May 2007, Mohegan Golf acquired substantially all of the assets of Pautipaug Country Club Inc., which included a golf course located in Sprague and Franklin, Connecticut. The golf course was renamed Mohegan Sun Country Club at Pautipaug and reopened under the ownership of Mohegan Golf in June 2007.

Mohegan Sun at Pocono Downs

Through Downs Racing, we own and operate a slot machine and harness racing facility known as Mohegan Sun at Pocono Downs situated on a 400-acre site in Plains Township, Pennsylvania, and OTWs located in Carbondale, East Stroudsburg, Hazleton and Lehigh Valley, Pennsylvania. In November 2006, Mohegan Sun at Pocono Downs became the first location to offer slot machine gaming in the Commonwealth of Pennsylvania when Phase I of its gaming and entertainment facility opened. In July 2008, we completed a major expansion of Mohegan Sun at Pocono Downs known as Project Sunrise, which included increased gaming, restaurant and retail space.

Mohegan Sun at Pocono Downs operates in an approximately 400,000 square-foot facility, including the grandstand, which includes the following:

 

   

approximately 2,500 slot machines and electronic table games;

 

   

food and beverage amenities, including: Ruth’s Chris Steakhouse, Rustic Kitchen Bistro and Bar, which features dining and a live cooking show, Bar Louie, a casual bar and restaurant, Timbers Buffet, a 300-seat Mohegan Indian cultural heritage themed buffet, and a food court, including: Johnny Rockets, Hot Dog Hall of Fame, Puck Express by Wolfgang Puck and Ben & Jerry’s Ice Cream, for a total seating of approximately 1,800;

 

   

retail amenities, including: Brookstone, Marshall Rousso women’s couture, Misura men’s fine apparel boutique, Crossing Vineyards Wine and Cheese Shop, and MOGO, the Mohegan Sun at Pocono Downs logo store; and

 

   

three bars/lounges: Sunburst Bar, featured in the center of the gaming floor, Breakers Night Club and Pearl Sushi Bar.

Introduction of Table Games

On January 7, 2010, the Governor of the Commonwealth of Pennsylvania signed into law a bill that significantly amends the Pennsylvania Race Horse Development and Gaming Act. Among other changes, the new law allows licensed slot machine operators in the Commonwealth of Pennsylvania to operate table games,

 

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including poker, subject to approval by the Pennsylvania Gaming Control Board, or the PGCB, and payment of a one-time, non-refundable, table games authorization fee. For Category One slot machine licensees, such as Downs Racing, the one-time table games authorization fee is $16.5 million, if paid prior to June 1, 2010, or $24.8 million, if paid thereafter. We intend to pay the table games authorization fee prior to June 1, 2010. Pursuant to the new law, during the initial two years of operation, table games revenues will be taxed at a rate of 14%, plus 2% in local share assessments. Following the initial two years of operation, the tax rate on table games revenues will be reduced to 12%, plus the 2% local share assessments. On January 22, 2010, Downs Racing filed its petition with the PGCB for a certificate to operate table games. The PGCB is required to either approve or deny the petition within 60 days of receipt. The PGCB has scheduled a public input hearing regarding the petition on February 24, 2010 in Plains Township, Pennsylvania.

If Downs Racing’s petition to operate table games is approved, we plan to renovate the existing Mohegan Sun at Pocono Downs facility to accommodate the operation of approximately 80 table games. Total costs for this renovation are forecast to be approximately $17.9 million, inclusive of $2.0 million in pre-opening costs and expenses. The renovation costs will include the relocation of approximately 300 slot machines to a new gaming area, the addition of table games, including poker, blackjack, roulette and craps in the vacated slot area, the renovation of the lower-level of the racing grandstand to accommodate the addition of poker and slots, the recruitment and training of approximately 500 new employees and the acquisition of all other requisite gaming equipment to support the renovation. Total project costs, including the one-time table games authorization fee and pre-opening costs and expenses, are forecast to be approximately $34.4 million. We anticipate opening the renovated gaming areas during the fourth quarter of fiscal 2010.

Market and Competition from Other Gaming Operations

Our gaming operation at Mohegan Sun is one of only two legally authorized gaming operations in New England offering traditional slot machines and table games, with the other operation being our sole gaming competitor in Connecticut, Foxwoods Resort Casino, including the MGM Grand at Foxwoods, collectively Foxwoods, owned by the Mashantucket Pequot Tribe, or the MPT. We also currently face competition from casinos in Atlantic City, New Jersey and several casinos and gaming facilities located on Indian tribal lands in the State of New York and Video Lottery Terminal, or VLT, facilities in the states of New York and Rhode Island, as well as potential competition from prospective gaming projects announced by other Indian tribes and the expansion of state-licensed gaming in the Northeastern United States. Additionally, we face existing and future competition in and from the Northeastern Pennsylvania gaming market, both in the immediate market for Mohegan Sun at Pocono Downs, and for Mohegan Sun, in marketing to and attracting patrons from the New York City metropolitan region. Please refer to “Part I. Item 1. Business—Market and Competition from Other Gaming Operations” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 for further details regarding our current and projected competition from other gaming operations.

The following is a summary of developments that have occurred since September 30, 2009:

In November 2009, according to published reports, the MPT made a partial interest payment of $14.2 million on a series of $500.0 million notes due in 2015, in lieu of the required semi-annual interest payment of $21.3 million. Also, it has been reported that effective December 16, 2009, following a grace period, the MPT’s failure to make the full interest payment constituted a default under those notes. In January 2010, the MPT announced an extension of a forbearance agreement with lenders under a $700.0 million bank credit facility, which matures in June 2010. The forbearance agreement reportedly was extended to April 30, 2010. In January 2010, table games dealers at Foxwoods voted to ratify an agreement between the United Auto Workers Local 2121 and Foxwoods, which reportedly provides scheduled pay increases for two years, offers job protections and governs certain working conditions for approximately 2,500 table games dealers at Foxwoods.

In January 2010, the Governor and legislative leaders of New York announced the choice of Aqueduct Entertainment Group to build and operate a VLT facility at Aqueduct Raceway in Queens with up to 4,500 VLTs and an expected 300-room hotel. It has been reported that, among other conditions, Aqueduct Entertainment

 

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Group is required to pay an upfront licensing fee of $300.0 million. The St. Regis Mohawk Tribe held separate referenda in November 2009 and January 2010, with the latter calling for the tribe to continue its 15-year pursuit of a casino in the Catskills Region.

In the Commonwealth of Massachusetts, it has been reported that new legislation to permit state licensed gaming at multiple locations is expected to be introduced and hearings are expected to continue in the winter and spring of 2010. In addition, the Mashpee Wampanoag Tribe continues to pursue the establishment of its initial reservation in Mashpee and Middleboro, as well as a large gaming facility in Middleboro, but also has recently expressed interest in other locations, including Fall River. The Aquinnah Wampanoag Tribe, based on Martha’s Vineyard, has indicated renewed interest in pursuing a state gaming license in the Commonwealth of Massachusetts and also is reportedly considering the Fall River area.

In January 2010, the Governor of the Commonwealth of Pennsylvania signed into law a bill that significantly amends the Pennsylvania Race Horse Development and Gaming Act. Among other changes, the new law allows licensed slot machine operators in the Commonwealth of Pennsylvania to operate table games, including poker, subject to approval by the PGCB, and payment of a one-time, non-refundable, table games authorization fee. Category One and Two slot operators may apply for a certificate to operate up to 250 table games, while Category Three slot operators may apply to operate up to 50 table games. The introduction of table games operation in the Commonwealth of Pennsylvania is expected to impact the Northeastern Pennsylvania gaming market, as well as the New England gaming market. Sands Casino Resort Bethlehem has announced plans to add between 80 and 100 table games and stated that the new law may prompt the resumption of its previously stalled hotel, retail and convention center construction.

In New Jersey, MGM Mirage, Inc., part owner of the Borgata Hotel and Casino complex and investor in the stalled MGM Grand Atlantic City project, is reportedly considering selling its investments in New Jersey amidst a licensing dispute. It has been reported that Morgan Stanley has taken over the $2.0 billion Revel Entertainment casino project and is seeking up to $260.0 million in state tax incentives in order to complete construction. In February 2010, Pinnacle Entertainment, Inc. announced its desire to sell its assets in Atlantic City and abandon construction of a planned resort at the site of the demolished Sands Casino Hotel.

In January 2010, Delaware passed legislation approving the operation of table games at the state’s three existing gaming facilities. According to published reports, these facilities are expected to introduce table games during 2010.

Explanation of Key Financial Statement Captions

There have been no material changes from the explanation of key financial statement captions previously disclosed in our Form 10-K for the fiscal year ended September 30, 2009.

Results of Operations

Summary Operating Results

As of December 31, 2009, we own and operate Mohegan Sun, the Connecticut Sun WNBA franchise and the Mohegan Sun Country Club in Connecticut, collectively the Connecticut entities, and the Pennsylvania entities. All of our revenues are derived from these operations. The Connecticut Sun WNBA franchise and the Mohegan Sun Country Club are aggregated with the Mohegan Sun operating segment because these operations all share similar economic characteristics. Our executive officers review and assess the performance and operating results and determine the proper allocation of resources to the Connecticut entities and the Pennsylvania entities on a separate basis. We, therefore, believe that we have two separate reportable segments due to the differing nature of their operations: (1) Mohegan Sun, which comprises the operations of the Connecticut entities, and (2) Mohegan Sun at Pocono Downs, which comprises the operations of the Pennsylvania entities.

 

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The following table summarizes our results from operations on a property basis (in thousands, except where noted):

 

     For the Three Months Ended December 31,  
     2009     2008     Variance     Percentage
Variance
 

Net revenues:

        

Mohegan Sun

   $ 282,091      $ 307,483      $ (25,392   (8.3 )% 

Mohegan Sun at Pocono Downs

     59,720        56,548        3,172      5.6
                              

Total

   $ 341,811      $ 364,031      $ (22,220   (6.1 )% 

Income (loss) from operations:

        

Mohegan Sun

   $ 39,922      $ 34,047      $ 5,875      17.3

Mohegan Sun at Pocono Downs

     2,257        (1,010     3,267      323.5

Corporate expenses

     (4,349     (5,030     681      13.5
                              

Total

   $ 37,830      $ 28,007      $ 9,823      35.1

Net income (loss) attributable to Mohegan Tribal Gaming Authority

   $ 4,404      $ (3,777   $ 8,181      216.6

Operating margin:

        

Mohegan Sun

     14.2     11.1     3.1   27.9

Mohegan Sun at Pocono Downs

     3.8     (1.8 )%      5.6   311.1

Total

     11.1     7.7     3.4   44.2

The most significant factors and trends that we believe impacted our financial performance were as follows:

 

   

the national economic recession and the related reduction in consumer discretionary spending;

 

   

the continued execution of a company-wide cost containment program, which positively impacted operating costs and expenses at Mohegan Sun and Mohegan Sun at Pocono Downs;

 

   

the strengthened awareness of the Mohegan Sun brand in the Northeastern Pennsylvania gaming market, which resulted in higher slot revenues at Mohegan Sun at Pocono Downs;

 

   

increased promotional offerings in the Northeast gaming market from gaming facilities at Empire City in Yonkers, New York, Foxwoods in Mashantucket, Connecticut, and Twin River in Lincoln, Rhode Island, which resulted in lower slot revenues at Mohegan Sun;

 

   

increased competition in the Northeastern Pennsylvania gaming market following the May 2009 opening of Sands Casino Resort Bethlehem, or Sands Bethlehem, which impacted slot revenue growth at Mohegan Sun at Pocono Downs;

 

   

increased promotional room rates offered to gaming patrons, designed to maintain hotel occupancy levels to augment gaming and non-gaming revenues at Mohegan Sun; and

 

   

a $1.6 million charge associated with the early extinguishment of our $147.0 million term loan under our bank credit facility.

Net revenues for the three months ended December 31, 2009 compared to the same period in the prior year decreased as a result of declines in both gaming and non-gaming revenues at Mohegan Sun, partially offset by increased slot revenues at Mohegan Sun at Pocono Downs.

Income from operations for the three months ended December 31, 2009 compared to the same period in the prior year increased primarily as a result of lower operating costs and expenses at Mohegan Sun reflecting the continued execution of the cost containment program implemented during the second quarter of fiscal 2009 and the growth in net revenues at Mohegan Sun at Pocono Downs. These results were partially offset by the decline in net revenues at Mohegan Sun.

 

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Net income attributable to the Authority for the three months ended December 31, 2009 compared to the same period in the prior year increased primarily due to the increase in income from operations, partially offset by the loss associated with the early extinguishment of the term loan under our bank credit facility and higher interest expense.

Mohegan Sun

Gross Revenues

Gross revenues consisted of the following (in thousands):

 

     For the Three Months Ended December 31,  
     2009    2008    Variance     Percentage
Variance
 

Gaming

   $ 252,994    $ 272,945    $ (19,951   (7.3 )% 

Food and beverage

     19,398      20,313      (915   (4.5 )% 

Hotel

     9,542      10,842      (1,300   (12.0 )% 

Retail, entertainment and other

     26,109      32,388      (6,279   (19.4 )% 
                            

Total

   $ 308,043    $ 336,488    $ (28,445   (8.5 )% 
                            

The following table summarizes the percentage of gross revenues from each of the four revenue sources:

 

     For the Three Months Ended
December 31,
 
           2009                 2008        

Gaming

   82.1   81.1

Food and beverage

   6.3   6.0

Hotel

   3.1   3.2

Retail, entertainment and other

   8.5   9.7
            

Total

   100.0   100.0
            

The following table presents data related to gaming operations (in thousands, except where noted):

 

     For the Three Months Ended December 31,  
     2009     2008     Variance     Percentage
Variance
 

Slot handle

   $ 2,198,497      $ 2,304,211      $ (105,714   (4.6 )% 

Gross slot revenues

   $ 179,590      $ 195,335      $ (15,745   (8.1 )% 

Net slot revenues

   $ 172,930      $ 188,095      $ (15,165   (8.1 )% 

Free promotional slot plays (1)

   $ 11,374      $ 5,141      $ 6,233      121.2

Weighted average number of slot machines (in units)

     6,719        6,743        (24   (0.4 )% 

Gross slot hold percentage

     8.2     8.5     (0.3 )%    (3.5 )% 

Gross slot win per unit per day (in dollars)

   $ 291      $ 315      $ (24   (7.6 )% 

Table games drop

   $ 522,104      $ 580,631      $ (58,527   (10.1 )% 

Table games revenues

   $ 75,132      $ 79,686      $ (4,554   (5.7 )% 

Weighted average number of table games (in units)

     322        329        (7   (2.1 )% 

Table games hold percentage (2)

     14.4     13.7     0.7   5.1

Table games win per unit per day (in dollars)

   $ 2,540      $ 2,635      $ (95   (3.6 )% 

Poker revenues

   $ 2,941      $ 2,826      $ 115      4.1

Weighted average number of poker tables (in units)

     42        42        —        —     

Poker revenue per unit per day (in dollars)

   $ 761      $ 731      $ 30      4.1

 

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(1) Free promotional slot plays are included in slot handle, but not reflected in slot revenues.
(2) Table games hold percentage is relatively predictable over longer periods of time, but can significantly fluctuate over shorter periods.

The following table presents slot data related to Mohegan Sun’s market area (in thousands, except where noted):

 

     For the Three Months Ended December 31,  
     2009     2008     Variance     Percentage
Variance
 

Northeast gaming market (1) (2):

        

Gross slot revenues

   $ 591,970      $ 592,168      $ (198   0.0

Mohegan Sun slot win market share

     32.3     33.8     (1.5 )%    (4.4 )% 

Mohegan Sun slot win efficiency

     122.8     133.5     (10.7 )%    (8.0 )% 

Connecticut gaming market (3):

        

Gross slot revenues

   $ 332,652      $ 351,806      $ (19,154   (5.4 )% 

Free promotional slot plays (4)

   $ 22,801      $ 21,174        1,627      7.7

Mohegan Sun slot win market share

     54.0     55.5     (1.5 )%    (2.7 )% 

Mohegan Sun slot win efficiency

     113.7     123.6     (9.9 )%    (8.0 )% 

 

(1) Northeast gaming market consists of Mohegan Sun, Foxwoods, Twin River, Newport Grand and Empire City.
(2) Includes free promotional slot plays.
(3) Connecticut gaming market consists of Mohegan Sun and Foxwoods.
(4) Free promotional slot plays are included in slot handle, but not reflected in slot revenues.

Gaming revenues for the three months ended December 31, 2009 compared to the same period in the prior year decreased due to declines in both slot and table games revenues. The decline in slot revenues was primarily attributable to lower slot handle, likely resulting from reduced consumer discretionary spending on activities such as gaming, leisure and hospitality caused by the national economic recession. During the three months ended December 31, 2009, the number of Mohegan Sun’s rated slot player trips increased 3.4%, while spending per rated slot player decreased 5.7% compared to the same period in the prior year. Increased promotional offerings by competitors also may have contributed to the decrease in slot revenues, as well as the decline in our slot win efficiency in the Northeast gaming market. Our slot win efficiency in the Connecticut gaming market declined primarily as a result of a reduction in Foxwoods’ weighted average number of slot machines during the period. The decline in table games revenues for the three months ended December 31, 2009 compared to the same period in the prior year resulted from lower table games drop, particularly, high-limit table games play, partially offset by improved table games hold percentage. During the three months ended December 31, 2009, the number of Mohegan Sun’s rated table games patron trips remained stable, while spending per rated table games patron decreased 24.6% compared to the same period in the prior year, reflecting the decline in high-limit table games play, as well as the overall reduction in consumer spending likely caused by the national economic recession.

The following table presents data related to food and beverage operations:

 

     For the Three Months Ended December 31,  
     2009    2008    Variance     Percentage
Variance
 

Meals served

     1,027,976      1,072,820      (44,844   (4.2 )% 

Average price per meal served

   $ 15.45    $ 15.55    $ (0.10   (0.6 )% 

Food and beverage revenues for the three months ended December 31, 2009 compared to the same period in the prior year decreased primarily due to a $794,000 decline in food revenues, resulting from the reduction in the

 

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number of meals served at Mohegan Sun-owned food outlets. The decreased number of meals served reflects, in part, a reduction in restaurant seating capacity resulting from the closure of Fidelia’s Restaurant, which was replaced by Bobby Flay’s Bar Americain in November 2009. Food and beverage revenues also were negatively impacted by the July 2009 opening of Frank Pepe Pizzeria Napoletana, a third-party restaurant in the renovated Winter Entrance, which resulted in decreased patron visitation at Mohegan Sun-owned food outlets.

The following table presents data related to hotel operations:

 

     For the Three Months Ended December 31,  
     2009     2008     Variance     Percentage
Variance
 

Rooms occupied

     101,100        103,400        (2,300   (2.2 )% 

Average daily room rate (ADR)

   $ 91      $ 94      $ (3   (3.2 )% 

Occupancy rate

     93.5     95.6     (2.1 )%    (2.2 )% 

Revenue per available room (REVPAR)

   $ 85      $ 90      $ (5   (5.6 )% 

Hotel revenues for the three months ended December 31, 2009 compared to the same period in the prior year declined primarily as a result of lower room rates offered to gaming patrons due to extremely competitive room offers from Foxwoods and the Atlantic City gaming market, partially offset by a 17.3% increase in group rooms occupied during the period.

The following table presents data related to entertainment operations:

 

     For the Three Months Ended December 31,  
     2009    2008    Variance     Percentage
Variance
 

Arena events

     30      31      (1   (3.2 )% 

Arena tickets sold

     180,096      190,497      (10,401   (5.5 )% 

Average price per Arena ticket sold

   $ 56    $ 78    $ (22   (28.2 )% 

Retail, entertainment and other revenues for the three months ended December 31, 2009 compared to the same period in the prior year decreased primarily due to declines in entertainment revenues of $5.2 million and retail revenues of $1.3 million. The decline in entertainment revenues resulted from the decrease in the average price per ticket due to fewer scheduled headliner shows at the Mohegan Sun Arena. The decline in retail revenues reflects lower Player’s Club point redemptions by patrons during the period.

Promotional Allowances

The retail value of providing promotional allowances was included in revenues as follows (in thousands):

 

     For the Three Months Ended December 31,  
     2009    2008    Variance     Percentage
Variance
 

Food and beverage

   $ 9,066    $ 9,457    $ (391   (4.1 )% 

Hotel

     3,478      4,094      (616   (15.0 )% 

Retail, entertainment and other

     13,408      15,454      (2,046   (13.2 )% 
                            

Total

   $ 25,952    $ 29,005    $ (3,053   (10.5 )% 
                            

 

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The estimated cost of providing promotional allowances was included in operating costs and expenses, primarily gaming, as follows (in thousands):

 

     For the Three Months Ended December 31,  
     2009    2008    Variance     Percentage
Variance
 

Food and beverage

   $ 9,678    $ 10,030    $ (352   (3.5 )% 

Hotel

     2,038      2,301      (263   (11.4 )% 

Retail, entertainment and other

     11,482      12,830      (1,348   (10.5 )% 
                            

Total

   $ 23,198    $ 25,161    $ (1,963   (7.8 )% 
                            

Promotional allowances for the three months ended December 31, 2009 compared to the same period in the prior year declined as a result of lower redemptions under the Player’s Club program commensurate with the declines in business volumes.

Operating Costs and Expenses

Operating costs and expenses consisted of the following (in thousands):

 

     For the Three Months Ended December 31,  
     2009    2008    Variance     Percentage
Variance
 

Gaming

   $ 157,204    $ 178,840    $ (21,636   (12.1 )% 

Food and beverage

     9,683      10,009      (326   (3.3 )% 

Hotel

     3,610      3,763      (153   (4.1 )% 

Retail, entertainment and other

     7,704      12,275      (4,571   (37.2 )% 

Advertising, general and administrative

     44,315      48,139      (3,824   (7.9 )% 

Pre-opening costs and expenses

     42      50      (8   (16.0 )% 

Depreciation and amortization

     19,611      20,360      (749   (3.7 )% 
                            

Total

   $ 242,169    $ 273,436    $ (31,267   (11.4 )% 
                            

Gaming costs and expenses for the three months ended December 31, 2009 compared to the same period in the prior year decreased primarily due to the continued execution of our cost containment program, which resulted in reductions in payroll costs and casino marketing and promotional expenditures, and reduced Slot Win Contribution payments commensurate with the decline in slot revenues. Lower redemption costs due to decreased utilization of Player’s Club points at third-party outlets, as well as decreased non-gaming complimentaries redeemed by casino patrons at Mohegan Sun-owned outlets, also contributed to the decrease in gaming costs and expenses. Expenses associated with the combined Slot Win Contribution and free promotional slot play contribution totaled $45.3 million and $50.1 million for the three months ended December 31, 2009 and 2008, respectively. Gaming costs and expenses as a percentage of gaming revenues was 62.1% for the three months ended December 31, 2009 compared to 65.5% for the same period in the prior fiscal year.

Food and beverage costs and expenses for the three months ended December 31, 2009 compared to the same period in the prior year declined primarily due to reduced payroll costs resulting from our cost containment efforts. Lower cost of goods sold as a result of the reduction in the number of meals served also contributed to the decrease in food and beverage costs and expenses. The decline in food and beverage costs and expenses was partially offset by decreased use of food and beverage complimentaries, resulting in lower amounts of food and beverage costs being allocated to gaming costs and expenses.

Hotel costs and expenses for the three months ended December 31, 2009 compared to the same period in the prior year decreased primarily as a result of our cost containment efforts. The decline in hotel costs and expenses was partially offset by decreased use of hotel complimentaries, resulting in lower amounts of hotel costs being allocated to gaming costs and expenses.

 

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Retail, entertainment and other costs and expenses for the three months ended December 31, 2009 compared to the same period in the prior year declined primarily due to a significant reduction in direct entertainment costs resulting from fewer scheduled headliner shows at the Mohegan Sun Arena. Lower cost of goods sold as a result of reduced patronage at Mohegan Sun-owned retail outlets also contributed to the decrease in retail, entertainment and other costs and expenses. The decline in retail, entertainment and other costs and expenses was partially offset by decreased use of retail, entertainment and other complimentaries, resulting in lower amounts of retail, entertainment and other costs and expenses being allocated to gaming costs and expenses.

Advertising, general and administrative costs and expenses for the three months ended December 31, 2009 compared to the same period in the prior year decreased primarily as a result of our cost containment program, which resulted in significant reductions in certain costs and expenses such as payroll and advertising costs and professional and consulting expenditures. The cost containment program also resulted in reductions in most other general and administrative costs and expenses necessary to support Mohegan Sun operations.

Mohegan Sun at Pocono Downs

Gross Revenues

Gross revenues consisted of the following (in thousands):

 

     For the Three Months Ended December 31,  
     2009    2008    Variance    Percentage
Variance
 

Gaming

   $ 56,845    $ 53,745    $ 3,100    5.8

Food and beverage

     3,917      3,575      342    9.6

Retail and other

     1,329      1,283      46    3.6
                           

Total

   $ 62,091    $ 58,603    $ 3,488    6.0
                           

The following table summarizes the percentage of gross revenues from each of the three revenue sources:

 

     For the Three Months Ended
December 31,
 
         2009             2008      

Gaming

   91.6   91.7

Food and beverage

   6.3   6.1

Retail and other

   2.1   2.2
            

Total

   100.0   100.0
            

The following table presents data related to gaming operations (in thousands, except where noted):

 

     For the Three Months Ended December 31,  
     2009     2008     Variance     Percentage
Variance
 

Slot handle

   $ 677,763      $ 582,551      $ 95,212      16.3

Gross slot revenues

   $ 52,551      $ 49,351      $ 3,200      6.5

Net slot revenues

   $ 52,521      $ 49,294      $ 3,227      6.5

Free promotional slot plays (1)

   $ 9,549      $ 4,512      $ 5,037      111.6

Weighted average number of slot machines (in units)

     2,466        2,479        (13   (0.5 )% 

Gross slot hold percentage

     7.8     8.5     (0.7 )%    (8.2 )% 

Gross slot win per unit per day (in dollars)

   $ 232      $ 216      $ 16      7.4

 

(1) Free promotional slot plays are included in slot handle, but not reflected in slot revenues.

 

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The following table presents slot data related to Mohegan Sun at Pocono Downs’ market area (in thousands, except where noted):

 

     For the Three Months Ended December 31,  
     2009     2008     Variance     Percentage
Variance
 

Northeastern Pennsylvania gaming market (1):

        

Gross slot revenues

   $ 140,175      $ 91,515      $ 48,660      53.2

Free promotional slot plays (2)

   $ 36,792      $ 12,849      $ 23,943      186.3

Mohegan Sun at Pocono Downs slot win market share

     37.5     53.9     (16.4 )%    (30.4 )% 

Mohegan Sun at Pocono Downs slot win efficiency

     119.9     108.7     11.2   10.3

 

(1) Northeastern Pennsylvania gaming market consists of Mohegan Sun at Pocono Downs, Mount Airy Resort Casino and Sands Casino Resort Bethlehem, which opened on May 20, 2009.