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EX-32.1 - EXHIBIT 32.1 - MOHEGAN TRIBAL GAMING AUTHORITYdex321.htm
EX-31.1 - EXHIBIT 31.1 - MOHEGAN TRIBAL GAMING AUTHORITYdex311.htm
EX-32.2 - EXHIBIT 32.2 - MOHEGAN TRIBAL GAMING AUTHORITYdex322.htm
EX-10.1 - EXHIBIT 10.1 - MOHEGAN TRIBAL GAMING AUTHORITYdex101.htm
EX-31.2 - EXHIBIT 31.2 - MOHEGAN TRIBAL GAMING AUTHORITYdex312.htm

 

 

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, 2010

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

 

 

 


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, 2010 and September 30, 2010 (unaudited)

     3   
 

Condensed Consolidated Statements of Income for the Three Months Ended December 31, 2010 and 2009 (unaudited)

     4   
 

Condensed Consolidated Statements of Changes in Capital for the Three Months Ended December 31, 2010 and 2009 (unaudited)

     5   
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2010 and 2009 (unaudited)

     6   
 

Notes to the Condensed Consolidated Financial Statements (unaudited)

     7   
 

Report of Independent Registered Public Accounting Firm

     27   
Item 2.  

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

     28   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     50   
Item 4.  

Controls and Procedures

     51   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     52   
Item 1A.  

Risk Factors

     52   
Item 5.  

Other Information

     52   
Item 6.  

Exhibits

     52   
Signatures.  

Mohegan Tribal Gaming Authority

     53   


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

         December 31,    
2010
         September 30,    
2010
 
ASSETS      

Current assets:

     

Cash and cash equivalents

     $ 92,151          $ 63,897    

Restricted cash

     1,499          1,246    

Receivables, net

     22,875          24,154    

Inventories

     14,798          14,519    

Other current assets

     30,284          26,062    
                 

Total current assets

     161,607          129,878    

Non-current assets:

     

Property and equipment, net

     1,556,862          1,573,153    

Goodwill

     39,459          39,459    

Other intangible assets, net

     406,645          406,747    

Other assets, net

     50,730          51,386    
                 

Total assets

     $ 2,215,303          $ 2,200,623    
                 
LIABILITIES AND CAPITAL      

Current liabilities:

     

Current portion of long-term debt

     $ 28,977          $ 25,397    

Current portion of relinquishment liability

     74,870          69,031    

Due to Mohegan Tribe

     10,000          10,000    

Current portion of capital leases

     687          681    

Trade payables

     12,668          18,275    

Construction payables

     5,450          14,408    

Accrued interest payable

     27,067          26,849    

Other current liabilities

     145,337          140,407    
                 

Total current liabilities

     305,056          305,048    

Non-current liabilities:

     

Long-term debt, net of current portion

     1,612,162          1,596,122    

Relinquishment liability, net of current portion

     151,222          161,692    

Capital leases, net of current portion

     5,168          5,349    

Other long-term liabilities

     376          368    
                 

Total liabilities

     2,073,984          2,068,579    

Commitments and Contingencies

     

Capital:

     

Retained earnings

     137,899          129,476    
                 

Mohegan Tribal Gaming Authority capital

     137,899          129,476    

Non-controlling interests

     3,420          2,568    
                 

Total capital

     141,319          132,044    
                 

Total liabilities and capital

     $ 2,215,303          $ 2,200,623    
                 

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

 

3


MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands)

(unaudited)

 

    For the
Three Months Ended
December 31, 2010
    For the
Three Months Ended
December 31, 2009
 

Revenues:

   

Gaming

    $ 307,657          $ 309,839     

Food and beverage

    21,994          23,315     

Hotel

    8,997          9,542     

Retail, entertainment and other

    22,446          27,438     
               

Gross revenues

    361,094          370,134     

Less-Promotional allowances

    (25,489)         (28,323)    
               

Net revenues

    335,605          341,811     
               

Operating costs and expenses:

   

Gaming

    193,331          200,818     

Food and beverage

    10,045          11,184     

Hotel

    3,166          3,610     

Retail, entertainment and other

    6,213          7,954     

Advertising, general and administrative

    50,294          50,613     

Corporate

    4,536          4,329     

Pre-opening

    -              42     

Depreciation and amortization

    23,215          25,431     

Severance

    521          -         
               

Total operating costs and expenses

    291,321          303,981     
               

Income from operations

    44,284          37,830     
               

Other income (expense):

   

Accretion of discount to the relinquishment liability

    (2,842)         (3,856)    

Interest income

    780          732     

Interest expense, net of capitalized interest

    (29,746)         (28,549)    

Loss on early extinguishment of debt

    -              (1,584)    

Write-off of debt issuance costs

    -              (338)    

Other income (expense), net

    5          (344)    
               

Total other expense

    (31,803)         (33,939)    
               

Net income

    12,481          3,891     

Loss attributable to non-controlling interests

    449          513     
               

Net income attributable to Mohegan Tribal Gaming Authority

    $ 12,930          $ 4,404     
               

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

 

4


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, 2010

     $ 132,044           $ 129,476           $ 2,568     

Contributions from members

     1,301           -               1,301     

Net income (loss)

     12,481           12,930           (449)    

Distributions to Tribe

     (4,507)          (4,507)          -         
                          

Balance, December 31, 2010

     $ 141,319           $ 137,899           $ 3,420     
                          

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     
                          

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

 

5


MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the
Three Months Ended
December 31, 2010
    For the
Three Months Ended
December 31, 2009
 

Cash flows provided by (used in) operating activities:

    

Net income

     $ 12,481          $ 3,891     

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

    

Depreciation and amortization

     23,215          25,431     

Accretion of discount to the relinquishment liability

     2,842          3,856     

Cash paid for accretion of discount to the relinquishment liability

     (1,929 )       (2,553 )  

Amortization of debt issuance costs

     1,792          1,836     

Accretion of bond discount

     158          100     

Amortization of net deferred gain on settlement of derivative instruments

     (117 )       (117 )  

Provision for losses on receivables

     485          717     

Net loss on disposition of assets

     14          253     

Loss on early extinguishment of debt

     -              1,584     

Write-off of debt issuance costs

     -              338     

Changes in operating assets and liabilities:

    

Decrease (increase) in receivables

     957          (1,940 )  

Increase in inventories

     (279 )       (524 )  

Increase in other assets

     (5,383 )       (4,459 )  

Decrease in trade payables

     (5,609 )       (5,603 )  

Increase in other liabilities

     6,298          22,611     
                

Net cash flows provided by operating activities

     34,925          45,421     
                

Cash flows provided by (used in) investing activities:

    

Purchases of property and equipment, net of decrease in construction payables of $8,958 and $2,415, respectively

     (15,857)         (12,389)    

Proceeds from Commonwealth of Pennsylvania’s facility improvement grant

     -              1,000     

Issuance of third-party loans and advances

     (221)         (489)    

Payments received on third-party loans

     61          47     

Increase in restricted cash, net

     (1,333)         (1,629)    

Proceeds from asset sales

     33          2     
                

Net cash flows used in investing activities

     (17,317)         (13,458)    
                

Cash flows provided by (used in) financing activities:

    

Bank Credit Facility borrowings - revolving loan

     96,000          106,000     

Bank Credit Facility repayments - revolving loan

     (80,000)         (119,000)    

Bank Credit Facility repayments - term loan

     -              (147,000)    

Salishan Credit Facility borrowings - revolving loan

     250          500     

Line of Credit borrowings

     137,784          116,255     

Line of Credit repayments

     (134,455)         (120,696)    

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

     -              192,468     

Principal portion of relinquishment liability payments

     (5,544)         (4,795)    

Distributions to Tribe

     (4,507)         (27,293)    

Capitalized debt issuance costs

     (8)         (8,195)    

Payments on capital lease obligations

     (175)         (248)    

Non-controlling interest contributions

     1,301          255     
                

Net cash flows provided by (used in) financing activities

     10,646          (11,749 )  
                

Net increase in cash and cash equivalents

     28,254          20,214     

Cash and cash equivalents at beginning of period

     63,897          64,664     
                

Cash and cash equivalents at end of period

     $ 92,151          $ 84,878     
                

Supplemental disclosure:

    

Cash paid during the period for interest

     $ 27,695          $ 16,931     

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

 

6


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—ORGANIZATION:

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 authority 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 (“IGRA”), 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 entered into a compact (the “Mohegan Compact”), which was 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 Mohegan Sun, a gaming and entertainment complex situated on a 185-acre site on the Tribe’s reservation. 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 Mohegan Tribal Council results in a corresponding change in the Authority’s Management Board.

As of December 31, 2010, the following subsidiaries were 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 the Connecticut Sun, a professional basketball team in the Women’s National Basketball Association (the “WNBA”). MBC currently owns a 3.8% membership interest in WNBA, LLC. Mohegan Golf owns and operates the Mohegan Sun Country Club at Pautipaug golf course in Southeastern Connecticut (“Mohegan Sun Country Club”).

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., while the Authority holds the remaining 99.99% limited partnership interest in each entity. Downs Racing, L.P. (“Downs Racing”) owns and operates Mohegan Sun at Pocono Downs, a gaming and entertainment facility situated on a 400-acre site in Plains Township, Pennsylvania, and several off-track wagering facilities located elsewhere in Pennsylvania (collectively, the “Pennsylvania Entities”). The Authority views Mohegan Sun and 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 the development and management of a proposed 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 holds a 100% membership interest in Wisconsin Tribal Gaming, LLC (“WTG”), which was formed to participate in the development of a proposed 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”). Certain of the Authority’s and the Tribe’s diversification efforts are conducted, either directly or indirectly, through MG&H and Mohegan Resorts. Mohegan Resorts holds a 100% membership interest in Mohegan Resorts Mass, LLC, which was formed to pursue potential gaming opportunities in the Commonwealth of Massachusetts.

 

7


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

NOTE 2—LIQUIDITY AND FINANCIAL POSITION

The Authority estimates that cash flows from operations, combined with existing cash balances and available borrowings under its Bank Credit Facility, will be sufficient to fund its cash requirements over the next twelve months, including scheduled interest and required principal payments on its outstanding indebtedness, relinquishment payments, planned capital expenditures, distributions to the Tribe and projected working capital needs. The Authority continues to monitor revenues, expenditures and borrowings under its bank credit facility to ensure continued compliance with its financial covenants. During January and February 2011, the Authority experienced unfavorable winter weather conditions compared to the same period in the prior year. As a result, the Authority’s revenues and, correspondingly, its operating results for the second quarter of fiscal 2011 are expected to be adversely impacted. While the Authority anticipates that it will remain in compliance with all covenant requirements under its bank credit facility, if the Authority is unable to sufficiently increase revenues or offset declines in revenues due to continued or increasing unfavorable weather conditions or otherwise, it may need to offset future declines in revenues by implementing further cost containment and other initiatives in order to maintain compliance with its covenants. If the Authority is unable to satisfy its financial covenants, it would need to obtain waivers or amendments under the bank credit facility; however, no assurance can be made that it would be able to obtain such waivers or amendments. If the Authority is unable to obtain such waivers or amendments, it would be in default under the bank credit facility, which may result in cross-defaults under its other indebtedness. If such defaults or cross-defaults were to occur, it would allow the Authority’s lenders and creditors to exercise their rights and remedies as defined under their respective agreements, including their right to accelerate the repayment of outstanding indebtedness. The Authority does not have sufficient cash to repay its outstanding indebtedness and, if such acceleration were to occur, the Authority can provide no assurance that it would be able to obtain the financing necessary for such repayment.

The Authority’s Bank Credit Facility matures on March 9, 2012 and its 2002 8% Senior Subordinated Notes mature on April 1, 2012. In addition, a substantial amount of the Authority’s remaining indebtedness matures over the following three fiscal years. Please refer to Note 4 “Financing Facilities” for further details regarding the Authority’s debt maturities. The Authority believes that it will need to refinance all or part of its indebtedness at or prior to each maturity thereof in order to maintain sufficient resources for its operations. The Authority has engaged Blackstone Advisory Partners, L.P. to assist in its strategic planning relating to its debt maturities and Credit Suisse Securities (USA) LLC to assist in the evaluation and implementation of refinancing alternatives. As of December 31, 2010, the Authority’s fixed charge coverage ratio, as defined under its senior and senior subordinated note indentures, was below 2.0 to 1.0. While this fixed charge coverage ratio remains below 2.0 to 1.0, the Authority will be unable to refinance its existing subordinated indebtedness with senior indebtedness without waivers or consents from certain of its creditors that would not otherwise be required, thus limiting the options available to the Authority to refinance its existing indebtedness. The Authority can provide no assurance that it will be able to obtain such waivers or consents or that it will be able to refinance its existing indebtedness or that financing options available to it, if any, will be on favorable or acceptable terms.

NOTE 3—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 instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the accompanying 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 accompanying year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting

 

8


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

principles generally accepted in the United States of America. In management’s opinion, all adjustments, including normal recurring accruals and adjustments, necessary for a fair statement of the Authority’s operating results for the interim period, have been included. The Authority’s operating results for the three months ended December 31, 2010 are not necessarily indicative of results for the fiscal year ending September 30, 2011.

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, 2010. In addition, certain amounts in the accompanying condensed consolidated financial statements for the three months ended December 31, 2009 have been reclassified to conform to 2011 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 Standards 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 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 amounts that the Authority could realize in a current market transaction.

The Authority applies the following fair value hierarchy, which prioritizes the inputs utilized 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 unobservable. The unobservable inputs reflect the Authority’s estimates or assumptions that market participants would utilize in pricing such assets or liabilities.

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

 

9


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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

 

     December 31, 2010  
             Carrying Value                       Fair Value           

Bank Credit Facility

     $ 543,000         $ 502,275   

2009 11 1/2% Second Lien Senior Secured Notes

     $ 193,172         $ 184,376   

2005 6  1/8% Senior Unsecured Notes

     $ 250,000         $ 207,345   

2001 8 3/8% Senior Subordinated Notes

     $ 2,010         $ 1,677   

2002 8% Senior Subordinated Notes

     $ 250,000         $ 208,595   

2004 7 1/8% Senior Subordinated Notes

     $ 225,000         $ 141,611   

2005 6  1/8% Senior Subordinated Notes

     $ 150,000         $ 92,345   

The estimated fair values of the Authority’s financing facilities and notes were based on quoted market prices or prices of similar instruments on or about December 31, 2010.

Severance

In September 2010, the Authority implemented cost containment initiatives in an effort to better align operating costs with market and business conditions, including staffing reductions in Uncasville, Connecticut. The costs associated with related post-employment severance benefits were expensed at the time the termination was communicated to the employees. Severance charges for the three months ended December 31, 2010 resulted from adjustments to the initial estimates utilized under the workforce reduction plan. Cash payments commenced in September 2010 and are anticipated to be completed in March 2012. The Authority does not anticipate incurring any additional severance charges in connection with this workforce reduction, other than charges that may arise from adjustments to the initial estimates utilized under the plan. The following table presents a reconciliation of the related severance liability by business segment (in thousands):

 

     Balance
September 30, 2010
     Adjustments
For the Three Months Ended
December 31, 2010
     Cash Payments
For the Three Months Ended
December 31,  2010
     Ending Balance
December 31, 2010
 

Mohegan Sun

     $                 9,801          $                                  520          $                            (5,297)          $     5,024    

Corporate

     35                  (9)          27    
                                   

Total

     $ 9,836          $ 521          $ (5,306)          $                   5,051    
                                   

Long-Term Receivables

Long-term receivables consist primarily of receivables from affiliates and tenants.

Receivables from affiliates, which are included in other assets, net, in the accompanying condensed consolidated balance sheets, consist primarily of reimbursable costs and expenses advanced by Salishan-Mohegan on behalf of the Cowlitz Tribe for the Cowlitz Project and WTG on behalf of the Menominee Tribe for the Menominee Project. The Salishan-Mohegan receivables are payable upon: (1) the receipt of necessary financing for the development of the proposed casino, and (2) the related property being taken into trust by the United States Department of the Interior. Due to the uncertainty in the development of the Cowlitz Project, the Authority maintains a reserve for doubtful collection of the Salishan-Mohegan receivables, which is based on the Authority’s estimate of the probability that the receivables will be collected. The Authority assesses the reserve for doubtful collection of the Salishan-Mohegan receivables on a quarterly basis. Future developments in the

 

10


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

receipt of financing, the relevant land being taken into trust or other matters affecting the Cowlitz Project could affect the collectability of the Salishan-Mohegan receivables. In fiscal 2008, the WTG receivables were fully reserved, and, in fiscal 2010, WTG ceased advancing development expenses on behalf of the Menominee Tribe for the Menominee Project. A portion of the WTG receivables is payable upon the receipt of necessary financing for the development of the proposed casino, subject to certain conditions.

Receivables from tenants, which are primarily included in other assets, net, in the accompanying condensed consolidated balance sheets, consist primarily of funds loaned to various tenants at Mohegan Sun and Mohegan Sun at Pocono Downs. Loan terms range between three and ten years. The Authority maintains a reserve for doubtful collection of receivables from tenants, which is based on the Authority’s estimate of the amount expected to be uncollectible considering historical experience, creditworthiness of the related tenant and all other available information.

The following table presents a reconciliation of long-term receivables and the related reserves for doubtful collection of these long-term receivables (in thousands):

     Long-Term Receivables  
     Affiliates (1)      Tenants      Total  

Balance, September 30, 2010

     $             43,205          $ 2,468           $             45,673     

Additions:

        

Issuance of affiliate advances and tenant loans

     901          -               901     

Deductions:

        

Payments received

     -               (61)          (61)    

Other

     -               (933)          (933)    
                          

Balance, December 31, 2010

     $ 44,106         $             1,474          $ 45,580     
                          

 

(1) Includes accrued interest of $16.5 million and $15.8 million as of December 31, 2010 and September 30, 2010, respectively.
     The WTG receivables no longer accrue interest pursuant to a release and reimbursement agreement entered into in September 2010.

 

     Reserves for Doubtful Collection of Long-Term Receivables  
             Affiliates                      Tenants                          Total               

Balance, September 30, 2010

     $                19,215          $                 149           $                 19,364     

Additions:

        

Charges to bad debt expense

     266          -               266     

Deductions:

        

Adjustments

     -               (54)          (54)    
                          

Balance, December 31, 2010

     $ 19,481          $ 95         $ 19,576     
                          

New Accounting Standards

In July 2010, the FASB issued guidance pertaining to disclosures about the credit quality of financing receivables and allowance for credit losses. The new guidance is effective for interim and annual periods ending on or after December 15, 2010. The Authority adopted this guidance in its first quarter of fiscal 2011 and its adoption did not impact the Authority’s financial position, results of operations or cash flows.

In June 2009, the FASB issued guidance pertaining to 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 the enterprise that has the power to direct the activities of the variable interest entity and the obligation to absorb losses or the right to receive benefits of the variable interest entity. Additionally, the new

 

11


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

guidance provides more timely and useful information about an enterprise’s involvement with a variable interest entity. The new guidance is effective for annual periods beginning on or after November 15, 2009. The Authority adopted this guidance in its first quarter of fiscal 2011 and its adoption did not impact the Authority’s financial position, results of operations or cash flows.

In April 2010, the FASB issued guidance pertaining to accruals for casino jackpot liabilities. The new guidance clarifies that an entity should not accrue jackpot liabilities (or portions thereof) before a jackpot is won if the entity can avoid paying such jackpot. The new guidance specifies that jackpots should be accrued and charged to revenue when the entity has the obligation to pay such jackpot and applies to both base and progressive jackpots and requires a cumulative-effect adjustment to opening retained earnings in the period of adoption. The new guidance is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2010. The Authority does not expect this adoption to materially impact its financial position, results of operations or cash flows.

In January 2010, the FASB issued amended guidance pertaining to fair value measurements and disclosures. The amended guidance requires additional disclosures about significant unobservable inputs and transfers within Level 1 and 2 measurements. This guidance is effective for interim and annual periods beginning on or after December 15, 2009. The Authority adopted this guidance in its first quarter of fiscal 2010 and its adoption did not impact the Authority’s financial position, results of operations or cash flows. The amended guidance also requires enhanced disclosure of activities within Level 3 fair value measurements. Those disclosures are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2010. The Authority does not expect this adoption to impact its financial position, results of operations or cash flows.

NOTE 4—FINANCING FACILITIES:

Financing facilities consisted of the following (in thousands):

 

     December 31,
2010
     September 30,
2010
 

Bank Credit Facility

     $                 543,000          $                   527,000    

2009 11 1/2% Second Lien Senior Secured Notes, net of discount of $6,828 and $6,986, respectively

     193,172          193,014    

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

     10,716          7,387    

WNBA Promissory Note

     1,000          1,000    

Salishan Credit Facility

     15,250          15,000    

Mohegan Tribe Promissory Note

     10,000          10,000    
                 

Subtotal

     1,650,148          1,630,411    

Net deferred gain on derivative instruments sold

     991          1,108    
                 

Total debt, excluding capital leases

     $ 1,651,139          $ 1,631,519    
                 

Bank Credit Facility

In October 2009, the Authority entered into an amendment to the terms of its Bank Credit Facility. The Bank Credit Facility provides for a revolving loan and letter of credit borrowing capacity of up to $675.0 million from a syndicate of financial institutions and commercial banks, with Bank of America, N.A., serving as

 

12


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Administrative Agent. The Bank Credit Facility has no mandatory amortization provision and is payable in full on the maturity date, March 9, 2012. As of December 31, 2010, $543.0 million was drawn on the Bank Credit Facility. As of December 31, 2010, amounts under letters of credit issued under the Bank Credit Facility totaled $3.3 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 and the Authority’s Line of Credit and note indentures, the Authority had approximately $35.6 million of borrowing capacity under the Bank Credit Facility as of December 31, 2010.

Under the Bank Credit Facility, at the Authority’s option, each advance of loan proceeds accrues interest on the basis of a Base Rate or on the basis of a one-month, two-month, three-month, 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 borrowing capacity under the Bank Credit Facility on a quarterly basis equal to the product obtained by multiplying the Applicable Rate for commitment fees by the average daily unused borrowing capacity for that calendar quarter. The Applicable Rate for Base Rate loans is between 1.25% and 2.75%. The Applicable Rate for Eurodollar Rate loans is between 2.50% and 4.00%. The Applicable Rate for commitment fees is between 0.20% and 0.50%. 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, 2010, the Authority had $9.0 million in Base Rate loans and $534.0 million in Eurodollar Rate loans outstanding. The Base Rate loans outstanding at December 31, 2010 were based on Bank of America’s Prime Rate of 3.25% plus an Applicable Rate of 2.75%. The Eurodollar Rate loans outstanding at December 31, 2010 were based on a one-month Eurodollar Rate of 0.26% plus an Applicable Rate of 4.0%. The Applicable Rate for commitment fees was 0.50% as of December 31, 2010. As of December 31, 2010 and September 30, 2010, accrued interest, including commitment fees, on the Bank Credit Facility was $909,000 and $780,000, respectively.

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 and improvements that comprise Mohegan Sun. The Authority also is required to pledge additional assets as collateral for the Bank Credit Facility as it or its existing and future guarantor subsidiaries acquire them. The Authority’s obligations under the Bank Credit Facility are fully and unconditionally guaranteed, jointly and severally, by MBC, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, WTG and MTGA Gaming. The Bank Credit Facility includes non-financial covenants of the types customarily found in loan agreements for similar transactions. The Bank Credit Facility also subjects the Authority to a number of restrictive financial covenants. These financial covenants relate to, among other things, a minimum fixed charge coverage ratio, maximum total leverage and senior leverage ratios and maximum capital expenditures.

The Authority continues to monitor revenues, expenditures and borrowings under its bank credit facility to ensure continued compliance with its financial covenants. During January and February 2011, the Authority experienced unfavorable winter weather conditions compared to the same period in the prior year. As a result, the Authority’s revenues and, correspondingly, its operating results for the second quarter of fiscal 2011 are expected to be adversely impacted. While the Authority anticipates that it will remain in compliance with all covenant requirements under its bank credit facility, if the Authority is unable to sufficiently increase revenues or offset declines in revenues due to continued or increasing unfavorable weather conditions or otherwise, it may need to offset future declines in revenues by implementing further cost containment and other initiatives in order to maintain compliance with its covenants. If the Authority is unable to satisfy its financial covenants, it would need to obtain waivers or amendments under the bank credit facility; however, no assurance can be made that it would

 

13


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

be able to obtain such waivers or amendments. If the Authority is unable to obtain such waivers or amendments, it would be in default under the bank credit facility, which may result in cross-defaults under its other indebtedness. If such defaults or cross-defaults were to occur, it would allow the Authority’s lenders and creditors to exercise their rights and remedies as defined under their respective agreements, including their right to accelerate the repayment of outstanding indebtedness. The Authority does not have sufficient cash to repay its outstanding indebtedness and, if such acceleration were to occur, the Authority can provide no assurance that it would be able to obtain the financing necessary for such repayment.

As of December 31, 2010, the Authority and the Tribe were in compliance with all respective covenant requirements under the Bank Credit Facility.

Senior Notes

2009 11  1/2% Second Lien Senior Secured Notes

In October 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 Senior 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 a then-existing term loan and revolving loans under the Bank Credit Facility in the aggregate principal amounts of $147.0 million and $41.0 million, respectively, as well as 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. The 2009 Second Lien Senior Secured Notes are collateralized by a second lien on substantially all of the Authority’s and its existing and future guarantor subsidiaries’ properties and assets, and are effectively subordinated to all of the Authority’s and its existing and future guarantor subsidiaries’ first lien secured indebtedness, including borrowings under the Bank Credit Facility, to the extent of the value of the collateral securing such indebtedness. 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 Senior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing, but, to the extent of the value of the collateral securing such indebtedness, rank effectively senior to all of the Authority’s and its existing and future guarantor subsidiaries’ unsecured senior indebtedness, including the 2005 6 1/8% Senior Unsecured Notes and Senior and Junior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing. 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 8 3/8% Senior Subordinated Notes, 2002 8% Senior Subordinated Notes, 2004 7 1/8% Senior Subordinated Notes and 2005 6 7/8% Senior Subordinated Notes. As of December 31, 2010 and September 30, 2010, accrued interest on the 2009 Second Lien Senior Secured Notes was $3.8 million and $9.6 million, respectively.

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 9 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.

 

14


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

2005 6 1/8% Senior Unsecured Notes

In February 2005, the Authority issued $250.0 million Senior Unsecured 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, and are effectively subordinated to all of the Authority’s and its existing and future guarantor subsidiaries’ senior secured indebtedness, including borrowings under the Bank Credit Facility and 2009 Second Lien Senior Secured Notes, to the extent of the value of the collateral securing such debt. The 2005 Senior Unsecured Notes rank equally in right of payment with the 2009 Second Lien Senior Secured Notes and Senior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing. The 2005 Senior Unsecured Notes rank senior to Junior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing and all of the Authority’s and its existing and future guarantor subsidiaries’ subordinated indebtedness, including the 2001 8 3/8% Senior Subordinated Notes, 2002 8% Senior Subordinated Notes, 2004 7 1/8% Senior Subordinated Notes and 2005 6 7/8% Senior Subordinated Notes. As of December 31, 2010 and September 30, 2010, accrued interest on the 2005 Senior Unsecured Notes was $5.7 million and $1.9 million, respectively.

The 2005 Senior Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, by MBC, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, WTG and MTGA Gaming. Refer to Note 9 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. In connection with this 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, 2010. As of December 31, 2010 and September 30, 2010, 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 outstanding 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 transaction will depend on prevailing market conditions and the Authority’s liquidity and covenant restrictions, among other factors.

 

15


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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, 2010 and September 30, 2010, 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, 2010 and September 30, 2010, accrued interest on the 2004 Senior Subordinated Notes was $6.0 million and $2.0 million, respectively.

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 was February 15, 2010. Interest on the 2005 Senior Subordinated Notes is payable semi-annually on February 15th and August 15th. As of December 31, 2010 and September 30, 2010, 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 borrowings under the Bank Credit Facility, 2009 Second Lien Senior Secured Notes, 2005 Senior Unsecured Notes and Senior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing. The senior subordinated notes rank equally in right of payment with each other and Junior Relinquishment Payment obligations under the Relinquishment Agreement that are then due and owing. The senior subordinated notes are fully and unconditionally guaranteed, jointly and severally, 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 9 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 non-financial and financial covenants with which the Authority and the Tribe must comply. The non-financial covenants include, among other things, reporting obligations, compliance with laws and regulations, maintenance of licenses and insurances and continued existence of the Authority. The financial covenants include, among other things, limitations on the Authority’s ability to make restricted payments, as defined under the note indentures, and incur additional indebtedness. Under these financial covenants, the Authority is generally able to make restricted payments, including distributions to the Tribe, and incur additional indebtedness that otherwise may be restricted, provided the Authority’s fixed charge coverage ratio is at least 2.0 to 1.0. At any time the Authority’s fixed charge coverage ratio falls below 2.0 to 1.0, its ability to make restricted payments and incur additional indebtedness is limited and subject to other applicable exceptions under the note indentures. As of December 31, 2010, the Authority’s fixed charge coverage ratio was below 2.0 to 1.0. Accordingly, the Authority’s ability to make

 

16


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

restricted payments, including distributions to the Tribe, is limited. Additionally, while the Authority may continue to borrow under the Bank Credit Facility pursuant to exceptions contained in the note indentures, its ability to incur other additional indebtedness to raise capital also is limited. Further, while the Authority’s fixed charge coverage ratio remains below 2.0 to 1.0, the Authority will be unable to refinance its existing subordinated indebtedness with senior indebtedness without waivers or consents from certain of its creditors that would not otherwise be required, thus limiting the options available to the Authority to refinance its existing indebtedness. The Authority can provide no assurance that it will be able to obtain such waivers or consents or that it will be able to refinance its existing indebtedness or that financing options available to it, if any, will be on favorable or acceptable terms.

As of December 31, 2010, the Authority and the Tribe were in compliance with all respective covenant requirements under the senior and senior subordinated note indentures.

Salishan-Mohegan Bank Credit Facility

As of December 31, 2010, Salishan-Mohegan had a fully drawn $15.25 million revolving loan agreement with Bank of America, N.A. (the “Salishan Credit Facility”). On December 30, 2010, Salishan-Mohegan entered into an amendment to the terms of the Salishan Credit Facility to extend the maturity date from January 5, 2011 to February 18, 2011. Under the Salishan Credit Facility, at the option of Salishan-Mohegan, each advance of loan proceeds accrues interest on the basis of a Base Rate or on the basis of a one-month, two-month, three-month or six-month Eurodollar Rate, plus a spread of 2.50% for Base Rate loans and an Applicable Rate, as defined under the Salishan Credit Facility, of 3.50% for Eurodollar Rate loans. The Base Rate is the higher of Bank of America’s announced Prime Rate or the Federal Funds Rate plus 0.50%. The Applicable Rate for commitment fees is 0.50%. The revolving loan has no mandatory amortization provision and is payable in full at maturity. The Salishan Credit Facility is collateralized by a lien on substantially all of the existing and future assets of Salishan-Mohegan. The obligations of Salishan-Mohegan under the Salishan Credit Facility also are guaranteed by the Tribe. The Salishan Credit Facility subjects Salishan-Mohegan to a number of restrictive covenants, including financial and non-financial covenants customarily found in loan agreements for similar transactions. As of December 31, 2010, Salishan-Mohegan was in compliance with all respective covenant requirements under the Salishan Credit Facility. The Authority has commenced discussions with Bank of America, N.A. to extend the maturity date of the Salishan Credit Facility; however, it can provide no assurance of the terms of such extension or whether such extension will be granted.

As of December 31, 2010, Salishan-Mohegan had $15.25 million in Eurodollar Rate loans and no Base Rate loan outstanding. The Eurodollar Rate loans outstanding at December 31, 2010 were based on a one-month Eurodollar Rate of 0.26% plus an Applicable Rate of 3.50%. As of December 31, 2010 and September 30, 2010, accrued interest on the Salishan Credit Facility was $51,000 and $2,000, respectively.

Mohegan Tribe Promissory Note

In September 2009, the Tribe made a $10.0 million loan to Salishan-Mohegan (the “Mohegan Tribe Promissory Note”), which was used to repay revolving loans under the Salishan Credit Facility. On December 30, 2010, Salishan-Mohegan entered into an amendment to the terms of the Mohegan Tribe Promissory Note to extend the maturity date from January 5, 2011 to February 18, 2011. The Mohegan Tribe Promissory Note accrues interest at an annual rate of 15.0%. Accrued interest is paid at a monthly rate of 3.0%, with the remaining 12.0% due at maturity. In December 2010, the Tribe agreed to defer the 3.0% interest payments due December 1, 2010 and January 1, 2011 until maturity. The Authority has commenced discussions with the Tribe to extend the maturity date of the Mohegan Tribe Promissory Note; however, it can provide no

 

17


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

assurance of the terms of such extension or whether such extension will be granted. As of December 31, 2010 and September 30, 2010, accrued interest on the Mohegan Tribe Promissory Note was $1.6 million and $1.2 million, respectively.

NOTE 5—RELATED PARTY TRANSACTIONS:

For the three months ended December 31, 2010 and 2009, distributions to the Tribe totaled $4.5 million and $27.3 million, respectively.

The Tribe provides governmental and certain administrative services to the Authority in connection with the operation of Mohegan Sun. For the three months ended December 31, 2010 and 2009, the Authority incurred expenses for such services of $6.9 million and $7.0 million, respectively.

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, 2010 and 2009, the Authority incurred costs for such utilities of $5.2 million and $6.4 million, respectively.

In September 2009, the Tribe made a $10.0 million loan to Salishan-Mohegan, which was used to repay revolving loans under the Salishan Credit Facility. On December 30, 2010, Salishan-Mohegan entered into an amendment to the terms of the Mohegan Tribe Promissory Note to extend the maturity date from January 5, 2011 to February 18, 2011. The Mohegan Tribe Promissory Note accrues interest at an annual rate of 15.0%. Accrued interest is paid at a monthly rate of 3.0%, with the remaining 12.0% due at maturity. In December 2010, the Tribe agreed to defer the 3.0% interest payments due December 1, 2010 and January 1, 2011 until maturity. The Authority has commenced discussions with the Tribe to extend the maturity date of the Mohegan Tribe Promissory Note; however, it can provide no assurance of the terms of such extension or whether such extension will be granted. For the three months ended December 31, 2010 and 2009, the Authority incurred interest expense associated with the Mohegan Tribe Promissory Note of $378,000 and $374,000, respectively.

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, 2010 and 2009, 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 under a long-term lease agreement. The agreement requires the Authority to make a nominal annual rental payment. This lease has an initial term of 25 years and is renewable for an additional 25-year term upon expiration.

In addition, in July 2008, the Authority entered into a land lease agreement with the Tribe, replacing a prior land lease agreement, relating to property located adjacent to the Tribe’s reservation that is utilized by Mohegan Sun for employee parking. This agreement requires the Authority to make monthly payments equaling $75,000 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.

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

 

18


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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 6—COMMITMENTS AND CONTINGENCIES:

Slot Win and Free Promotional Slot Play Contributions

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 from 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 operation with slot machines, video facsimiles of games of chance 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.

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 the 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 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%.

For the three months ended December 31, 2010 and 2009, the Authority reflected expenses associated with the combined Slot Win Contribution and free promotional slot play contribution totaling $43.1 million and $45.3 million, respectively. As of December 31, 2010 and September 30, 2010, the combined outstanding Slot Win Contribution and free promotional slot play contribution totaled $13.5 million and $14.8 million, respectively.

Pennsylvania Slot Machine 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.

 

19


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

The Pennsylvania Race Horse Development and Gaming Act stipulates that holders of Category One slot machine licenses must pay a portion of revenues from slot machines to the PGCB on a daily basis (“Pennsylvania Slot Machine 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 Slot Machine Tax is currently 55% of gross revenues from slot machines, 2% of which is subject to a $10.0 million minimum annual threshold to ensure that the host cities and municipalities receive an annual minimum of $10.0 million in local share assessments. Downs Racing maintains a $1.5 million escrow deposit in the name of the Commonwealth of Pennsylvania for Pennsylvania Slot Machine Tax payments, which was included in other assets, net, in the accompanying condensed consolidated balance sheets.

For the three months ended December 31, 2010 and 2009, the Authority reflected expenses associated with the Pennsylvania Slot Machine Tax totaling $30.8 million and $30.3 million, respectively. As of December 31, 2010 and September 30, 2010, outstanding Pennsylvania Slot Machine Tax payments totaled $6.7 million and $4.6 million, respectively.

Pennsylvania Table Game Tax

In January 2010, the Commonwealth of Pennsylvania amended the Pennsylvania Race Horse Development and Gaming Act to allow slot machine operators in the Commonwealth of Pennsylvania to obtain a table game operation certificate and operate certain table games, including poker. On July 13, 2010, Downs Racing opened its table game and poker operations at Mohegan Sun at Pocono Downs. Under the amended law, holders of table game operation certificates must pay a portion of revenues from table games to the PGCB on a weekly basis (“Pennsylvania Table Game Tax”). During the initial two years of operation, the Pennsylvania Table Game Tax is 14%, plus 2% in local share assessments. Following the initial two years of operation, the Pennsylvania Table Game Tax will be reduced to 12%, plus the 2% local share assessments.

For the three months ended December 31, 2010, the Authority reflected expenses associated with the Pennsylvania Table Game Tax totaling $1.6 million. As of December 31, 2010 and September 30, 2010, outstanding Pennsylvania Table Game Tax payments totaled $96,000 and $167,000, respectively.

Horsemen’s Agreement

In January 2005, Downs Racing and the PHHA entered into an agreement that governs all live harness racing and simulcasting and account wagering at the Pennsylvania Entities. As of December 31, 2010 and September 30, 2010, outstanding payments to the PHHA for purses earned by horsemen, but not yet paid, and other fees totaled $9.6 million and $9.1 million, respectively.

Priority Distribution Agreement

In August 2001, the Authority and the Tribe entered into an agreement (the “Priority Distribution Agreement”), which stipulates that the Authority must 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 Agreement, which has a perpetual term, limits the maximum aggregate priority distribution payments 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 under the Priority Distribution Agreement: (1) do not reduce the Authority’s obligations to reimburse the Tribe for governmental and administrative services provided by the Tribe or to make payments under any other agreements with the Tribe; (2) are limited obligations

 

20


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

of the Authority and are payable only to the extent of the Authority’s Net Cash Flow, as defined under the Priority Distribution Agreement; and (3) are not secured by a lien or encumbrance on any of the Authority’s assets or properties.

For each of the three months ended December 31, 2010 and 2009, the Authority reflected payments associated with the Priority Distribution Agreement totaling $4.5 million.

Litigation

The Authority is a defendant in various litigation matters resulting from its normal course of business. In the opinion of management, the aggregate liability, if any, arising from such litigations will not have a material impact on the Authority’s financial position, results of operations or cash flows.

NOTE 7—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 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 and Junior Relinquishment Payment is 2.5% of Revenues generated by Mohegan Sun over the immediate 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 Senior and Junior Relinquishment Payments then due and owing are subordinated in right of payment to the Authority’s senior secured obligations, which include the Bank Credit Facility, the 2009 Second Lien Senior Secured Notes and capital lease obligations, and that Junior Relinquishment Payments then due and owing are further subordinated in right of payment to all of the Authority’s other senior obligations, including the 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, recorded a $549.1 million relinquishment liability at September 30, 1998 based on the estimated present value of its obligations under the Relinquishment Agreement.

 

21


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

As of December 31, 2010 and September 30, 2010, the carrying amount of the relinquishment liability was $226.1 million and $230.7 million, respectively. The decrease in the relinquishment liability during the three months ended December 31, 2010 was due to $7.4 million in relinquishment payments. This reduction in the liability was offset by $2.8 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,
 
           2010                  2009        

Principal

     $           5.5          $ 4.8    

Accretion of discount

     1.9           2.6    
                 

Total

     $ 7.4           $               7.4    
                 

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, 2010 and September 30, 2010, relinquishment payments earned but unpaid were $20.4 million and $14.9 million, respectively.

NOTE 8—SEGMENT REPORTING:

As of December 31, 2010, 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, which is to generate gaming and entertainment revenues by attracting patrons to Mohegan Sun. 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: (1) Mohegan Sun, which includes the operations of the Connecticut Entities, and (2) Mohegan Sun at Pocono Downs, which includes the operations of the Pennsylvania Entities. The following tables provide financial information related to each segment (in thousands):

 

     For the Three Months Ended
December 31,
 
     2010      2009  

Net revenues:

     

Mohegan Sun

     $         263,830           $         282,091     

Mohegan Sun at Pocono Downs

     71,775           59,720     
                 

Total

     335,605           341,811     

Income (loss) from operations:

     

Mohegan Sun

     42,544           39,922     

Mohegan Sun at Pocono Downs

     6,319           2,257     

Corporate

     (4,579)          (4,349)    
                 

Total

     44,284           37,830     

Accretion of discount to the relinquishment liability

     (2,842)          (3,856)    

Interest income

     780           732     

Interest expense, net of capitalized interest

     (29,746)          (28,549)    

Loss on early extinguishment of debt

     -               (1,584)    

Write-off of debt issuance costs

     -               (338)    

Other income (expense), net

     5           (344)    
                 

Net income

     12,481           3,891     

Loss attributable to non-controlling interests

     449           513     
                 

Net income attributable to Mohegan Tribal Gaming Authority

     $ 12,930           $ 4,404     
                 

 

22


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

     For the Three Months Ended
December 31,
 
     2010      2009  

Capital expenditures incurred:

     

Mohegan Sun

     $ 5,411           $ 8,792     

Mohegan Sun at Pocono Downs

     1,488           1,182     
                 

Total

     $ 6,899           $ 9,974     
                 
     December 31,
2010
     September 30,
2010
 

Total assets:

     

Mohegan Sun

     $ 1,548,282           $ 1,532,842     

Mohegan Sun at Pocono Downs

     598,308           599,702     

Corporate

     68,713           68,079     
                 

Total

     $ 2,215,303           $ 2,200,623     
                 

NOTE 9—SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT INFORMATION:

As of December 31, 2010, substantially all of the Authority’s outstanding debt, including its Bank Credit Facility, 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 100% owned 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. In September 2010, Mohegan Ventures, LLC, a subsidiary of the Tribe, surrendered its membership interest in WTG to MVW. Accordingly, MVW now holds 100% membership interest in WTG. Separate financial statements and other disclosures concerning MBC, Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, MTGA Gaming and WTG are not presented below because the Authority believes that the summarized financial information provided below and in Note 8 are adequate for investor analysis of these subsidiaries. Condensed consolidating financial statement information for the Authority, its 100% owned guarantor subsidiaries and its non-guarantor entities as of December 31, 2010 and September 30, 2010 and for the three months ended December 31, 2010 and 2009 is as follows (in thousands):

CONDENSED CONSOLIDATING BALANCE SHEETS

 

    December 31, 2010  
    Authority     100%
Owned
Guarantor
Subsidiary-
MBC
    Other
100%
Owned
Guarantor
Subsidiaries (1)
    Total
Guarantor
Subsidiaries
    Total Non-
Guarantor
Entities (2)
    Consolidating/
Eliminating
Adjustments
    Consolidated  
ASSETS              

Property and equipment, net

    $     1,283,555          $         63          $           253,293          $         253,356          $           19,951          $             -              $     1,556,862     

Intercompany receivables

    501,716          -              12,411          12,411          -              (514,127)         -         

Investment in subsidiaries

    93,993          -              3,290          3,290          -              (97,283)         -         

Other intangible assets, net

    120,821          4,041          281,783          285,824          -              -              406,645     

Other assets, net

    150,630          254          74,745          74,999          26,167          -              251,796     
                                                       

Total assets

  $ 2,150,715        $ 4,358          $ 625,522          $ 629,880          $ 46,118          $ (611,410)         $ 2,215,303     
                                                       
LIABILITIES AND CAPITAL              

Current liabilities

  $ 243,572        $ 1,908          $ 32,578          $ 34,486          $ 16,998          $ -              $ 295,056     

Due to Mohegan Tribe

    -              -              -              -              10,000          -              10,000     

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

    1,617,330          -              -              -              -              -              1,617,330     

Relinquishment liability, net of current portion

    151,222          -              -              -              -              -              151,222     

Intercompany payables

    -              -              501,716          501,716          12,411          (514,127)         -         

Other long-term liabilities

    376          -              -              -              -              -              376     
                                                       

Total liabilities

    2,012,500          1,908          534,294          536,202          39,409          (514,127)         2,073,984     

Mohegan Tribal Gaming Authority capital

    138,215          2,450          91,228          93,678          6,709          (100,703)         137,899     

Non-controlling interests

    -              -              -              -              -              3,420          3,420     
                                                       

Total liabilities and capital

  $ 2,150,715          $         4,358          $             625,522          $         629,880          $           46,118          $     (611,410)         $ 2,215,303     
                                                       

 

(1)   Includes Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, MTGA Gaming and WTG.

(2)   Includes Salishan-Mohegan, MG&H and Mohegan Resorts and subsidiaries.

      

      

 

23


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

    September 30, 2010  
        Authority         100%
Owned
Guarantor
   Subsidiary-

MBC  
    Other   
100%
Owned  
Guarantor
Subsidiaries
(1)
    Total
Guarantor
  Subsidiaries  
    Total   Non-
Guarantor  
Entities (2)
      Consolidating/
   Eliminating
Adjustments
      Consolidated    
ASSETS              

Property and equipment, net

  $     1,298,112        $             65        $     255,025        $     255,090        $       19,951        $ -            $     1,573,153     

Intercompany receivables

    492,653          -              12,238          12,238          -              (504,891)          -         

Investment in subsidiaries

    101,966          -              2,473          2,473          -              (104,439)          -         

Other intangible assets, net

    120,850          4,086          281,811          285,897          -              -              406,747     

Other assets, net

    124,333          321          72,109          72,430          23,960        -              220,723     
                                                       

Total assets

  $ 2,137,914        $ 4,472        $ 623,656        $ 628,128        $ 43,911      $ (609,330)         $ 2,200,623     
                                                       
LIABILITIES AND CAPITAL              

Current liabilities

  $ 244,591      $ 1,731      $ 32,093      $ 33,824        $ 16,633        $ -            $ 295,048     

Due to Mohegan Tribe

    -              -              -              -              10,000          -              10,000     

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

    1,601,471          -              -              -              -              -              1,601,471     

Relinquishment liability, net of current portion

    161,692          -              -              -              -              -              161,692     

Intercompany payables

    -              -              492,653        492,653          12,238          (504,891)          -         

Other long-term liabilities

    368          -              -              -              -              -              368     
                                                       

Total liabilities

    2,008,122          1,731          524,746        526,477          38,871          (504,891)          2,068,579     

Mohegan Tribal Gaming Authority capital

    129,792          2,741          98,910        101,651          5,040          (107,007)          129,476     

Non-controlling interests

    -              -              -              -              -              2,568           2,568     
                                                       

Total liabilities and capital

  $   2,137,914        $ 4,472        $ 623,656        $ 628,128        $ 43,911        $ (609,330 )     $ 2,200,623     
                                                       

 

(1) Includes Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, MTGA Gaming and WTG.
(2) Includes Salishan-Mohegan, MG&H and Mohegan Resorts and subsidiaries.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)

 

    For the Three Months Ended December 31, 2010  
      Authority       100% Owned
Guarantor
Subsidiary-MBC
    Other
100%
Owned
Guarantor
Subsidiaries
(1)
    Total
Guarantor
Subsidiaries
    Total
Non-
Guarantor
Entities
(2)
    Consolidating/
Eliminating
Adjustments
    Consolidated  

Net revenues

  $     263,821        $             10        $ 71,775        $ 71,785        $         -            $             (1)       $ 335,605     

Operating costs and expenses:

             

Gaming and other operations

    160,061          324          52,371          52,695          -              (1 )       212,755     

Advertising, general and administrative

    45,843          186          7,888          8,074          913          -              54,830     

Depreciation and amortization

    17,758          47          5,410          5,457          -              -              23,215     

Severance

    521          -              -              -              -              -              521     
                                                       

Total operating costs and expenses

    224,183          557          65,669          66,226          913          (1)         291,321     
                                                       

Income (loss) from operations

    39,638          (547 )       6,106          5,559          (913 )       -              44,284     

Accretion of discount to the relinquishment liability

    (2,842 )       -              -              -              -              -              (2,842 )  

Interest expense, net of capitalized interest

    (15,684 )       (5 )       (13,526 )       (13,531 )       (693 )       162          (29,746 )  

Loss on interests in subsidiaries

    (8,234 )       -              (432 )       (432 )       -              8,666          -         

Other income, net

    52         -              170          170         725          (162 )       785     
                                                       

Net income (loss)

    12,930         (552 )       (7,682 )       (8,234 )       (881 )       8,666          12,481     

Loss attributable to non-controlling interests

    -              -              -              -              -              449          449     
                                                       

Net income (loss) attributable to Mohegan Tribal Gaming Authority

  $ 12,930        $ (552 )     $ (7,682 )     $ (8,234 )     $ (881 )     $ 9,115        $ 12,930     
                                                       

 

(1) Includes Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, MTGA Gaming and WTG.
(2) Includes Salishan-Mohegan, MG&H and Mohegan Resorts and subsidiaries.

 

24


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

    For the Three Months Ended December 31, 2009  
    Authority     100% Owned
Guarantor
  Subsidiary-MBC  
    Other
100% Owned
Guarantor
Subsidiaries (1)  
    Non
100% Owned
Guarantor
  Subsidiary-WTG  
    Total
Guarantor
  Subsidiaries  
    Total Non-
Guarantor
  Entities (2)  
    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     
                                                               

 

(1) Includes Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW and MTGA Gaming.
(2) Includes Salishan-Mohegan, MG&H and Mohegan Resorts and subsidiaries.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 

    For the Three Months Ended December 31, 2010  
    Authority     100% Owned
Guarantor
  Subsidiary-MBC  
    Other 100%
Owned
Guarantor
  Subsidiaries (1)  
    Total
Guarantor
  Subsidiaries  
    Total Non-
Guarantor
  Entities (2)  
    Consolidating/
Eliminating
  Adjustments  
      Consolidated    

Net cash flows provided by (used in) operating activities

  $     25,381        $         (225)       $     12,572        $     12,347        $      (2,803)       $       -            $     34,925     
                                                       

Cash flows provided by (used in) investing activities:

             

Purchases of property and equipment

    (9,729)         -              (6,128)         (6,128)         -              -              (15,857)    

Other cash flows provided by (used in) investing activities

    2,667          -              (1,370)         (1,370)         (196)         (2,561)         (1,460)    
                                                       

Net cash flows used in investing activities

    (7,062)         -              (7,498)         (7,498)         (196)         (2,561)         (17,317)    
                                                       

Cash flows provided by (used in) financing activities:

             

Bank Credit Facility borrowings—revolving loan

    96,000          -              -              -              -              -              96,000     

Bank Credit Facility repayments—revolving loan

    (80,000)         -              -              -              -              -              (80,000)    

Line of Credit borrowings

    137,784          -              -              -              -              -              137,784     

Line of Credit repayments

    (134,455)         -              -              -              -              -              (134,455)    

Principal portion of relinquishment liability payments

    (5,544)         -              -              -              -              -              (5,544)    

Distributions to Tribe

    (4,507)         -              -              -              -              -              (4,507)    

Other cash flows provided by (used in) financing activities

    (1,448)         261          (2,810)         (2,549)         2,804          2,561          1,368     
                                                       

Net cash flows provided by (used in) financing activities

    7,830          261          (2,810)         (2,549)         2,804          2,561          10,646     
                                                       

Net increase (decrease) in cash and cash equivalents

    26,149          36          2,264          2,300          (195)         -              28,254     

Cash and cash equivalents at beginning of period

    39,146          (49)         24,366          24,317          434          -              63,897     
                                                       

Cash and cash equivalents at end of period

  $ 65,295        $ (13)       $ 26,630        $ 26,617        $ 239        $ -            $ 92,151     
                                                       

 

(1) Includes Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW, MTGA Gaming and WTG.
(2) Includes Salishan-Mohegan, MG&H and Mohegan Resorts and subsidiaries.

 

25


MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

    For the Three Months Ended December 31, 2009  
    Authority     100% Owned
Guarantor
Subsidiary-
MBC
    Other
100% Owned
Guarantor
Subsidiaries (1)
    Non
100%
Owned

Guarantor
Subsidiary-
WTG
    Total
Guarantor
Subsidiaries
    Total  Non-
Guarantor

Entities (2)
    Consolidating/
Eliminating
Adjustments
    Consolidated  
               
               
               

Net cash flows provided by (used in) operating activities

    $     34,952          $        (352)          $      11,523          $      (91)          $             11,080          $      (611)         $      -              $      45,421     
                                                               

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          -              (946)         (91)         (1,037)         (398)         (6,980)         (1,069)    
                                                               

Net cash flows used in investing activities

    (3,753)         -              (2,236)         (91)         (2,327)         (398)         (6,980)         (13,458)    
                                                               

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 Second Lien Senior Secured Notes, net of discount

    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     
                                                               

 

(1) Includes Mohegan Ventures-NW, MCV-PA, the Pennsylvania Entities, Mohegan Golf, MVW and MTGA Gaming.
(2) Includes Salishan-Mohegan, MG&H and Mohegan Resorts and subsidiaries.

 

26


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, 2010, and the related condensed consolidated statements of income and of changes in capital for each of the three-month periods ended December 31, 2010 and 2009 and the condensed consolidated statement of cash flows for the three-month periods ended December 31, 2010 and 2009. 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, 2010, 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 29, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of September 30, 2010, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

February 14, 2011

Hartford, CT

 

 

27


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

 

   

our ability to integrate new amenities from expansions to our facilities into our current operations and manage the expanded facilities;

 

   

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, 2010, 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.

 

28


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 IGRA, 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 entered into a compact, the Mohegan Compact, which was approved by the United States Secretary of the Interior. We were established as an instrumentality of the Tribe, with the exclusive authority to conduct and regulate gaming activities for the Tribe 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 located in Plains Township, Pennsylvania, and several off-track wagering facilities, or OTW facilities, 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, we opened Sunrise Square, and, in 2008, we opened Casino of the Wind.

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

Casino of the Earth

As of December 31, 2010, Casino of the Earth offered:

 

   

approximately 188,000 square feet of gaming space;

 

   

approximately 3,500 slot machines and 190 table games, including blackjack, roulette, craps and baccarat;

 

   

Sunrise Square, a 9,800-square-foot Asian-themed gaming area, including 50 table games;

 

   

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

 

   

food and beverage amenities, including: Birches Bar & Grill, an approximately 200-seat full-service restaurant, 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 and Fidelia’s Market, a 123-seat multi-station food court, operated by third-parties, for a total seating of approximately 1,500;

 

   

four Mohegan Sun-owned retail shops, offering products ranging from Mohegan Sun logo souvenirs to cigars; and

 

   

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

 

29


Casino of the Sky

As of December 31, 2010, Casino of the Sky offered:

 

   

approximately 119,000 square feet of gaming space;

 

   

approximately 2,200 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 and four 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 2,500;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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, 2010, Casino of the Wind offered:

 

   

approximately 45,000 square feet of gaming space;

 

   

approximately 725 slot machines, 30 table games, including blackjack, roulette and craps, and a 42-table themed poker room;

 

   

food and beverage 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, and a bar, both operated by us, for a total seating of approximately 500; and

 

   

a retail shop operated by a third-party.

Mohegan Sun offers parking for approximately 13,000 patrons 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.

Mohegan Basketball Club

We formed Mohegan Basketball Club, LLC, or MBC, to own and operate a professional basketball team in the Women’s National Basketball Association, or the WNBA. In January 2003, 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

We formed 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 in Sprague and Franklin, Connecticut. The golf course was renamed Mohegan Sun

 

30


Country Club at Pautipaug and reopened under the ownership of Mohegan Golf in June 2007. In August 2010, the golf course and related facilities were temporarily closed for renovations and are scheduled to re-open in the spring of 2012.

Mohegan Sun at Pocono Downs

Through Downs Racing, we own and operate a gaming and entertainment facility known as Mohegan Sun at Pocono Downs located on a 400-acre site in Plains Township, Pennsylvania, and OTW facilities 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. In July 2010, Mohegan Sun at Pocono Downs opened its table game and poker operations, including additional non-smoking sections and a high-limit gaming area.

As of December 31, 2010, Mohegan Sun at Pocono Downs operates in an approximately 400,000-square-foot facility, which includes the following:

 

   

approximately 82,000 square feet of gaming space;

 

   

approximately 2,500 slot machines, 66 table games, including blackjack, roulette and craps, and an 18-table poker room;

 

   

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;

 

   

five retail shops, one of which we own, offering products ranging from Mohegan Sun at Pocono Downs logo souvenirs to fine apparel; and

 

   

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

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, and located approximately 10 miles from Mohegan Sun. We also currently face competition from casinos in Atlantic City, New Jersey, several casinos and gaming facilities located on Indian tribal lands in the State of New York and video lottery terminal facilities, or VLT facilities, in the states of New York and Rhode Island. In addition, we face 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 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, 2010 and our other reports and filings with the SEC for further details regarding current and potential competition from other gaming operations.

The following is a summary of developments that have occurred since September 30, 2010:

In the State of Connecticut, in October 2010, the United States Supreme Court declined to hear an appeal of the Schaghticoke Tribal Nation, a state-recognized tribe based in Western Connecticut, which sought to overturn adverse decisions on its petition for federal recognition.

 

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In the State of Rhode Island, in November 2010, Twin River Casino was discharged from Chapter 11 bankruptcy protection and its new owners received final approval from state regulators to operate the facility with a management team that includes several members of the facility’s prior management. According to published reports, under the approved reorganization plan, ownership of Twin River Casino was transferred to the facilities’ first lien note holders and second lien note holders received certain contingent value rights. In addition, $290 million in debt was relieved. As part of the reorganization plan, during the 2010 legislative session, the governor approved a concession package for Twin River Casino, which authorized up to $3.6 million in state marketing subsidies and utilization of free promotional slot plays up to 4% of the prior year’s net terminal income, as well as extended hours of operation to 24 hours, seven days a week.

In the State of New York, in November 2010, the Stockbridge-Munsee Tribe of Wisconsin signed a land claim settlement agreement and Class III gaming compact with the state which, if approved by the federal government, would end the tribe’s claim to 23,000 acres in Madison County in exchange for 333 acres in Sullivan County and the right to operate a casino in the Town of Thompson. According to published reports, several VLT operators and Indian tribes in the state have voiced opposition to this project and requested that the Bureau of Indian Affairs, or BIA, disapprove the agreements. The BIA is expected to act on this request in February 2011. In October 2010, Genting New York, an affiliate of the Malaysian-based gaming group Genting, which was awarded the VLT rights for Aqueduct Raceway in Queens, reportedly commenced construction of the VLT facility at Aqueduct Raceway, following the payment of a $380 million licensing fee to the state. According to published reports, the facility will have 1,600 VLTs installed by May 2011, which will be increased to 4,525 VLTs by October 2011. In December 2010, the New York City Off-Track Betting Corporation closed more than 50 off-track pari-mutuel betting parlors in the New York City area, which had reportedly accounted for approximately 45% of the state’s pari-mutuel racing handle. It has been reported that the New York Racing Authority is considering adding simulcasting teletheaters in New York City. In September 2010, Saratoga Casino and Raceway introduced electronic roulette games for the first time in the state, followed by Monticello Casino and Raceway in November 2010 and Empire City Casino in December 2010.

In the State of New Jersey, the governor and state legislature have recently acted on a series of legislative reforms and public-private initiatives to revitalize gaming in the state and respond to competition from expanded gaming in nearby states. In January and February 2011, the governor signed bills authorizing up to two “boutique hotel casinos” in Atlantic City and the creation of a new Atlantic City tourism district, as well as regulatory reforms to dissolve the state’s Casino Control Commission, transfer various functions to the Division of Gaming Enforcement and allocate certain regulatory cost savings into a casino marketing fund. The governor also signed legislation permitting betting exchanges for horse racing and the pooling of pari-mutuel wagers. In addition, it has been reported that in February 2011, the governor will act on a bill that would authorize internet gaming in the State of New Jersey on an intrastate basis. In February 2011, following the announcement of a new $1.1 billion financing plan for the suspended Revel Entertainment Group project in Atlantic City, the governor announced a planned state investment of $261 million in tax increment financing and other incentives for the project. It has been reported that the project will be completed in June 2012.

In the Commonwealth of Pennsylvania, in November 2010, four applicants presented proposals to the Pennsylvania Gaming Control Board, or PGCB, for a Category Three resort facility with up to 600 slot machines and 50 table games. One of the applicants, Fernwood Hotel & Resort, is approximately 45 miles from Mohegan Sun at Pocono Downs. In December 2010, the PGCB voted to revoke a Category Two license awarded to an affiliate of Foxwoods Development, LLC for a second stand-alone facility in Philadelphia. It has been reported that the developer has challenged this action in state court. According to various reports, the state legislature may consider modifying the existing legal requirement that the license be awarded to a facility in Philadelphia. Sands Casino Resort Bethlehem will reportedly open its new 300-room hotel in May 2011 and has announced plans to resume work on mall and convention center developments.

 

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Explanation of Key Financial Statement Captions

There has been no material change from the explanation of key financial statement captions previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

Results of Operations

Summary Operating Results

As of December 31, 2010, we own and operate Mohegan Sun, the Connecticut Sun WNBA franchise and the Mohegan Sun Country Club, or 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, which is to generate gaming and entertainment revenues by attracting patrons to Mohegan Sun. 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: (1) Mohegan Sun, which includes the operations of the Connecticut entities, and (2) Mohegan Sun at Pocono Downs, which includes the operations of the Pennsylvania entities.

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

 

     For the Three Months Ended December 31,  
         2010              2009              Variance          Percentage
     Variance    
 
           

Net revenues:

           

Mohegan Sun

     $         263,830           $         282,091           $         (18,261)                      (6.5%)    

Mohegan Sun at Pocono Downs

     71,775           59,720           12,055           20.2%     
                                   

Total

     $ 335,605           $ 341,811           $ (6,206)          (1.8%)    

Income (loss) from operations:

           

Mohegan Sun

     $ 42,544           $ 39,922           $ 2,622           6.6%     

Mohegan Sun at Pocono Downs

     6,319           2,257           4,062           180.0%     

Corporate

     (4,579)          (4,349)          (230)          5.3%     
                                   

Total

     $ 44,284           $ 37,830           $ 6,454           17.1%     

Net income attributable to Mohegan Tribal Gaming Authority

     $ 12,930           $ 4,404           $ 8,526           193.6%     

Operating margin:

           

Mohegan Sun

     16.1%          14.2%          1.9%          13.4%     

Mohegan Sun at Pocono Downs

     8.8%          3.8%          5.0%          131.6%     

Total

     13.2%          11.1%          2.1%          18.9%     

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

 

   

the continued weakness in consumer spending;

 

   

an increasingly competitive promotional environment, including increased use of free promotional slot plays;

 

   

the July 2010 addition of table game and poker operations at Mohegan Sun at Pocono Downs;

 

   

staffing reductions and other cost containment initiatives implemented in September 2010 at Mohegan Sun;

 

   

reduced shows held at the Mohegan Sun Arena and the resulting decline in patron visitation to the facility; and

 

   

increased promotional room rates offered to gaming patrons at Mohegan Sun that are designed to maintain high hotel occupancy by gaming patrons to augment gaming revenues.

 

33


Net revenues for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily as a result of declines in gaming and non-gaming revenues at Mohegan Sun. These results were partially offset by the addition of table game and poker revenues from the July 2010 opening of table game and poker operations at Mohegan Sun at Pocono Downs.

Income from operations for the three months ended December 31, 2010 compared to the same period in the prior year increased primarily due to the addition of table game and poker operations at Mohegan Sun at Pocono Downs. The increase in income from operations also was attributable to lower operating costs and expenses at Mohegan Sun reflecting, in part, staffing reductions and other cost containment initiatives implemented in September 2010.

Net income attributable to the Authority for the three months ended December 31, 2010 compared to the same period in the prior year increased primarily as a result of the increase in income from operations, combined with the impact of a non-recurring loss on the early extinguishment of a then-existing term loan under our bank credit facility.

Mohegan Sun

Gross Revenues

Gross revenues consisted of the following (in thousands):

 

     For the Three Months Ended December 31,  
         2010              2009              Variance          Percentage
Variance
 
           

Gaming

     $     239,724           $     252,994            $        (13,270)                  (5.2%)    

Food and beverage

     16,147           19,398          (3,251)          (16.8%)    

Hotel

     8,997           9,542          (545)          (5.7%)    

Retail, entertainment and other

     20,844           26,109          (5,265)          (20.2%)    
                                   

Total

     $     285,712           $     308,043            $        (22,331)          (7.2%)    
                                   

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

 

    For the Three Months Ended December 31,  
        2010             2009      

Gaming

                83.9%         82.1%    

Food and beverage

    5.7%         6.3%    

Hotel

    3.1%         3.1%    

Retail, entertainment and other

    7.3%         8.5%    
               

Total

    100.0%                     100.0%    
               

 

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

 

     For the Three Months Ended December 31,  
         2010              2009             Variance          Percentage
   Variance  
 
          

Slots:

          

Handle

     $       2,120,579         $       2,198,497        $       (77,918)                 (3.5%)    

Gross revenues

     $ 169,356         $ 179,590        $ (10,234)         (5.7%)    

Net revenues

     $ 163,217         $ 172,930        $ (9,713)         (5.6%)    

Free promotional slot plays (1)

     $ 12,370         $ 11,374        $             996         8.8%    

Weighted average number of machines (in units)

     6,404         6,719        (315)         (4.7%)    

Hold percentage (gross)

     8.0%         8.2%        (0.2%)         (2.4%)    

Win per unit per day (gross) (in dollars)

     $ 287         $ 291        $ (4)         (1.4%)    

Table games:

          

Drop

     $ 504,359         $ 522,104        $ (17,745)         (3.4%)    

Revenues

     $ 71,542         $ 75,132        $ (3,590)         (4.8%)    

Weighted average number of games (in units)

     331         322        9         2.8%    

Hold percentage (2)

     14.2%         14.4%        (0.2%)         (1.4%)    

Win per unit per day (in dollars)

     $ 2,351         $ 2,540        $ (189)         (7.4%)    

Poker:

          

Revenues

     $ 2,967         $ 2,941        $ 26         0.9%    

Weighted average number of tables (in units)

     42         42        -             -        

Revenue per unit per day (in dollars)

     $ 768         $ 761        $ 7         0.9%    

 

(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,  
         2010              2009              Variance         Percentage
    Variance    
 

Northeast slot gaming market (1) (2):

          

Gross revenues

     $     605,915          $     591,970            $       13,945           2.4%    

Mohegan Sun win market share

     30.0%         32.3%         (2.3%     (7.1%)   

Mohegan Sun win efficiency

     113.4%         122.8%         (9.4%     (7.7%)   

Connecticut slot gaming market (3):

          

Gross revenues

   $ 321,251          $ 332,652            $       (11,401     (3.4%)   

Free promotional slot plays

   $ 30,568          $ 22,801            $ 7,767         34.1%    

Mohegan Sun win market share

     52.7%         54.0%         (1.3%     (2.4%)   

Mohegan Sun win efficiency

     107.1%         113.7%         (6.6%     (5.8%)   

 

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

Gaming revenues for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily due to the declines in slot and table games revenues. The decline in slot revenues likely was attributable to the continued weakness in consumer spending primarily due to high unemployment in the Northeast region and aggressive promotional programs by competitors, including increased use of free promotional slot plays. For the three months ended December 31, 2010, free promotional slot plays redeemed in the Connecticut slot gaming market increased 34.1% compared to the same period in the prior year, while free promotional slot plays redeemed at Mohegan Sun increased 8.8%. Slot revenues also were negatively impacted by the reduction in shows held at the Mohegan Sun Arena, which resulted in decreased patron visitation to the facility. Additionally, the reduction in slot revenues reflects the overall decline in the Connecticut slot gaming market. We believe that aggressive promotional programs by competitors in the states of Rhode Island and New York may have contributed to the decreases in our slot win market share and efficiency in the Northeast slot

 

35


gaming market. The decline in our slot win efficiency in the Connecticut slot gaming market was primarily the result of a reduction in Foxwoods Resort Casino’s weighted average number of slot machines during the period. The decrease in table games revenues for the three months ended December 31, 2010 compared to the same period in the prior year resulted from lower table games drop combined with the decline in table games hold percentage.

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

 

     For the Three Months Ended December 31,  
     2010      2009      Variance     Percentage
Variance
 

Meals served

     846         1,028         (182     (17.7 %) 

Average price per meal served (in dollars)

   $     15.17       $     15.45       $     (0.28     (1.8 %) 

Food and beverage revenues for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily due to a $3.1 million decline in food revenues resulting from the reduction in the number of meals served at Mohegan Sun-owned food and beverage outlets. The reduction in the number of meals served reflects the closure of the Sunburst Buffet and the replacement of certain other Mohegan Sun-owned food and beverage outlets with third-party operators. Food and beverage revenues also were negatively impacted by the decrease in the number of shows held at the Mohegan Sun Arena and the resulting decline in patron visitation to the facility.

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

 

     For the Three Months Ended December 31,  
     2010     2009     Variance      Percentage
Variance
 

Rooms occupied

     103        101        2            2.0

Occupancy rate

     95.4     93.5     1.9%         2.0

Average daily room rate (in dollars)

   $         84      $         91      $ (7)           (7.7 %) 

Revenue per available room (in dollars)

   $ 80      $ 85      $ (5)           (5.9 %) 

Hotel revenues for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily as a result of the continued emphasis on maintaining high occupancy of the hotel by gaming patrons. The decline in hotel revenues also reflects lower room rates offered to gaming patrons in response to competitive promotional offers from competitors in the Connecticut and Atlantic City markets.

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

 

     For the Three Months Ended December 31,  
     2010      2009      Variance      Percentage
Variance
 

Arena events (in events)

     23         30         (7)         (23.3%)   

Arena tickets

     119         180         (61)         (33.9%)   

Average price per Arena ticket (in dollars)

   $       45.79       $       55.76       $       (9.97)         (17.9%)   

Retail, entertainment and other revenues for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily due to a $4.6 million decline in entertainment revenues. The decrease in entertainment revenues resulted from the declines in the number of Arena tickets and the average price per Arena ticket due to fewer shows held at the Mohegan Sun Arena, including fewer headliner shows, as a result of a reduction in available entertainment acts on tour.

 

36


Promotional Allowances

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

 

     For the Three Months Ended December 31,  
     2010      2009      Variance      Percentage
Variance
 

Food and beverage

   $         7,229       $         9,066       $         (1,837)                  (20.3%)   

Hotel

     3,968         3,478         490           14.1%    

Retail, entertainment and other

     10,685         13,408         (2,723)          (20.3%)   
                                   

Total

   $ 21,882       $ 25,952       $ (4,070)          (15.7%)   
                                   

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

 

     For the Three Months Ended December 31,  
     2010      2009      Variance      Percentage
Variance
 

Food and beverage

   $         7,313       $         9,678       $         (2,365)              (24.4%)    

Hotel

     2,430         2,038         392           19.2%    

Retail, entertainment and other

     9,000         11,482         (2,482)          (21.6%)    
                                   

Total

   $ 18,743       $ 23,198       $ (4,455)          (19.2%)    
                                   

Promotional allowances for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily due to lower entertainment promotional allowances as a result of the fewer shows held at the Mohegan Sun Arena. The decline in promotional allowances also reflects lower food promotional allowances commensurate with the closure of the Sunburst Buffet and the replacement of certain other Mohegan Sun-owned food and beverage outlets with third-party operators.

Operating Costs and Expenses

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

 

     For the Three Months Ended December 31,  
     2010      2009      Variance      Percentage
Variance
 

Gaming

     $         143,075          $         157,204        $         (14,129)                  (9.0%)    

Food and beverage

     8,254          9,683          (1,429)          (14.8%)    

Hotel

     3,166          3,610          (444)          (12.3%)    

Retail, entertainment and other

     5,910          7,704          (1,794)          (23.3%)    

Advertising, general and administrative

     42,498          44,315          (1,817)          (4.1%)    

Pre-opening

     -              42          (42)          (100.0%)    

Depreciation and amortization

     17,863          19,611          (1,748)          (8.9%)    

Severance

     520          -              520           100.0%     
                                   

Total

     $ 221,286          $ 242,169        $ (20,883)          (8.6%)    
                                   

Gaming costs and expenses for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily as a result of lower non-gaming complimentaries redeemed by casino patrons at Mohegan Sun-owned outlets. The decline in gaming costs and expenses also reflects lower payroll costs and casino marketing and promotional expenditures, reflecting, in part, staffing reductions and other cost containment initiatives implemented in September 2010. Additionally, the decrease in gaming costs and expenses reflects reduced Slot Win Contribution payments commensurate with the decline in slot revenues. For the three months ended December 31, 2010 and 2009, expenses associated with the combined Slot Win Contribution and free promotional slot play contribution totaled $43.1 million and $45.3 million, respectively. Gaming costs and expenses as a percentage of gaming revenues were 59.7% and 62.1% for the three months ended December 31, 2010 and 2009, respectively.

 

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Food and beverage costs and expenses for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily due to lower payroll costs and cost of goods sold reflecting staffing reductions and other cost containment initiatives implemented in September 2010, including the closure of the Sunburst Buffet and the replacement of certain other Mohegan Sun-owned food and beverage outlets with third-party operators. These results were 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, 2010 compared to the same period in the prior year decreased primarily as a result of increased use of hotel complimentaries, resulting in higher amounts of hotel costs being allocated to gaming costs and expenses.

Retail, entertainment and other costs and expenses for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily due to lower direct entertainment costs resulting from fewer shows held at the Mohegan Sun Arena, including fewer headliner shows. These results were 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, 2010 compared to the same period in the prior year decreased primarily as a result of lower payroll costs and advertising expenditures, reflecting, in part, staffing reductions and other cost containment initiatives implemented in September 2010. The decline in advertising, general and administrative costs and expenses also reflects lower utility expenses.

Depreciation and amortization expenses for the three months ended December 31, 2010 compared to the same period in the prior year decreased primarily due to fully depreciated furniture and equipment related to Project Sunburst, which were placed into service in fiscal 2002.

Severance charges for the three months ended December 31, 2010 resulted from adjustments to the initial estimates utilized under the workforce reduction plan. Cash payments commenced in September 2010 and are anticipated to be completed in March 2012. We do not anticipate incurring any additional severance charges in connection with this workforce reduction, other than charges that may arise from adjustments to the initial estimates utilized under the plan.

Mohegan Sun at Pocono Downs

Gross Revenues

Gross revenues consisted of the following (in thousands):

 

     For the Three Months Ended December 31,  
     2010      2009      Variance      Percentage
Variance
 

Gaming

     $         67,933          $         56,845          $         11,088                  19.5%    

Food and beverage

     5,847          3,917          1,930          49.3%    

Retail and other

     1,602          1,329          273          20.5%    
                                   

Total

     $ 75,382          $ 62,091          $ 13,291          21.4 %  
                                   

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

 

     For the Three Months Ended December 31,  
     2010      2009  

Gaming

                         90.1%                              91.6%    

Food and beverage

     7.8%          6.3%    

Retail and other

     2.1%          2.1%    
                 

Total

     100.0%          100.0%    
                 

 

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

 

     For the Three Months Ended December 31,  
     2010      2009      Variance      Percentage
Variance
 

Slots:

           

Handle

   $       689,358         $       677,763         $       11,595                   1.7%   

Gross revenues

   $ 53,658         $ 52,551         $ 1,107           2.1%   

Net revenues

   $ 53,652         $ 52,521         $ 1,131           2.2%   

Free promotional slot plays (1)

   $ 15,208         $ 9,549         $ 5,659           59.3%   

Weighted average number of machines (in units)

     2,466           2,466           -             -       

Hold percentage (gross)

     7.8%         7.8%         -             -       

Win per unit per day (gross) (in dollars)

   $ 237         $ 232         $ 5           2.2%   

Table games (2):

           

Drop

   $ 49,837         $ -           $ 49,837           100.0%   

Revenues

   $ 9,197         $ -           $ 9,197           100.0%   

Weighted average number of games (in units)

     66           -             66           100.0%   

Hold percentage (3)

     18.5%         -             18.5%         100.0%   

Win per unit per day (in dollars)

   $ 1,513         $ -           $ 1,513           100.0%   

Poker (2):

           

Revenues

   $ 1,070         $ -           $ 1,070           100.0%   

Weighted average number of tables (in units)

     18           -             18           100.0%   

Revenue per unit per day (in dollars)

   $ 646         $ -           $ 646           100.0%   

 

(1) Free promotional slot plays are included in slot handle, but not reflected in slot revenues.
(2) Table game and poker operations commenced on July 13, 2010.
(3) 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 at Pocono Downs’ market area (in thousands, except where noted):

 

     For the Three Months Ended December 31,  
     2010      2009      Variance     Percentage
Variance
 

Northeastern Pennsylvania slot gaming market (1):

          

Gross revenues

   $       150,419       $       140,175       $       10,244              7.3

Free promotional slot plays (2)

   $ 46,741       $ 36,792       $ 9,949        27.0

Mohegan Sun at Pocono Downs win market share

     35.7%         37.5%         (1.8%     (4.8%

Mohegan Sun at Pocono Downs win efficiency

     114.9%         119.9%         (5.0%     (4.2%

 

(1) Northeastern Pennsylvania slot gaming market consists of Mohegan Sun at Pocono Downs, Mount Airy Resort Casino and Sands Casino Resort Bethlehem.
(2) Free promotional slot plays are included in slot handle, but not reflected in slot revenues.

Gaming revenues for the three months ended December 31, 2010 compared to the same period in the prior year increased primarily due to the addition of table game and poker revenues from the July 2010 opening of table game and poker operations. The growth in gaming revenues also reflects higher slot revenues resulting from the continued success of our targeted direct mail and other promotional programs. Slot revenues also were positively impacted by the addition of table game and poker operations, which resulted in increased patron visitation to the facility.

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

 

     For the Three Months Ended December 31,  
     2010      2009      Variance      Percentage
Variance
 

Meals served

     193         147         46         31.3%   

Average price per meal served (in dollars)

   $       14.96       $       13.06       $       1.90                 14.5%   

 

39


Food and beverage revenues for the three months ended December 31, 2010 compared to the same period in the prior year increased primarily due to increased patron visitation to the facility resulting from the addition of table game and poker operations. The increase in food and beverage revenues also reflects the operations of an additional Mohegan Sun at Pocono Downs-owned food and beverage outlet.

Retail and other revenues for the three months ended December 31, 2010 compared to the same period in the prior year increased primarily as a result of increased patron visitation to the facility resulting from the addition of table game and poker operations.

Promotional Allowances

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

 

     For the Three Months Ended December 31,  
     2010      2009      Variance      Percentage
Variance
 

Food and beverage

   $       3,288       $       2,133       $       1,155                 54.1%   

Retail

     319         238         81         34.0%   
                                   

Total

   $ 3,607       $ 2,371       $ 1,236         52.1%   
                                   

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

 

     For the Three Months Ended December 31,  
     2010      2009      Variance      Percentage
Variance
 

Food and beverage

   $       2,457       $       1,945       $       512