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 March 31, 2018
OR
| o | 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 ¨ No x*
| * | The registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required during the preceding 12 months had it been subject to such filing requirements. |
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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer x | Smaller reporting company o |
Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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. | ||
| Item 1. | ||
| Item 2. | ||
| Item 3. | ||
| Item 4. | ||
| PART II. | ||
| Item 1. | ||
| Item 1A. | ||
| Item 6. | ||
| Signatures. | ||
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
MOHEGAN TRIBAL GAMING AUTHORITY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
| March 31, 2018 | September 30, 2017 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 101,060 | $ | 88,953 | |||
| Restricted cash and cash equivalents | 1,339 | 899 | |||||
| Receivables, net of allowance for doubtful accounts of $10,212 and $11,554, respectively | 32,950 | 41,932 | |||||
| Inventories | 14,962 | 14,952 | |||||
| Due from Mohegan Tribe | 4,016 | 213 | |||||
| Other current assets | 23,231 | 20,408 | |||||
| Total current assets | 177,558 | 167,357 | |||||
| Non-current assets: | |||||||
| Restricted cash and cash equivalents | 143,440 | 149,204 | |||||
| Property and equipment, net | 1,389,902 | 1,353,976 | |||||
| Goodwill | 39,459 | 39,459 | |||||
| Other intangible assets, net | 403,702 | 403,908 | |||||
| Due from Mohegan Tribe | 3,419 | 2,969 | |||||
| Other assets, net | 127,110 | 118,808 | |||||
| Total assets | $ | 2,284,590 | $ | 2,235,681 | |||
| LIABILITIES AND CAPITAL | |||||||
| Current liabilities: | |||||||
| Current portion of long-term debt | $ | 92,009 | $ | 75,131 | |||
| Trade payables | 9,710 | 13,979 | |||||
| Construction payables | 13,364 | 24,496 | |||||
| Accrued interest payable | 19,030 | 19,027 | |||||
| Due to Mohegan Tribe | 3,272 | 2,948 | |||||
| Other current liabilities | 147,465 | 139,478 | |||||
| Total current liabilities | 284,850 | 275,059 | |||||
| Non-current liabilities: | |||||||
| Long-term debt, net of current portion | 1,565,932 | 1,576,078 | |||||
| Redemption note payable | 76,607 | — | |||||
| Redemption liability | — | 72,351 | |||||
| Other long-term liabilities | 5,403 | 3,024 | |||||
| Total liabilities | 1,932,792 | 1,926,512 | |||||
| Commitments and Contingencies | |||||||
| Capital: | |||||||
| Retained earnings | 229,922 | 196,645 | |||||
| Accumulated other comprehensive income | 8,306 | 1,125 | |||||
| Mohegan Tribal Gaming Authority total capital | 238,228 | 197,770 | |||||
| Non-controlling interests | 113,570 | 111,399 | |||||
| Total capital | 351,798 | 309,169 | |||||
| Total liabilities and capital | $ | 2,284,590 | $ | 2,235,681 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MOHEGAN TRIBAL GAMING AUTHORITY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| For the | For the | For the | For the | ||||||||||||
| Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | ||||||||||||
| March 31, 2018 | March 31, 2017 | March 31, 2018 | March 31, 2017 | ||||||||||||
| Revenues: | |||||||||||||||
| Gaming | $ | 288,735 | $ | 293,736 | $ | 575,741 | $ | 578,811 | |||||||
| Food and beverage | 21,170 | 21,731 | 42,990 | 44,787 | |||||||||||
| Hotel | 14,957 | 14,919 | 29,864 | 29,622 | |||||||||||
| Retail, entertainment and other | 29,849 | 29,508 | 62,737 | 63,973 | |||||||||||
| Gross revenues | 354,711 | 359,894 | 711,332 | 717,193 | |||||||||||
| Less-Promotional allowances | (22,694 | ) | (23,070 | ) | (47,831 | ) | (49,377 | ) | |||||||
| Net revenues | 332,017 | 336,824 | 663,501 | 667,816 | |||||||||||
| Operating costs and expenses: | |||||||||||||||
| Gaming* | 161,801 | 160,200 | 326,116 | 329,582 | |||||||||||
| Food and beverage | 10,180 | 10,241 | 20,369 | 20,570 | |||||||||||
| Hotel* | 6,647 | 6,971 | 13,652 | 13,174 | |||||||||||
| Retail, entertainment and other | 9,589 | 11,582 | 21,206 | 26,969 | |||||||||||
| Advertising, general and administrative* | 49,595 | 50,193 | 99,972 | 100,589 | |||||||||||
| Corporate* | 14,090 | 20,260 | 26,243 | 31,448 | |||||||||||
| Depreciation and amortization | 19,828 | 18,090 | 40,035 | 36,302 | |||||||||||
| (Gain) loss on disposition of assets | 410 | (111 | ) | 331 | (91 | ) | |||||||||
| Severance | 2,792 | — | 2,792 | — | |||||||||||
| Pre-opening | 1,013 | (26 | ) | 1,713 | 429 | ||||||||||
| Total operating costs and expenses | 275,945 | 277,400 | 552,429 | 558,972 | |||||||||||
| Income from operations | 56,072 | 59,424 | 111,072 | 108,844 | |||||||||||
| Other income (expense): | |||||||||||||||
| Accretion of discounts | (65 | ) | — | (1,798 | ) | — | |||||||||
| Interest income | 3,877 | 2,678 | 7,746 | 5,578 | |||||||||||
| Interest expense, net of capitalized interest | (30,806 | ) | (28,594 | ) | (59,142 | ) | (58,629 | ) | |||||||
| Loss on modification and early extinguishment of debt | — | — | — | (73,796 | ) | ||||||||||
| Loss from unconsolidated affiliates | (596 | ) | (2,114 | ) | (421 | ) | (2,845 | ) | |||||||
| Other income (expense), net | (63 | ) | 2 | (348 | ) | 3 | |||||||||
| Total other expense | (27,653 | ) | (28,028 | ) | (53,963 | ) | (129,689 | ) | |||||||
| Net income (loss) | 28,419 | 31,396 | 57,109 | (20,845 | ) | ||||||||||
| Loss attributable to non-controlling interests | 189 | 74 | 708 | 693 | |||||||||||
| Net income (loss) attributable to Mohegan Tribal Gaming Authority | $ | 28,608 | $ | 31,470 | $ | 57,817 | $ | (20,152 | ) | ||||||
| Comprehensive income (loss): | |||||||||||||||
| Foreign currency translation adjustment | 1,460 | 15,009 | 16,207 | (3,301 | ) | ||||||||||
| Other comprehensive income (loss) | 1,460 | 15,009 | 16,207 | (3,301 | ) | ||||||||||
| Other comprehensive (income) loss attributable to non-controlling interests | (708 | ) | (7,804 | ) | (9,026 | ) | 1,609 | ||||||||
| Other comprehensive income (loss) attributable to Mohegan Tribal Gaming Authority | 752 | 7,205 | 7,181 | (1,692 | ) | ||||||||||
| Comprehensive income (loss) attributable to Mohegan Tribal Gaming Authority | $ | 29,360 | $ | 38,675 | $ | 64,998 | $ | (21,844 | ) | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
* These financial statement line items include costs and expenses associated with related party transactions (refer to Note 4).
4
MOHEGAN TRIBAL GAMING AUTHORITY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
(in thousands)
(unaudited)
| Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Mohegan Tribal Gaming Authority Total Capital | Non-controlling Interests | Total Capital | |||||||||||||||
| Balance, December 31, 2017 | $ | 213,464 | $ | 7,554 | $ | 221,018 | $ | 119,198 | $ | 340,216 | |||||||||
| Net income (loss) | 28,608 | — | 28,608 | (189 | ) | 28,419 | |||||||||||||
| Foreign currency translation adjustment | — | 752 | 752 | 708 | 1,460 | ||||||||||||||
| Share redemption | — | — | — | (6,147 | ) | (6,147 | ) | ||||||||||||
| Distributions to Mohegan Tribe | (12,000 | ) | — | (12,000 | ) | — | (12,000 | ) | |||||||||||
| Distributions from Salishan-Mohegan, LLC to Mohegan Tribe | (150 | ) | — | (150 | ) | — | (150 | ) | |||||||||||
| Balance, March 31, 2018 | $ | 229,922 | $ | 8,306 | $ | 238,228 | $ | 113,570 | $ | 351,798 | |||||||||
| Balance, September 30, 2017 | $ | 196,645 | $ | 1,125 | $ | 197,770 | $ | 111,399 | $ | 309,169 | |||||||||
| Net income (loss) | 57,817 | — | 57,817 | (708 | ) | 57,109 | |||||||||||||
| Foreign currency translation adjustment | — | 7,181 | 7,181 | 9,026 | 16,207 | ||||||||||||||
| Share redemption | — | — | — | (6,147 | ) | (6,147 | ) | ||||||||||||
| Distributions to Mohegan Tribe | (24,000 | ) | — | (24,000 | ) | — | (24,000 | ) | |||||||||||
| Distributions from Salishan-Mohegan, LLC to Mohegan Tribe | (540 | ) | — | (540 | ) | — | (540 | ) | |||||||||||
| Balance, March 31, 2018 | $ | 229,922 | $ | 8,306 | $ | 238,228 | $ | 113,570 | $ | 351,798 | |||||||||
| Balance, December 31, 2016 | $ | 185,480 | $ | (3,791 | ) | $ | 181,689 | $ | 98,412 | $ | 280,101 | ||||||||
| Net income (loss) | 31,470 | — | 31,470 | (74 | ) | 31,396 | |||||||||||||
| Foreign currency translation adjustment | — | 7,205 | 7,205 | 7,804 | 15,009 | ||||||||||||||
| Share-based compensation | — | — | — | 7,569 | 7,569 | ||||||||||||||
| Distributions to Mohegan Tribe | (12,000 | ) | — | (12,000 | ) | — | (12,000 | ) | |||||||||||
| Balance, March 31, 2017 | $ | 204,950 | $ | 3,414 | $ | 208,364 | $ | 113,711 | $ | 322,075 | |||||||||
| Balance, September 30, 2016 | $ | 249,102 | $ | 5,106 | $ | 254,208 | $ | 108,444 | $ | 362,652 | |||||||||
| Net loss | (20,152 | ) | — | (20,152 | ) | (693 | ) | (20,845 | ) | ||||||||||
| Foreign currency translation adjustment | — | (1,692 | ) | (1,692 | ) | (1,609 | ) | (3,301 | ) | ||||||||||
| Share-based compensation | — | — | — | 7,569 | 7,569 | ||||||||||||||
| Distributions to Mohegan Tribe | (24,000 | ) | — | (24,000 | ) | — | (24,000 | ) | |||||||||||
| Balance, March 31, 2017 | $ | 204,950 | $ | 3,414 | $ | 208,364 | $ | 113,711 | $ | 322,075 | |||||||||
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 Six Months Ended | For the Six Months Ended | ||||||
| March 31, 2018 | March 31, 2017 | ||||||
| Cash flows provided by (used in) operating activities: | |||||||
| Net income (loss) | $ | 57,109 | $ | (20,845 | ) | ||
| Adjustments to reconcile net income (loss) to net cash flows provided by operating activities: | |||||||
| Depreciation and amortization | 40,035 | 36,302 | |||||
| Accretion of discounts | 1,798 | — | |||||
| Loss on modification and early extinguishment of debt, net | — | 65,218 | |||||
| Amortization of debt issuance costs, premiums and discounts | 6,227 | 3,521 | |||||
| Provision for losses on receivables | 1,774 | 1,463 | |||||
| Share-based compensation | — | 7,569 | |||||
| Loss on share redemption | 188 | — | |||||
| (Gain) loss on disposition of assets | 331 | (91 | ) | ||||
| Loss from unconsolidated affiliates | 421 | 2,845 | |||||
| Changes in operating assets and liabilities: | |||||||
| Decrease in receivables | 7,871 | 8,639 | |||||
| (Increase) decrease in inventories | (10 | ) | 374 | ||||
| Increase in other assets | (13,339 | ) | (10,166 | ) | |||
| Decrease in trade payables | (4,269 | ) | (2,462 | ) | |||
| Increase in accrued interest | 3 | 12,902 | |||||
| Increase in other liabilities | 5,645 | 7,966 | |||||
| Net cash flows provided by operating activities | 103,784 | 113,235 | |||||
| Cash flows provided by (used in) investing activities: | |||||||
| Purchases of property and equipment, including decreases in construction payables of $11,132 and $2,604, respectively | (83,667 | ) | (31,929 | ) | |||
| Issuance of third-party loans and advances | (1,072 | ) | (1,074 | ) | |||
| Payments received on third-party loans and advances | 92 | 87 | |||||
| Decrease in restricted cash and cash equivalents, net | 16,625 | 6,518 | |||||
| Proceeds from asset sales | 258 | 146 | |||||
| Investments in unconsolidated affiliates | (1,475 | ) | (600 | ) | |||
| Share redemption payments | (1,527 | ) | — | ||||
| Net cash flows used in investing activities | (70,766 | ) | (26,852 | ) | |||
| Cash flows provided by (used in) financing activities: | |||||||
| Prior Senior Secured Credit Facility borrowings - Revolving | — | 35,000 | |||||
| Prior Senior Secured Credit Facility repayments - Revolving | — | (48,000 | ) | ||||
| Prior Senior Secured Credit Facility repayments - Term Loan A | — | (99,986 | ) | ||||
| Prior Senior Secured Credit Facility repayments - Term Loan B | — | (778,175 | ) | ||||
| Senior Secured Credit Facility borrowings - Revolving | 257,000 | 301,000 | |||||
| Senior Secured Credit Facility repayments - Revolving | (216,000 | ) | (284,000 | ) | |||
| Senior Secured Credit Facility borrowings - Term Loan A, net of discount | — | 441,965 | |||||
| Senior Secured Credit Facility repayments - Term Loan A | (43,435 | ) | (16,688 | ) | |||
| Senior Secured Credit Facility borrowings - Term Loan B, net of discount | — | 777,150 | |||||
| Senior Secured Credit Facility repayments - Term Loan B | (23,771 | ) | (1,963 | ) | |||
| Prior Line of Credit borrowings | — | 9,735 | |||||
| Prior Line of Credit repayments | — | (9,735 | ) | ||||
| Line of Credit borrowings | 394,569 | 296,550 | |||||
| Line of Credit repayments | (374,005 | ) | (290,634 | ) | |||
| Proceeds from issuance of Senior Unsecured Notes, net of discount | — | 496,355 | |||||
Mohegan Expo Credit Facility borrowings - Term Loan | 9,200 | — | |||||
| Downs Lodging Credit Facility repayments - Term Loan | — | (21,656 | ) | ||||
| Repayments to Mohegan Tribe | — | (12,920 | ) | ||||
| Repayments of other long-term debt | (138 | ) | (785,327 | ) | |||
| Payments on capital lease obligations | — | (1,521 | ) | ||||
| Distributions to Mohegan Tribe | (24,000 | ) | (24,000 | ) | |||
Distributions from Salishan-Mohegan, LLC to Mohegan Tribe | (540 | ) | — | ||||
| Payments of tender offer and repurchase costs | — | (50,308 | ) | ||||
| Payments of financing fees | (19 | ) | (22,106 | ) | |||
| Net cash flows used in financing activities | (21,139 | ) | (89,264 | ) | |||
| Net increase (decrease) in cash and cash equivalents | 11,879 | (2,881 | ) | ||||
| Effect of exchange rate on cash and cash equivalents | 228 | (16 | ) | ||||
| Cash and cash equivalents at beginning of period | 88,953 | 83,743 | |||||
| Cash and cash equivalents at end of period | $ | 101,060 | $ | 80,846 | |||
| Supplemental disclosures: | |||||||
| Cash paid during the period for interest | $ | 53,119 | $ | 42,220 | |||
| Conversion of Redemption Liability to Redemption Note Payable | $ | 74,084 | $ | — | |||
| Share redemption | $ | 6,335 | $ | — | |||
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 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. In June 2017, the Mohegan Tribal Gaming Authority announced a corporate effort to align its brand image with its expanding business, and accordingly rebranded, and is now doing business as Mohegan Gaming & Entertainment (the “Company”).
The Tribe is a federally-recognized Indian tribe with an approximately 595-acre reservation situated in southeastern Connecticut, adjacent to Uncasville, Connecticut. Under the Indian Gaming Regulatory Act of 1988, federally-recognized Indian tribes are permitted to conduct full-scale casino gaming operations on tribal lands, subject to, among other things, the negotiation of a compact with the affected state. The Tribe and the State of Connecticut entered into such a compact (the “Mohegan Compact”), which was approved by the United States Secretary of the Interior. The Company is primarily engaged in the ownership, operation and development of gaming facilities. In October 1996, the Company opened Mohegan Sun, a gaming and entertainment complex situated on an approximately 196-acre site on the Tribe's reservation. The Company 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 Company's Management Board.
As of March 31, 2018, the following subsidiaries were wholly-owned by the Company: Mohegan Basketball Club, LLC (“MBC”), Mohegan Golf, LLC (“Mohegan Golf”), Mohegan Lacrosse, LLC (“Mohegan Lacrosse”), Mohegan Expo Center, LLC (“Mohegan Expo”), Mohegan Commercial Ventures-PA, LLC (“MCV-PA”), Mohegan Ventures-Northwest, LLC (“Mohegan Ventures-NW”) and Mohegan Gaming Advisors, LLC (“Mohegan Gaming Advisors”).
MBC owns and operates the Connecticut Sun, a professional basketball team in the Women's National Basketball Association (the “WNBA”). MBC currently owns a 4.2% membership interest in WNBA, LLC.
Mohegan Golf owns and operates the Mohegan Sun Golf Club in southeastern Connecticut.
Mohegan Lacrosse holds a 50% membership interest in New England Black Wolves, LLC (“NEBW”). NEBW owns and operates the New England Black Wolves, a professional indoor lacrosse team in the National Lacrosse League.
Mohegan Expo was formed to finance, build and operate an exposition and convention center to be located adjacent to Mohegan Sun.
MCV-PA holds a 0.01% general partnership interest in each of Downs Racing, L.P. (“Downs Racing”), Backside, L.P., Mill Creek Land, L.P. and Northeast Concessions, L.P. (collectively, along with MCV-PA, the “Pocono Subsidiaries”), while the Company holds the remaining 99.99% limited partnership interest in each entity. Downs Racing owns and operates Mohegan Sun Pocono, a gaming and entertainment facility situated on an approximately 400-acre site in Plains Township, Pennsylvania, and several off-track wagering facilities located elsewhere in Pennsylvania (collectively, the “Pennsylvania Facilities”).
The Company views the operations of Mohegan Sun, MBC, Mohegan Golf and Mohegan Lacrosse (collectively, the “Connecticut Facilities”) and the Pennsylvania Facilities as two separate operating segments.
Mohegan Ventures-NW and a subsidiary of the Tribe hold 81.92% and 18.08% membership interests in Salishan-Mohegan, LLC (“Salishan-Mohegan”), respectively. Salishan-Mohegan was formed to participate in the development and management of ilani Casino Resort, a gaming and entertainment facility owned by the federally-recognized Cowlitz Indian Tribe (the “Cowlitz Tribe”) and the Cowlitz Tribal Gaming Authority (the “CTGA”), which opened in April 2017 on the Cowlitz reservation in Clark County, Washington (the “Cowlitz Project”).
Mohegan Ventures-NW and a subsidiary of the Tribe also hold 49.15% and 10.85% membership interests in Salishan-Mohegan Development Company, LLC (“SMDC”), respectively. SMDC was formed as a joint venture development entity to which Salishan-Mohegan assigned the right of first refusal for certain subsequent material expansion or future development, as provided in the development agreement for the Cowlitz Project.
7
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Mohegan Gaming Advisors was formed to pursue gaming opportunities outside the state of Connecticut, including management contracts and consulting agreements for casino and entertainment properties. As of March 31, 2018, the subsidiary and investment interests held by Mohegan Gaming Advisors include the following:
| • | a 100% membership interest in MGA Holding NJ, LLC (“MGA Holding NJ”) and MGA Gaming NJ, LLC (collectively, the “Mohegan NJ Entities”). The Mohegan NJ Entities were formed to pursue management contracts and consulting agreements in the state of New Jersey. MGA Holding NJ holds a 10% ownership interest in Resorts Casino Hotel in Atlantic City, New Jersey, and its associated gaming activities, including on-line gaming in the state of New Jersey. |
| • | a 100% membership interest in MGA Holding MA, LLC (“MGA Holding MA”) and MGA Gaming MA, LLC (“MGA Gaming MA”). MGA Holding MA holds a 100% membership interest in MGA Palmer Partners, LLC (“MGA Palmer Partners”). MGA Palmer Partners holds a 100% membership interest in Mohegan Sun Massachusetts, LLC (“Mohegan Sun Massachusetts” and, together with MGA Holding MA, MGA Gaming MA and MGA Palmer Partners, collectively referred to herein as the “Mohegan MA Entities”). The Mohegan MA Entities were formed to pursue gaming opportunities in the commonwealth of Massachusetts. |
| • | a 50.19% membership interest in Inspire Integrated Resort Co., Ltd. (“Inspire Integrated Resort”). Inspire Integrated Resort was formed to pursue gaming opportunities in South Korea ("Project Inspire"). |
| • | a 100% membership interest in MGA Korea, LLC (“MGA Korea”). MGA Korea was formed to support certain activities related to Project Inspire. |
| • | a 100% membership interest in MGNV, LLC (“MGNV”). MGNV was formed to pursue gaming, hospitality and entertainment opportunities in the state of Nevada. |
| • | a 100% membership interest in MGLA, LLC (“MGLA”). MGLA was formed to pursue gaming, hospitality and entertainment opportunities in the state of Louisiana. |
| • | a 100% membership interest in MGBR, LLC (“MGBR”). MGBR was formed to pursue gaming, hospitality and entertainment opportunities in South America. MGBR holds a 7.4% membership interest in an unaffiliated third-party limited liability company. |
| • | a 100% membership interest in MGDR, LLC (“MGDR”). MGDR was formed to pursue gaming, hospitality and entertainment opportunities in the Caribbean. |
The Company holds a 50% membership interest in MMCT Venture, LLC (“MMCT”). MMCT was formed with the Mashantucket Pequot Tribe (the “MPT”) to pursue additional gaming opportunities in the state of Connecticut.
NOTE 2—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 (“US GAAP”) 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 US GAAP 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 US GAAP. In management's opinion, all adjustments, including normal recurring accruals and adjustments, necessary for a fair statement of the Company's operating results for the interim period, have been included.
The gaming market in the Northeastern United States is seasonal in nature, with peak gaming activities often occurring at Mohegan Sun and Mohegan Sun Pocono during the months of May through August. Accordingly, the Company's operating results for the three months and six months ended March 31, 2018 are not necessarily indicative of operating results for other interim periods or an entire fiscal year.
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company 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 (“VIE”), the accounts of Salishan-Mohegan are consolidated into the accounts of Mohegan Ventures-NW (refer to Note 6), the accounts of Inspire Integrated Resort are consolidated
8
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
into the accounts of Mohegan Gaming Advisors (refer to Note 7) and the accounts of NEBW are consolidated into the accounts of Mohegan Lacrosse as Mohegan Ventures-NW, Mohegan Gaming Advisors and Mohegan Lacrosse are deemed to be the primary beneficiaries. A primary beneficiary is defined as the party that has both the power to direct the activities that most significantly impact the VIE's economic performance and the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. To determine whether the Company's interest in a VIE could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of its involvement in the VIE. The Company assesses whether it is the primary beneficiary of a VIE or the holder of a significant variable interest in a VIE on an on-going basis. In consolidation, all inter-company balances and transactions were eliminated.
Long-Term Receivables
Long-term receivables, which are included in other assets, net, in the accompanying condensed consolidated balance sheets, consist primarily of receivables from affiliates and others.
Long-term receivables from affiliates consist of reimbursable costs and expenses advanced by Salishan-Mohegan on behalf of the Cowlitz Tribe for the Cowlitz Project (refer to Note 6). The Company maintains a reserve for doubtful collection of the remaining Salishan-Mohegan receivables, which is based on the Company's estimate of the probability that the receivables will be collected. The Company assesses the adequacy of this reserve on a quarterly basis. Future developments relating to the Cowlitz Project, including cash flows generated by the casino resort, CTGA's debt covenant restrictions and other matters affecting the project could affect the collectability of these receivables and the related reserve.
Long-term receivables from others consist of funds loaned to a third-party in connection with the Cowlitz Project and a loan to a tenant of Mohegan Sun. The Company considered maintaining a reserve for doubtful collection of these receivables based on the Company's estimate of the probability that the receivables will be collected considering historical experience, creditworthiness of the related third-party and tenant and all other available information; however, no such reserve was deemed necessary as of March 31, 2018 and September 30, 2017.
A receivable is charged off against the reserve when the Company believes it is probable the receivable will not be recovered. The Company believes that there is no concentration of credit risk for which a reserve has not been established.
The following table presents a reconciliation of long-term receivables and the related reserve for doubtful collection of these long-term receivables (in thousands):
| Long-Term Receivables | |||||||||||
| Affiliates | Others | Total | |||||||||
| Balance, December 31, 2017 (1) | $ | 95,170 | $ | 5,743 | $ | 100,913 | |||||
| Additions: | |||||||||||
| Advances and other loans, including interest receivable | 3,032 | 823 | 3,855 | ||||||||
| Deductions: | |||||||||||
| Reclassification to current portion | — | (49 | ) | (49 | ) | ||||||
| Balance, March 31, 2018 (1) | $ | 98,202 | $ | 6,517 | $ | 104,719 | |||||
| Balance, September 30, 2017 (1) | $ | 92,304 | $ | 5,286 | $ | 97,590 | |||||
| Additions: | |||||||||||
| Advances and other loans, including interest receivable | 5,898 | 1,329 | 7,227 | ||||||||
| Deductions: | |||||||||||
| Reclassification to current portion | — | (98 | ) | (98 | ) | ||||||
| Balance, March 31, 2018 (1) | $ | 98,202 | $ | 6,517 | $ | 104,719 | |||||
| (1) | Includes interest receivable of $67.7 million, $64.5 million and $61.5 million as of March 31, 2018, December 31, 2017 and September 30, 2017, respectively. |
9
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
| Reserves for Doubtful Collection of Long-Term Receivables | |||||||||||
| Affiliates | Others | Total | |||||||||
| Balance, December 31, 2017 | $ | 9,517 | $ | — | $ | 9,517 | |||||
| Additions: | |||||||||||
| Charges to bad debt expense | 303 | — | 303 | ||||||||
| Balance, March 31, 2018 | $ | 9,820 | $ | — | $ | 9,820 | |||||
| Balance, September 30, 2017 | $ | 9,230 | $ | — | $ | 9,230 | |||||
| Additions: | |||||||||||
| Charges to bad debt expense | 590 | — | 590 | ||||||||
| Balance, March 31, 2018 | $ | 9,820 | $ | — | $ | 9,820 | |||||
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 Company could realize in a current market transaction.
The Company 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 Company's estimates or assumptions that market participants would utilize in pricing such assets or liabilities. |
The Company'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.
The carrying amount of cash and cash equivalents, restricted cash and cash equivalents, receivables, trade payables and promissory notes and certain credit facilities approximates fair value. The estimated fair value of the Company's financing facilities and notes were as follows (in thousands):
| March 31, 2018 | |||||||
| Carrying Value | Fair Value | ||||||
| Senior Secured Credit Facility - Revolving | $ | 41,000 | $ | 40,795 | |||
| Senior Secured Credit Facility - Term Loan A | $ | 345,242 | $ | 350,624 | |||
| Senior Secured Credit Facility - Term Loan B | $ | 738,584 | $ | 753,453 | |||
| 2016 7 7/8% Senior Unsecured Notes | $ | 488,278 | $ | 497,500 | |||
| Mohegan Expo Credit Facility - Term Loan | $ | 22,398 | $ | 23,900 | |||
The estimated fair values of the Company's financing facilities and notes were based on Level 2 inputs (quoted market prices or prices of similar instruments) on or about March 31, 2018.
Additional Cash Flow Information
Please refer to Note 6 for a description of certain non-cash transactions relating to the Cowlitz Project.
New Accounting Standards
The following accounting standard was adopted during the three months ended December 31, 2017:
In October 2016, the FASB issued an accounting standards update which modifies existing guidance with respect to the method utilized by a decision maker, which holds an indirect interest in a VIE through a common control party, to determine whether it is the primary beneficiary of the VIE. This guidance is required for annual reporting periods beginning after December 15, 2016, and interim reporting periods thereafter. The Company adopted this guidance in its first quarter of fiscal 2018 and its adoption did not impact the Company's financial statements.
10
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
The following accounting standards will be adopted in future reporting periods:
In May 2014, the FASB issued an accounting standards update on revenue recognition pertaining to all contracts with customers. The update requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. This guidance is required to be applied on a retrospective basis, using one of two methodologies, and was to be effective for annual reporting periods beginning after December 15, 2016, with early application not being permitted. However, in July 2015, the FASB deferred the effective date by one year. This guidance is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Entities are permitted to adopt the guidance as of the original effective date. The FASB has since issued several accounting standards updates to further clarify this guidance including: (1) principal versus agent considerations, (2) identifying performance obligations and licensing, (3) narrow-scope improvements and practical expedients and (4) technical corrections and improvements. The Company is currently assessing the impact the adoption of this guidance will have on its consolidated financial statements and accompanying notes. Under the new guidance, the Company believes that it will no longer be permitted to recognize revenues for complimentary goods and services that are provided to patrons to incentivize gaming activities as gross revenues with a corresponding offset to promotional allowances to arrive at net revenues. Instead, the Company expects that a majority of such revenues, that are complimentary in nature, will be recorded as an offset to gaming revenues. Under the new guidance, the accounting for Momentum Dollars awarded under the Company’s loyalty rewards program will also change. Momentum Dollars earned by patrons through past revenue transactions will be identified as separate performance obligations and recorded as reductions to gaming revenues when earned at the retail value of such benefits owed to the patrons (less estimated breakage). Upon redemption of these benefits by patrons and the fulfillment of the related performance obligations by the Company, revenues will be recorded within the revenue segment that provided the goods or services (food and beverage, hotel or retail, entertainment and other). In addition, this guidance provides substantial revision to annual and interim financial statement disclosures. This guidance allows for either full retrospective adoption, meaning that the guidance should be applied to all periods presented, or modified retrospective adoption, meaning that the guidance should be applied only to the most current period presented with the cumulative effect of its adoption recognized at the date of initial application. The Company expects to adopt this guidance in its first quarter of fiscal 2019 on a full retrospective basis.
In February 2016, the FASB issued new guidance pertaining to leases based on the principle that entities should recognize assets and liabilities arising from leases. This guidance does not significantly change lessees’ recognition, measurement and presentation of expenses and cash flows from previous accounting standards. Leases are classified as operating or financing. The primary change in the guidance is the requirement for entities to recognize right-of-use assets representing the right to use leased assets and lease liabilities for payments during the term of operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize assets and liabilities for leases with terms of twelve months or less. Lessors' treatment of leases under this guidance is largely unchanged from previous accounting standards. In addition, the guidance expands disclosure requirements for lease arrangements. This guidance is required to be applied on a modified retrospective basis, which includes a number of practical expedients, and is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods, with early application permitted. The Company is currently evaluating the impact that this guidance will have on its financial statements.
In November 2016, the FASB issued an accounting standards update which clarifies the classification and presentation of restricted cash in the statement of cash flows. The update requires that a statement of cash flows explain the total change during the period in cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This guidance is required to be applied on a retrospective basis and is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods, with early application permitted. The Company expects to adopt this guidance in its first quarter of fiscal 2019 and is currently evaluating the impact that it will have on its statement of cash flows.
In January 2017, the FASB issued an accounting standards update which eliminates the second step in the goodwill impairment test that requires an entity to determine the implied fair value of the reporting unit's goodwill. Instead, an entity would recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. This guidance is required to be applied to goodwill impairment tests conducted for annual reporting periods beginning after December 15, 2019, including interim reporting periods, with early adoption permitted. The Company is currently evaluating the impact that this guidance will have on its financial statements.
11
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
NOTE 3—LONG-TERM DEBT:
Long-term debt consisted of the following (in thousands, including current maturities):
| March 31, 2018 | September 30, 2017 | ||||||
| Senior Secured Credit Facility - Revolving, due October 2021 | $ | 41,000 | $ | — | |||
| Senior Secured Credit Facility - Term Loan A, due October 2021, net of discount and debt issuance costs of $6,261 and $7,415, respectively | 345,242 | 387,523 | |||||
| Senior Secured Credit Facility - Term Loan B, due October 2023, net of discount and debt issuance costs of $16,757 and $18,073, respectively | 738,584 | 761,039 | |||||
| 2016 7 7/8% Senior Unsecured Notes, due October 2024, net of discount and debt issuance costs of $11,722 and $12,383, respectively | 488,278 | 487,617 | |||||
| Line of Credit | 20,564 | — | |||||
Mohegan Expo Credit Facility, due April 2022, net of debt issuance costs of $1,502 and $1,683, respectively | 22,398 | 13,017 | |||||
| Other | 1,875 | 2,013 | |||||
| Long-term debt | 1,657,941 | 1,651,209 | |||||
| Less: current portion of long-term debt | (92,009 | ) | (75,131 | ) | |||
| Long-term debt, net of current portion | $ | 1,565,932 | $ | 1,576,078 | |||
Senior Secured Credit Facilities
In October 2016, the Company entered into a Credit Agreement among the Company, the Tribe, Citizens Bank, N.A., as Administrative and Collateral Agent, and the other lenders and financial institutions party thereto, providing for $1.4 billion in aggregate principal amount of senior secured credit facilities (the “Senior Secured Credit Facilities”), comprised of a $170.0 million senior secured revolving credit facility (the “Revolving Facility”), a $445.0 million senior secured term loan A facility (the “Term Loan A Facility”) and a $785.0 million senior secured term loan B facility (the “Term Loan B Facility). The Senior Secured Credit Facilities mature on October 13, 2021 (in the case of the Revolving Facility and the Term Loan A Facility) and October 13, 2023 (in the case of the Term Loan B Facility).
In April 2017, the Company entered into a first amendment to the Senior Secured Credit Facilities. The amendment reduced the interest rate margins applicable to the Revolving Facility, Term Loan A Facility and Term Loan B Facility by 0.50%.
The Term Loan A Facility amortizes in equal quarterly installments in an aggregate annual amount equal to 15.0% of the initial aggregate principal amount of the Term Loan A Facility for the first two years after the closing date, 10.0% of the initial aggregate principal amount of the Term Loan A Facility for the third year after the closing date and 7.5% of the initial aggregate principal amount of the Term Loan A Facility in each year thereafter, with the balance payable on the maturity date of the Term Loan A Facility. The Term Loan B Facility amortizes in equal quarterly installments in an aggregate annual amount equal to 1.0% of the initial aggregate principal amount of the Term Loan B Facility. Amortization of the Term Loan A Facility and Term Loan B Facility began with the first full fiscal quarter after the closing date.
The proceeds from the Term Loan A Facility and Term Loan B Facility, together with a drawing under the Revolving Facility and proceeds from the 2016 Senior Unsecured Notes (as defined below), were used to: (i) satisfy in full all amounts outstanding under the Company’s Prior Senior Secured Credit Facilities, (ii) repurchase the Company’s 2013 Senior Unsecured Notes and 2012 Senior Subordinated Notes, (iii) prepay all amounts outstanding under the Company’s 2015 Senior Unsecured Notes and (iv) satisfy certain other obligations and pay related fees and expenses. The Revolving Facility is otherwise available for general corporate purposes.
As of March 31, 2018, amounts outstanding under the Revolving Facility, Term Loan A Facility and Term Loan B Facility totaled $41.0 million, $351.5 million and $755.3 million, respectively. As of March 31, 2018, letters of credit issued under the Revolving Facility totaled $2.3 million, of which no amounts were drawn. Inclusive of letters of credit, which reduce borrowing availability under the Revolving Facility, the Company had approximately $106.2 million of borrowing capacity under its Revolving Facility and Line of Credit as of March 31, 2018.
As amended, borrowings under the Senior Secured Credit Facilities accrue interest as follows: (i) for base rate loans under the Revolving Facility and Term Loan A Facility, at a base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 50 basis points and (c) the one-month LIBOR rate plus 100 basis points (the highest of (a), (b) and (c), the “base rate”), plus a total leverage-based margin of 100 to 275 basis points; (ii) for Eurodollar rate loans under the Revolving Facility and Term Loan A Facility, at the applicable LIBOR rate (subject to a 0.0% LIBOR floor) plus a total leverage-based margin of 200 to 375 basis points; (iii) for base rate loans under the Term Loan B Facility, at the base rate plus 300 basis points; and (iv) for
12
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Eurodollar rate loans under the Term Loan B Facility, at the applicable LIBOR rate (subject to a 1.0% LIBOR floor) plus 400 basis points. The Company is also required to pay a total leverage-based undrawn commitment fee of between 37.5 and 50 basis points under the Revolving Facility. 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 in arrears, but not less frequently than quarterly.
As of March 31, 2018, the $41.0 million outstanding under the Revolving Facility was comprised of a $15.0 million base rate loan with a base rate of 4.75% plus 275 basis points and a $26.0 million Eurodollar rate loan with a Eurodollar rate of 1.74% plus 375 basis points. The commitment fee was 0.50% as of March 31, 2018. As of March 31, 2018, interest on the $351.5 million outstanding under the Term Loan A Facility was based on a Eurodollar rate of 1.88% plus 375 basis points. As of March 31, 2018, interest on the $755.3 million outstanding under the Term Loan B Facility was based on a Eurodollar rate of 1.88% plus 400 basis points. As of March 31, 2018 and September 30, 2017, accrued interest, including commitment fees, on the Senior Secured Credit Facilities was $763,000 and $829,000, respectively.
The Company's obligations under the Senior Secured Credit Facilities are fully and unconditionally guaranteed, jointly and severally, by the Pocono Subsidiaries, MBC, Mohegan Golf and Mohegan Ventures-NW (collectively, the “Guarantors”; and the Guarantors other than MBC, collectively, the “Grantors”). The collateral securing the Senior Secured Credit Facilities constitutes substantially all of the Company’s and the Grantors’ property and assets. In the future, certain other subsidiaries of the Company may be required to become Guarantors and/or Grantors in accordance with the terms of the Senior Secured Credit Facilities.
The Senior Secured Credit Facilities contain customary covenants applicable to the Company and its restricted subsidiaries, including covenants governing: incurrence of indebtedness, incurrence of liens, payment of dividends and other distributions, investments, asset sales, affiliate transactions and mergers or consolidations. The Senior Secured Credit Facilities also include financial maintenance covenants pertaining to total leverage, senior secured leverage and minimum fixed charge coverage. In addition, the Senior Secured Credit Facilities contain customary events of default relating to, among other things, failure to make required payments, breach of covenants and breach of representations.
As of March 31, 2018, the Company and the Tribe were in compliance with all respective covenant requirements under the Senior Secured Credit Facilities.
Senior Unsecured Notes
2016 7 7/8% Senior Unsecured Notes
In October 2016, the Company issued $500.0 million senior unsecured notes with fixed interest payable at a rate of 7.875% per annum (the “2016 Senior Unsecured Notes”). The 2016 Senior Unsecured Notes mature on October 15, 2024. Interest on the 2016 Senior Unsecured Notes is payable semi-annually in arrears on April 15 and October 15. As of March 31, 2018 and September 30, 2017, accrued interest on the 2016 Senior Unsecured Notes was $18.1 million.
At any time prior to October 15, 2019, the Company may redeem the 2016 Senior Unsecured Notes, in whole or in part, at a price equal to 100% of the principal amount of the 2016 Senior Unsecured Notes redeemed plus accrued and unpaid interest, if any, to the date of redemption and a make-whole premium. The 2016 Senior Unsecured Notes are redeemable at the Company’s option, in whole or in part, at any time on or after October 15, 2019, at specified redemption prices, plus accrued and unpaid interest, if any, to the date of redemption. If the Company experiences specific kinds of change-of-control triggering events, it is required to make an offer to repurchase the 2016 Senior Unsecured Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest, if any. Additionally, if the Company undertakes specific kinds of asset sales and does not use the related sale proceeds for specified purposes, the Company may be required to offer to repurchase the 2016 Senior Unsecured Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest, if any. In certain circumstances, if any gaming regulatory authority requires a holder or beneficial owner of the 2016 Senior Unsecured Notes to be licensed, qualified or found suitable under applicable gaming laws, and such holder or beneficial owner does not obtain such license, qualification or finding of suitability within a specified time, the Company can require such holder or beneficial owner to dispose of its 2016 Senior Unsecured Notes or call for redemption of the 2016 Senior Unsecured Notes held by such holder or beneficial owner at a price equal to accrued and unpaid interest, if any, plus the lesser of 100% of the principal amount thereof or the price paid for such notes by such holder or beneficial owner.
The 2016 Senior Unsecured Notes are unsecured, unsubordinated obligations of the Company. The 2016 Senior Unsecured Notes are guaranteed by the Guarantors and will be guaranteed by any restricted subsidiary of the Company that becomes a guarantor in accordance with the terms of the 2016 Senior Unsecured Notes indenture.
The 2016 Senior Unsecured Notes indenture contains certain covenants that, subject to certain significant exceptions, limit, among other things, the Company’s and the Guarantors’ ability to incur additional debt, pay dividends or distributions, make
13
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
certain investments, create liens on assets, enter into transactions with affiliates, merge or consolidate with another company or transfer and sell assets. The 2016 Senior Unsecured Notes indenture also includes customary events of default, including, but not limited to, failure to make required payments, failure to comply with certain agreements or covenants, failure to pay certain other indebtedness the occurrence of which is caused by a failure to pay principal, premium or interest or results in the acceleration of such indebtedness, certain events of bankruptcy and insolvency and certain judgment defaults.
As of March 31, 2018, the Company and the Tribe were in compliance with all respective covenant requirements under the 2016 Senior Unsecured Notes indenture.
The 2016 Senior Unsecured 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.
The Company or its affiliates may, from time to time, seek to purchase or otherwise retire outstanding indebtedness for cash in open market purchases, privately negotiated transactions or otherwise. Any such transaction will depend on prevailing market conditions and the Company's liquidity and covenant requirement restrictions, among other factors.
Facility Agreement for Senior Unsecured Notes
In November 2015, the Company entered into an agreement (the “Facility Agreement”) by and among the Company, the Tribe and UBS AG, London Branch (“UBS”). Pursuant to the Facility Agreement, the Company may currently issue, from time to time, to UBS or its designee, senior unsecured notes in an aggregate principal amount of up to $100.0 million, in varying amounts and with varying borrowing dates, maturities and interest rates, as agreed with UBS or its designee.
Line of Credit
In October 2016, in connection with the new Senior Secured Credit Facilities, the Company entered into a $25.0 million revolving credit facility with Bank of America, N.A. (the “Line of Credit”). The Line of Credit is coterminous with the Senior Secured Credit Facilities. Pursuant to provisions of the Senior Secured Credit Facilities, under certain circumstances, the Line of Credit may be converted into loans under the Senior Secured Credit Facilities. Under the Line of Credit, each advance accrues interest on the basis of a one-month LIBOR rate plus an applicable margin based on the Company's total leverage ratio, as each term is defined under the Line of Credit, as amended. As of March 31, 2018, interest on the $20.6 million outstanding under the
Line of Credit was based on a rate of 4.91%. Borrowings under the Line of Credit are uncollateralized general obligations of the Company. The Line of Credit contains negative covenants and financial maintenance covenants that are substantially the same as those contained in the Senior Secured Credit Facilities. As of March 31, 2018, the Company was in compliance with all covenant requirements under the Line of Credit. As of March 31, 2018 and September 30, 2017, accrued interest on the Line of Credit was $48,000 and $37,000, respectively.
Mohegan Expo Credit Facility
In April 2017, the Company, through its wholly-owned subsidiary, Mohegan Expo, entered into a loan agreement with certain third-party lenders providing for a $25.0 million tax-exempt senior secured multi-draw term loan with an approximately $8.3 million increase option (the “Mohegan Expo Credit Facility”). In September 2017, Mohegan Expo exercised the Mohegan Expo Credit Facility increase option. The proceeds from the Mohegan Expo Credit Facility were used to partially finance the construction of an approximately $80.0 million, 240,000-square-foot exposition and convention center being constructed adjacent to Mohegan Sun on land leased to Mohegan Expo by the Company (the “Mohegan Sun Exposition and Convention Center”). The remainder of the construction costs for the Mohegan Sun Exposition and Convention Center are being funded through investments by the Company. Construction on the Mohegan Sun Exposition and Convention Center commenced in March 2017 and it is expected to open in the summer of 2018.
The Mohegan Expo Credit Facility matures on April 22, 2022. Principal outstanding under the Mohegan Expo Credit Facility amortizes at a rate of 7.5% per annum, payable quarterly, commencing October 1, 2018. As of March 31, 2018, borrowings under the Mohegan Expo Credit Facility accrued interest at a variable rate per annum equal to the following: the product of (a) the sum of (i) the LIBOR rate and (ii) 4.79% and (b) 70 basis points. There is also a fee of 0.50% per annum charged on undrawn amounts, payable quarterly in arrears. Interest is payable monthly through July 1, 2018 and quarterly in arrears thereafter through the maturity date. Mohegan Expo is required to maintain a six-month debt service reserve in a designated account under the Mohegan Expo Credit Facility. As of March 31, 2018, interest on the $23.9 million outstanding under the Mohegan Expo Credit Facility was based on a rate of approximately 5.25%.
14
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
The Mohegan Expo Credit Facility is a senior secured obligation of Mohegan Expo, collateralized by: (1) all existing and future assets of Mohegan Expo and (2) a contribution agreement pursuant to which the Company has agreed to make certain contingent cash contributions to Mohegan Expo to the extent required to: (a) complete the Mohegan Sun Exposition and Convention Center or (b) fund any shortfalls in the repayment of debt service under the Mohegan Expo Credit Facility. The Mohegan Expo Credit Facility subjects Mohegan Expo to certain covenant requirements customarily found in loan agreements for similar transactions. As of March 31, 2018 and September 30, 2017, accrued interest on the Mohegan Expo Credit Facility was $122,000 and $65,000, respectively.
NOTE 4—RELATED PARTY TRANSACTIONS:
Distributions
Distributions to the Tribe totaled $12.0 million for each of the three months ended March 31, 2018 and 2017 and $24.0 million for each of the six months ended March 31, 2018 and 2017.
Under the terms of Salishan-Mohegan’s operating agreement, management fees are allocated to the current members of Salishan-Mohegan based on their respective membership interests (refer to Note 6). Distributions to the Tribe in connection with this agreement totaled $150,000 and $540,000 for the three months and six months ended March 31, 2018, respectively.
Services
The Tribe provides certain governmental and administrative services to the Company. Expenses incurred for such services were recorded within operating costs and expenses in the accompanying condensed consolidated statements of income (loss) and comprehensive income (loss) as follows (in millions):
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||
| March 31, 2018 | March 31, 2017 | March 31, 2018 | March 31, 2017 | ||||||||||||
| Gaming | $ | 1.1 | $ | 1.1 | $ | 2.5 | $ | 2.2 | |||||||
| Advertising, general and administrative | 5.6 | 5.4 | 11.4 | 10.7 | |||||||||||
| Corporate | 1.6 | 1.5 | 3.3 | 3.1 | |||||||||||
| Total | $ | 8.3 | $ | 8.0 | $ | 17.2 | $ | 16.0 | |||||||
As of March 31, 2018, prepaid governmental and administrative services totaled $4.0 million and was included in due from Mohegan Tribe in the accompanying condensed consolidated balance sheet. As of September 30, 2017, there were no prepaid governmental and administrative services.
The Company purchases most of its utilities, including electricity, gas, water and waste water services, from an instrumentality of the Tribe, the Mohegan Tribal Utility Authority. The Company incurred costs for such utilities totaling $5.2 million and $4.7 million for the three months ended March 31, 2018 and 2017, respectively, and $9.9 million and $8.9 million for the six months ended March 31, 2018 and 2017, respectively. These costs were recorded within advertising, general and administrative costs and expenses in the accompanying condensed consolidated statements of income (loss) and comprehensive income (loss).
Leases
The Company leases the land on which Mohegan Sun is located from the Tribe under a long-term lease agreement. This lease agreement was amended and restated in October 2016. The lease agreement requires the Company to make a nominal annual rental payment. This lease has an initial term of 25 years and is renewable by the Company for an additional 25-year term upon expiration.
In July 2008, the Company entered into an additional land lease agreement with the Tribe relating to property located adjacent to the Tribe's reservation that is utilized by Mohegan Sun for employee parking. This lease agreement required the Company to make monthly payments equaling $75,000 until maturity on June 30, 2018. The Company 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. This land lease was paid off and terminated in October 2016 and the property was merged into the land under the long-term lease agreement with the Tribe referenced above.
In March 2015, the Company entered into a sublease agreement with a subsidiary of the Tribe, the Mohegan Tribal Finance Authority, to sublease the Earth Hotel Tower and related improvements for the purpose of operating the hotel on a triple net basis for a term of 28 years and 4 months. The Company also entered into a similar sublease agreement with the Tribe to sublease a related connector which connects the Earth Hotel Tower to the Sky Hotel lobby. Rental payments under these leases commenced with the opening of the Earth Hotel Tower, which occurred in November 2016. The Company classified these leases as operating
15
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
leases for financial reporting purposes in accordance with authoritative guidance issued by the FASB pertaining to the accounting for leases. On December 15, 2017, the Company purchased the connector for a purchase price of $8.5 million and terminated the related sublease agreement. The Company incurred lease expenses associated with these leases totaling $2.2 million and $2.3 million for the three months ended March 31, 2018 and 2017, respectively, and $4.5 million and $4.0 million for the six months ended March 31, 2018 and 2017, respectively. These expenses were recorded within hotel operating costs and expenses in the accompanying condensed consolidated statements of income (loss) and comprehensive income (loss).
Due from Mohegan Tribe
As of March 31, 2018 and September 30, 2017, due from Mohegan Tribe consisted primarily of a long-term loan receivable due from the Tribe. The Company, together with the Tribe, offer a benefit plan for certain eligible employees (the “Mohegan Benefit Plan”). The Mohegan Benefit Plan is sponsored by the Tribe for the benefit of participants who authorize the purchase of life insurance policies as a means of providing certain life insurance benefits to the participants and their spouses as joint insured. The life insurance policies are established on the life of each participant, and each premium contribution provided by the Company to the Tribe on behalf of the participant is treated as a loan from the Company to the Tribe and, in turn, as a loan from the Tribe to the participant, for legal, tax and financial reporting purposes. The loans from the Company to the Tribe are recorded as a long-term loan receivable. This loan receivable is required to be repaid by the Tribe. Accordingly, the Tribe retains an interest in each participant’s death benefit from the life insurance policies that will provide the Company with full repayment of the accumulated loan receivable at the death of the applicable participants insured under the life insurance policies.
Due to Mohegan Tribe
As of March 31, 2018 and September 30, 2017, due to Mohegan Tribe consisted primarily of outstanding lease payments related to the Earth Hotel Tower.
Other
As of March 31, 2018 and September 30, 2017, funds loaned, including accrued interest, to Salishan Company, LLC and its owner in connection with the Cowlitz Project which are included in other assets, net in the accompanying condensed consolidated balance sheets totaled $6.4 million and $5.1 million, respectively.
NOTE 5—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 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 Company entered into a settlement agreement with the State of Connecticut regarding contribution payments on the Company's free promotional slot play program. 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 a certain threshold of gross revenues from slot machines for such month. In the event free promotional slot plays granted by the Company exceed such threshold, contribution payments are required on such excess face amount of free promotional slot plays at the same rate as Slot Win Contribution payments, or 25%. The threshold before contribution payments on free promotional slot plays are required is currently 11% of gross revenues from slot machines.
The Company reflected expenses associated with the combined Slot Win Contribution and free promotional slot play contribution totaling $36.6 million and $36.9 million for the three months ended March 31, 2018 and 2017, respectively, and $73.1 million and $73.9 million for the six months ended March 31, 2018 and 2017, respectively. As of March 31, 2018 and September 30, 2017, the combined outstanding Slot Win Contribution and free promotional slot play contribution totaled $13.7 million and $13.0 million, respectively, and were included in other current liabilities in the accompanying condensed consolidated balance sheets.
16
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
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 Pocono. This license permits Downs Racing to install and operate up to 3,000 slot machines at Mohegan Sun Pocono, expandable to up to a total of 5,000 slot machines upon request and approval of the PGCB.
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”), including local share assessments and fees to be paid to or for the support of the counties and municipalities hosting Mohegan Sun Pocono and assessments for the development and support of horse racing in the commonwealth of Pennsylvania. The Pennsylvania Slot Machine Tax, including assessments, has approximated 55% of gross revenues from slot machines. By statute, 2% of the Pennsylvania Slot Machine Tax is allocated to the local county and an additional 2% was 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. In September 2016, the Pennsylvania Supreme Court declared the municipal local share assessment threshold to be unconstitutional and imposed a deadline for legislative action, which was subsequently extended to and expired on May 26, 2017. Downs Racing continued to pay the municipal local share assessment equal to the $10.0 million annual minimum to Plains Township under a memorandum of understanding. On October 30, 2017, the Governor of Pennsylvania signed into law Act 42 of 2017, which amends the Pennsylvania Race Horse Development and Gaming Act. Among other things, Act 42 of 2017 abolished the 2% or $10.0 million municipal local share assessment and replaced it with a new $10.0 million slot machine operation fee. The new slot machine operation fee was effective for the 2017 calendar year, with credits for amounts paid towards the prior municipal local share assessment. The 2% county local share assessment, which is applicable for revenues from both slot machines and table games, was unaffected. Effective January 1, 2018, Act 42 of 2017 also increased the effective Pennsylvania Slot Machine Tax by 1%. Downs Racing maintains a $1.5 million escrow deposit in the name of the Commonwealth of Pennsylvania for the Luzerne County portion of Pennsylvania Slot Machine Tax payments, which was included in other assets, net in the accompanying condensed consolidated balance sheets.
The Company reflected expenses associated with the Pennsylvania Slot Machine Tax totaling $29.1 million and $28.2 million for the three months ended March 31, 2018 and 2017, respectively, and $56.3 million and $55.9 million for the six months ended March 31, 2018 and 2017, respectively. As of March 31, 2018 and September 30, 2017, outstanding Pennsylvania Slot Machine Tax payments totaled $3.8 million and $5.4 million, respectively, and were included in other current liabilities in the accompanying condensed consolidated balance sheets.
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. 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”). The Pennsylvania Table Game Tax is currently 14%, plus the 2% county local share assessment.
The Company reflected expenses associated with the Pennsylvania Table Game Tax totaling $1.5 million and $1.7 million for the three months ended March 31, 2018 and 2017, respectively, and $3.1 million and $3.5 million for the six months ended March 31, 2018 and 2017, respectively. As of March 31, 2018 and September 30, 2017, outstanding Pennsylvania Table Game Tax payments totaled $113,000 and $100,000, respectively, and were included in other current liabilities in the accompanying condensed consolidated balance sheets.
Pennsylvania Regulatory Fee
Slot machine licensees in the commonwealth of Pennsylvania are required to reimburse state gaming regulatory agencies for various administrative and operating expenses (“Pennsylvania Regulatory Fee”) at a rate of 1.7% of gross revenues from slot machines and table games.
The Company reflected expenses associated with the Pennsylvania Regulatory Fee totaling $1.2 million and $1.3 million for the three months ended March 31, 2018 and 2017, respectively, and $2.5 million for each of the six months ended March 31, 2018 and 2017. As of March 31, 2018 and September 30, 2017, outstanding Pennsylvania Regulatory Fee payments to the PGCB totaled $146,000 and $145,000, respectively, and were included in other current liabilities in the accompanying condensed consolidated balance sheets.
17
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Pennsylvania Gaming Control Board Loans
The PGCB was initially granted $36.1 million in loans to fund start-up costs for gaming in the commonwealth of Pennsylvania, which are to be repaid by slot machine licensees (the "Initial Loans"). The PGCB was subsequently granted an additional $63.8 million in loans to fund ongoing gaming oversight costs, which are also to be repaid by slot machine licensees (the "Subsequent Loans").
In June 2011, the PGCB adopted a method of assessment of repayment for the Subsequent Loans pursuant to which repayment commenced on January 1, 2012 and will continue over a 10-year period in accordance with a formula based on a combination of a single fiscal year and cumulative gross revenues from slot machines for each operating slot machine licensee. The Company reflected expenses associated with this repayment schedule totaling $148,000 and $151,000 for the three months ended March 31, 2018 and 2017, respectively, and $297,000 and $303,000 for the six months ended March 31, 2018 and 2017, respectively.
Pursuant to Act 42 of 2017, on December 1, 2017, the PGCB issued an administrative order establishing a repayment schedule for the Initial Loans. Under the repayment schedule, quarterly payments commenced in January 2018 and will continue through June 2019. Accordingly, in fiscal 2017, the Company recorded a $3.2 million charge for its portion of the Initial Loans. As of March 31, 2018 and September 30, 2017, the related liability totaled $2.8 million and $3.2 million, respectively, and were included in other current liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets.
Horsemen’s Agreement
Downs Racing and the Pennsylvania Harness Horsemen’s Association (the “PHHA”) are parties to an agreement that governs all live harness racing and simulcasting and account wagering at the Pennsylvania Facilities through December 31, 2018. As of March 31, 2018 and September 30, 2017, outstanding payments to the PHHA for purses earned by horsemen, but not yet paid, totaled $4.7 million and $4.9 million, respectively, and were included in other current liabilities in the accompanying condensed consolidated balance sheets.
Priority Distribution Agreement
In August 2001, the Company and the Tribe entered into an agreement (the “Priority Distribution Agreement”), which stipulates that the Company must make monthly payments to the Tribe to the extent of the Company's net cash flow as defined under the Priority Distribution Agreement. The Priority Distribution Agreement was amended as of December 31, 2014. As amended, the Priority Distribution Agreement, which has a perpetual term, limits the minimum aggregate priority distribution payments in each calendar year to $40.0 million. Payments under the Priority Distribution Agreement: (1) do not reduce the Company'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 of the Company and are payable only to the extent of the Company'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 Company's assets or properties.
The Company reflected payments associated with the Priority Distribution Agreement totaling $10.0 million for each of the three months ended March 31, 2018 and 2017 and $20.0 million for each of the six months ended March 31, 2018 and 2017.
Litigation and Legal Proceedings
The Company is a defendant in various claims and legal actions resulting from its normal course of business, primarily relating to personal injuries to patrons and damages to patrons' personal assets. The Company estimates litigation claims expense and accrues for such liabilities based upon historical experience. In management's opinion, the aggregate liability, if any, arising from such litigations will not have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 6—MOHEGAN VENTURES-NORTHWEST, LLC (COWLITZ PROJECT):
Mohegan Ventures-NW, a wholly-owned subsidiary of the Company, is a member of Salishan-Mohegan. Salishan-Mohegan was formed to participate in the development and management of ilani Casino Resort, a gaming and entertainment facility owned by the federally-recognized Cowlitz Tribe and CTGA, which opened in April 2017 on the Cowlitz reservation in Clark County, Washington. Mohegan Ventures-NW, Salishan Company, LLC (“Salishan Company”), an unrelated entity, and a subsidiary of the Tribe, previously held membership interests in Salishan-Mohegan of 49.15%, 40% and 10.85%, respectively.
In April 2017, Salishan Company and Salishan-Mohegan entered into a membership interest redemption and withdrawal agreement (the “Redemption and Withdrawal Agreement”), pursuant to which Salishan-Mohegan agreed to redeem all of Salishan
18
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
Company’s right, title and interest in and to its membership interests of Salishan-Mohegan, and Salishan Company agreed to resign and irrevocably withdraw as a member of Salishan-Mohegan. As a result of this withdrawal and the retirement of the related shares, Mohegan Ventures-NW and a subsidiary of the Tribe now hold membership interests in Salishan-Mohegan of 81.92% and 18.08%, respectively. In connection with the Redemption and Withdrawal Agreement, the parties also formed a new development entity, SMDC, to which Salishan-Mohegan assigned the right of first refusal for certain subsequent material expansion or future development, as provided in the development agreement for the Cowlitz Project. Mohegan Ventures-NW, Salishan Company and a subsidiary of the Tribe hold membership interests in SMDC of 49.15%, 40% and 10.85%, respectively.
Salishan-Mohegan and SMDC are not restricted entities of the Company, and therefore, are not guarantors of the Company’s debt obligations.
As consideration for the redemption, Salishan-Mohegan agreed to pay Salishan Company a redemption price, the amount of which was to be determined by binding arbitration. Arbitration was conducted in November 2017 and, on December 4, 2017, the arbitrator determined a final redemption price in the amount of $114.8 million (the “Redemption Price”). Accordingly, in accordance with authoritative guidance issued by the FASB pertaining to the accounting for contingencies, the Company recorded a $68.5 million redemption liability (the “Redemption Liability”) based on the present value of the Redemption Price at April 14, 2017. The Redemption Liability was discounted utilizing the Company’s credit adjusted risk-free investment rate. The Company recognized accretion to the Redemption Liability to reflect the impact of the time value of money. Under the terms of the Redemption and Withdrawal Agreement, on December 15, 2017, Salishan-Mohegan executed and delivered a promissory note (“Redemption Note Payable”) to Salishan Company, pursuant to which Salishan-Mohegan agreed to pay the Redemption Price to Salishan Company in equal monthly installments over a five-year period, commencing in May 2019, subject to set-off for certain amounts owed by Salishan Company or its principal to Salishan-Mohegan or Mohegan Ventures-NW. On December 15, 2017, the Redemption Liability converted to the Redemption Note Payable. The Company recognizes interest expense relating to the amortization of discount to the Redemption Note Payable.
The following table presents a reconciliation of the Redemption Liability (in thousands):
| Redemption Liability | |||
| Balance, September 30, 2017 | $ | 72,351 | |
| Additions: | |||
| Accretion of discount to the Redemption Liability | 1,733 | ||
| Deductions: | |||
| Conversion to Redemption Note Payable on December 15, 2017 | (74,084 | ) | |
| Balance, March 31, 2018 | $ | — | |
The following table presents a reconciliation of the Redemption Note Payable (in thousands):
| Redemption Note Payable | |||
| Balance, December 31, 2017 | $ | 74,491 | |
| Additions: | |||
| Amortization of discount to the Redemption Note Payable | 2,116 | ||
| Balance, March 31, 2018 | $ | 76,607 | |
| Balance, September 30, 2017 | $ | — | |
| Additions: | |||
| Initial Redemption Note Payable on December 15, 2017 | 74,084 | ||
| Amortization of discount to the Redemption Note Payable | 2,523 | ||
| Balance, March 31, 2018 | $ | 76,607 | |
In September 2004, Salishan-Mohegan entered into development and management agreements with the Cowlitz Tribe in connection with the Cowlitz Project, which agreements have been amended from time to time.
Under the terms of the development agreement, Salishan-Mohegan assisted in securing financing, as well as administration and oversight of the planning, design, development, construction and furnishing of the Cowlitz Project. The development agreement provides for development fees of 3% of total project costs, as defined under the development agreement, to be paid to Salishan-Mohegan. Under the terms of Salishan-Mohegan's operating agreement, development fees earned by Salishan-Mohegan are distributed to Mohegan Ventures-NW. In 2006, pursuant to the development agreement, Salishan-Mohegan purchased an approximately 156-acre site for the casino resort. In addition, certain receivables contributed to Salishan-Mohegan and amounts advanced by Salishan-Mohegan on behalf of the Cowlitz Tribe are reimbursable to Salishan-Mohegan by the Cowlitz Tribe, subject to appropriate approvals defined under the development agreement.
19
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
The following table presents a reconciliation of development fees, including accrued interest, (in thousands):
| Development Fees | |||
| Balance, December 31, 2017 | $ | 2,627 | |
| Additions: | |||
| Fees earned, including interest receivable (1) | (230 | ) | |
| Deductions: | |||
| Payments received | (1,000 | ) | |
| Balance, March 31, 2018 | $ | 1,397 | |
| Balance, September 30, 2017 | $ | 3,508 | |
| Additions: | |||
| Fees earned, including interest receivable (1) | 889 | ||
| Deductions: | |||
| Payments received | (3,000 | ) | |
| Balance, March 31, 2018 | $ | 1,397 | |
| (1) | Primarily recorded within retail, entertainment and other revenues in the accompanying condensed consolidated statements of income and comprehensive income for the three months and six months ended March 31, 2018. |
Under the terms of the management agreement, which became effective on May 21, 2017 following approval by the National Indian Gaming Commission, Salishan-Mohegan is obligated to manage, operate and maintain the casino resort for a period of seven years. The management agreement provides for management fees of 24% of net revenues, as defined under the management agreement, which approximates net income earned from the Cowlitz Project. Under the terms of Salishan-Mohegan’s operating agreement, management fees will be allocated to the current members of Salishan-Mohegan based on their respective membership interests.
The following table presents a reconciliation of management fees (in thousands):
| Management Fees | |||
| Balance, December 31, 2017 | $ | 2,393 | |
| Additions: | |||
| Fees earned (1) | 3,389 | ||
| Deductions: | |||
| Payments received (2) | (957 | ) | |
| Balance, March 31, 2018 | $ | 4,825 | |
| Balance, September 30, 2017 | $ | 3,189 | |
| Additions: | |||
| Fees earned (1) | 4,752 | ||
| Deductions: | |||
| Payments received (2) | (3,116 | ) | |
| Balance, March 31, 2018 | $ | 4,825 | |
| (1) | Recorded within retail, entertainment and other revenues in the accompanying condensed consolidated statement of income and comprehensive income for the three months and six months ended March 31, 2018. |
| (2) | Distributions to the Tribe, based on their membership interest, totaled $150,000 and $540,000 for the three months and six months ended March 31, 2018, respectively. |
In December 2015, CTGA obtained financing for the Cowlitz Project. The financing provided funding for construction of the Cowlitz Project and a partial repayment of the Salishan-Mohegan receivables. In connection with this transaction, Salishan-Mohegan was repaid $19.4 million of the Salishan-Mohegan receivables, a portion of which was used to repay certain outstanding debt of Salishan-Mohegan. Under the terms of the development agreement, the remaining outstanding Salishan-Mohegan receivables are to be repaid in equal monthly installments over a seven-year period commencing the first month following the opening of the Cowlitz Project, which occurred in April 2017, subject to conditions of the Cowlitz financing. As of March 31, 2018, the remaining outstanding Salishan-Mohegan receivables accrue interest at an annual rate of 13.0%. Pursuant to the development agreement, repayment of the remaining outstanding Salishan-Mohegan receivables may accelerate depending on the level of available cash at the end of each fiscal year, subject to certain conditions as set forth in the development agreement, including conditions of the Cowlitz financing.
20
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
The Company maintains a reserve for doubtful collection of the Salishan-Mohegan receivables, which is based on the Company's estimate of the probability that the receivables will be collected. The Company assesses the adequacy of this reserve on a quarterly basis. In fiscal 2016, the Company reduced the reserve following the financing of the Cowlitz Project. The Company further reduced the reserve in fiscal 2017 following the opening of ilani Casino Resort. Future developments relating to the Cowlitz Project, including cash flows generated by the casino and other matters affecting the project could affect the collectability of these receivables and the related reserve. As of March 31, 2018 and September 30, 2017, the Salishan-Mohegan receivables, including accrued interest, totaled $98.2 million and $92.3 million, respectively. As of March 31, 2018 and September 30, 2017, related reserves for doubtful collection totaled $9.8 million and $9.2 million, respectively. The Salishan-Mohegan receivables were included in other assets, net, in the accompanying condensed consolidated balance sheets.
As of March 31, 2018 and September 30, 2017, Salishan-Mohegan had total assets of $95.9 million and $90.0 million, respectively, and total liabilities of $154.9 million and $147.0 million, respectively.
NOTE 7—MOHEGAN GAMING ADVISORS, LLC (PROJECT INSPIRE):
As of March 31, 2018, Mohegan Gaming Advisors, a wholly-owned subsidiary of the Company, held a 50.19% membership interest in Inspire Integrated Resort, which was formed to pursue gaming opportunities in South Korea. The remaining 49.81% membership interest in Inspire Integrated Resort was held by an unrelated third-party and its affiliates. Inspire Integrated Resort is not a restricted entity of the Company, and therefore, is not a guarantor of the Company’s debt obligations.
In February 2016, Inspire Integrated Resort was awarded pre-approval for a gaming license to be issued upon the completion of construction of Project Inspire, a proposed integrated resort and casino to be located adjacent to the Incheon International Airport in South Korea. In August 2016, Inspire Integrated Resort entered into an implementation agreement with the Incheon International Airport Authority for the long-term lease and development of land at the project site adjacent to the airport.
Mohegan Gaming Advisors and its partner have each contributed approximately $100.0 million in cash into Project Inspire. The construction costs for Project Inspire are currently being funded by these contributions. As of March 31, 2018 and September 30, 2017, unused contributions, after factoring in the effect of the exchange rate, totaled $155.9 million and $162.0 million, respectively, and were primarily included in non-current assets - restricted cash and cash equivalents and other assets, net in the accompanying condensed consolidated balance sheets. As of March 31, 2018 and September 30, 2017, property and equipment, net, which consisted primarily of construction in process, totaled $66.1 million and $49.2 million, respectively.
As of March 31, 2018 and September 30, 2017, Inspire Integrated Resort had total assets of $224.3 million and $212.8 million, respectively, and total liabilities of $9.8 million and $13.9 million, respectively. Outstanding liabilities are anticipated to be funded by Inspire Integrated Resort's restricted cash and cash equivalents.
In February 2018, Mohegan Gaming Advisors entered into an amicable settlement agreement with Miura Holdings Asia, LLC (“Miura”) to relinquish Miura’s rights in connection with certain prior agreements, pursuant to which Miura would have been entitled to a small percentage of (i) equity in Inspire Integrated Resort and (ii) certain development and management fees in connection with Project Inspire, for an amount equal to approximately $10.0 million payable over 13 years. These payments were reflected at the estimated fair value in the accompanying condensed consolidated balance sheet.
NOTE 8—SEGMENT REPORTING:
As of March 31, 2018, the Company owns and operates, either directly or through subsidiaries, the Connecticut Facilities and the Pennsylvania Facilities. Substantially all of the Company's revenues are derived from these operations. The Connecticut Sun franchise, the Mohegan Sun Golf Club and the New England Black Wolves franchise 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 Company's executive officers review and assess the performance and operating results and determine the proper allocation of resources to the Connecticut Facilities and the Pennsylvania Facilities on a separate basis. Accordingly, the Company has two separate reportable segments: (1) Mohegan Sun, which includes the operations of the Connecticut Facilities and (2) Mohegan Sun Pocono, which includes the operations of the Pennsylvania Facilities. The Company's operations related to investments in unconsolidated affiliates and certain other Corporate development and management operations have not been identified as separate reportable segments; therefore, these operations are included in Corporate and other in the following segment disclosures to reconcile to consolidated results.
21
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||
| (in thousands) | March 31, 2018 | March 31, 2017 | March 31, 2018 | March 31, 2017 | |||||||||||
| Net revenues: | |||||||||||||||
| Mohegan Sun | $ | 260,354 | $ | 264,994 | $ | 523,291 | $ | 524,197 | |||||||
| Mohegan Sun Pocono | 67,130 | 68,303 | 131,934 | 136,721 | |||||||||||
| Corporate and other | 4,593 | 3,587 | 8,396 | 7,018 | |||||||||||
| Inter-segment revenues | (60 | ) | (60 | ) | (120 | ) | (120 | ) | |||||||
| Total | $ | 332,017 | $ | 336,824 | $ | 663,501 | $ | 667,816 | |||||||
| Income (loss) from operations: | |||||||||||||||
| Mohegan Sun | 57,779 | 66,485 | $ | 114,172 | $ | 115,834 | |||||||||
| Mohegan Sun Pocono | 8,872 | 9,691 | 16,547 | 17,601 | |||||||||||
| Corporate and other | (10,579 | ) | (16,752 | ) | (19,647 | ) | (24,591 | ) | |||||||
| Total | 56,072 | 59,424 | 111,072 | 108,844 | |||||||||||
| Accretion of discounts | (65 | ) | — | (1,798 | ) | — | |||||||||
| Interest income | 3,877 | 2,678 | 7,746 | 5,578 | |||||||||||
| Interest expense, net of capitalized interest | (30,806 | ) | (28,594 | ) | (59,142 | ) | (58,629 | ) | |||||||
| Loss on modification and early extinguishment of debt | — | — | — | (73,796 | ) | ||||||||||
| Loss from unconsolidated affiliates | (596 | ) | (2,114 | ) | (421 | ) | (2,845 | ) | |||||||
| Other income (expense), net | (63 | ) | 2 | (348 | ) | 3 | |||||||||
| Net income (loss) | 28,419 | 31,396 | 57,109 | (20,845 | ) | ||||||||||
| Loss attributable to non-controlling interests | 189 | 74 | 708 | 693 | |||||||||||
| Net income (loss) attributable to Mohegan Tribal Gaming Authority | $ | 28,608 | $ | 31,470 | $ | 57,817 | $ | (20,152 | ) | ||||||
| Comprehensive income (loss): | |||||||||||||||
| Foreign currency translation adjustment | 1,460 | 15,009 | 16,207 | (3,301 | ) | ||||||||||
| Other comprehensive income (loss) | 1,460 | 15,009 | 16,207 | (3,301 | ) | ||||||||||
| Other comprehensive (income) loss attributable to non-controlling interests | (708 | ) | (7,804 | ) | (9,026 | ) | 1,609 | ||||||||
| Other comprehensive income (loss) attributable to Mohegan Tribal Gaming Authority | 752 | 7,205 | 7,181 | (1,692 | ) | ||||||||||
| Comprehensive income (loss) attributable to Mohegan Tribal Gaming Authority | $ | 29,360 | $ | 38,675 | $ | 64,998 | $ | (21,844 | ) | ||||||
| For the Six Months Ended | |||||||
| (in thousands) | March 31, 2018 | March 31, 2017 | |||||
| Capital expenditures incurred: | |||||||
| Mohegan Sun | $ | 56,482 | $ | 19,843 | |||
| Mohegan Sun Pocono | 3,786 | 2,875 | |||||
| Corporate and other | 12,267 | 6,607 | |||||
| Total | $ | 72,535 | $ | 29,325 | |||
| (in thousands) | March 31, 2018 | September 30, 2017 | |||||
| Total assets: | |||||||
| Mohegan Sun | $ | 1,358,638 | $ | 1,333,012 | |||
| Mohegan Sun Pocono | 577,859 | 582,241 | |||||
| Corporate and other | 348,093 | 320,428 | |||||
| Total | $ | 2,284,590 | $ | 2,235,681 | |||
22
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(unaudited)
NOTE 9—SUBSEQUENT EVENTS:
On April 12, 2018, the Company entered into an Incremental Joinder and Second Amendment to its Credit Agreement (the “Amendment Agreement”) among the Company, the Tribe, the other loan parties party thereto, Citizens Bank, N.A., as Administrative Agent and L/C Issuer, and the other lenders party thereto, amending the Senior Secured Credit Facilities.
The Amendment Agreement amends the Senior Secured Credit Facilities to, among other things, make changes to the covenants and other provisions therein and to change the interest rate applicable to borrowings under the Term Loan A Facility to: (i) for base rate loans, the base rate plus a leverage-based margin of 100 to 312.5 basis points and (ii) for Eurodollar rate loans, the applicable LIBOR rate (subject to a 0.0% LIBOR floor) plus a leverage-based margin of 200 to 412.5 basis points and the Term Loan B Facility to: (i) for base rate loans, the base rate plus a leverage-based margin of 300 to 337.5 basis points and (ii) for Eurodollar rate loans, the applicable LIBOR rate (subject to a 1.0% LIBOR floor) plus a leverage-based margin of 400 to 437.5 basis points.
In addition, pursuant to the Amendment Agreement, immediately after the effectiveness of the amendments described above, the Company established $80.0 million of increased revolving commitments and borrowed $80.0 million of increased term B loans (such increased commitments and loans, collectively, the “Incremental Facilities”) on the same terms as the Company’s existing revolving commitments and term B loans, respectively.
The net proceeds of the Incremental Facilities will be used for working capital and other general corporate purposes, including additional investments.
The Company incurred approximately $9.7 million in costs in connection with this transaction. While the Company has not yet completed its evaluation, it expects that a portion of these costs will be expensed in its third quarter of fiscal 2018.
23
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, 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 us 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 Pocono and our Pennsylvania off-track wagering facilities; |
| • | the local, regional, national or global economic climate; |
| • | increased competition, including the expansion of gaming in New England, New York, New Jersey or Pennsylvania or outside of the United States; |
| • | our leverage and ability to meet our debt service obligations and maintain compliance with financial debt covenants; |
| • | the continued availability of financing; |
| • | our dependence on existing management; |
| • | our ability to integrate new amenities from 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 our facilities; |
| • | our ability to successfully implement our diversification strategy; |
| • | an act of terrorism on the United States; |
| • | our customers' access to inexpensive transportation to our facilities and changes in oil, fuel or other transportation-related expenses; |
| • | unfavorable weather conditions; |
| • | risks associated with operations in foreign jurisdictions; |
| • | failure by our employees, agents, affiliates, vendors or businesses to comply with applicable laws, rules and regulations, including state gaming laws and regulations and anti-bribery laws such as the United States Foreign Corrupt Practices Act, and similar anti-bribery laws in other jurisdictions; and |
| • | fluctuations in foreign currency exchange rates. |
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, 2017, 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.
Overview
The Mohegan Tribe and the Company
The Mohegan Tribe of Indians of Connecticut, or the Mohegan Tribe or the Tribe, is a federally-recognized Indian tribe with an approximately 595-acre reservation situated in southeastern Connecticut, adjacent to Uncasville, Connecticut. Under the Indian Gaming Regulatory Act of 1988, federally-recognized Indian tribes are permitted to conduct full-scale casino gaming operations on tribal lands, subject to, among other things, the negotiation of a compact with the affected state. The Tribe and the
24
State of Connecticut entered into such 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 Southern 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 Pocono, 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 facilities. 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 an approximately 196-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, both components of Mohegan Sun's Project Horizon expansion.
Mohegan Sun currently operates in an approximately 5.0 million square-foot facility, which includes the following:
Casino of the Earth
As of March 31, 2018, Casino of the Earth offered:
| • | approximately 185,000 square feet of gaming space; |
| • | approximately 2,415 slot machines and 150 traditional and electronic table games; |
| • | Sunrise Square, a 9,800-square-foot Asian-themed gaming area; |
| • | an approximately 9,000-square-foot simulcasting Racebook facility; |
| • | food and beverage amenities, including: Seasons Buffet, a 784-seat multi-station buffet with live cooking stations, Bobby Flay's Bobby's Burger Palace, Bean and Vine Café & Wine Bar, Bow & Arrow Sports Bar and multiple service bars, all operated by us, as well as Ballo Italian Restaurant & Social Club, Jumbo Oriental, a full-service Asian restaurant and food court, Chick-Fil-A, Frank Pepe Pizzeria Napoletana, Hash House a Go Go, Fidelia's Market, an approximately 290-seat multi-station food court, and Carlo's Bakery, all operated by third-parties, for a total restaurant seating of approximately 2,240; |
| • | five Mohegan Sun-owned retail shops, offering products ranging from Mohegan Sun logo souvenirs to cigars; |
| • | an approximately 400-room Earth Hotel Tower operated by us; |
| • | COMIX, an approximately 415-seat comedy club and craft beer bar operated by a third-party; and |
| • | the Wolf Den, an approximately 10,000-square-foot, 275-seat lounge featuring live entertainment. |
Casino of the Sky
As of March 31, 2018, Casino of the Sky offered:
| • | approximately 125,000 square feet of gaming space; |
| • | approximately 1,880 slot machines and 105 traditional and electronic table games; |
| • | food and beverage amenities, including: Todd English's Tuscany, Bobby Flay's Bar Americain, Starbucks, a 24-hour coffee shop and three lounges and bars, all operated by us, as well as five additional full-service restaurants, two quick-service restaurants and a multi-station food court, all operated by third-parties, for a total restaurant seating of approximately 2,160; |
| • | The Shops at Mohegan Sun containing 30 retail shops, five of which we own; |
| • | the Mohegan Sun Arena with seating for up to 10,000; |
| • | a 350-seat Cabaret theatre; |
| • | an approximately 1,200-room luxury Sky Hotel Tower, including a private high-limit table games suite; |
| • | Lansdowne Irish Pub and Music House with restaurant seating of approximately 205, Avalon Nightclub and Vista Lounge, 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. |
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Casino of the Wind
As of March 31, 2018, Casino of the Wind offered:
| • | approximately 40,000 square feet of gaming space; |
| • | approximately 510 slot machines, 25 traditional table games and a 42-table themed poker room; |
| • | a 400-seat, 16,000-square-foot Jimmy Buffett's Margaritaville Restaurant operated by a third-party; and |
| • | Mist, a nightlife entertainment venue operated by us. |
Mohegan Sun offers parking for approximately 13,000 patrons and 3,600 employees. We also operate an approximately 3,600-square-foot, 20-pump gasoline and convenience center for patrons, as well as a 10-pump gasoline center for employees, both located adjacent to Mohegan Sun.
Connecticut Sun
Through Mohegan Basketball Club, LLC, we own and operate the Connecticut Sun franchise, a professional basketball team in the Women's National Basketball Association. The team plays its home games in the Mohegan Sun Arena.
New England Black Wolves
Through Mohegan Lacrosse, LLC, we have partnered with an unrelated third-party to own and operate the New England Black Wolves franchise, a professional lacrosse team in the National Lacrosse League. The team plays its home games in the Mohegan Sun Arena.
Mohegan Sun Golf Club
Through Mohegan Golf, LLC, we own and operate the Mohegan Sun Golf Club, a private 18-hole championship golf course, restaurant and bar located in Sprague and Franklin, Connecticut.
Mohegan Sun Pocono
Through Downs Racing, we own and operate a gaming and entertainment facility known as Mohegan Sun Pocono located on an approximately 400-acre site in Plains Township, Pennsylvania, and OTW facilities located in Carbondale, East Stroudsburg and Lehigh Valley, Pennsylvania. In November 2006, Mohegan Sun Pocono 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 Pocono known as Project Sunrise, which included increased gaming, restaurant and retail space, and, in July 2010, we opened our table game and poker operations, including additional non-smoking sections and a high-limit gaming area. In November 2013, we completed Project Sunlight, a hotel and convention center expansion located adjacent to the Mohegan Sun Pocono casino.
Mohegan Sun Pocono currently operates in an approximately 400,000-square-foot facility, which includes the following as of March 31, 2018:
| • | approximately 90,000 square feet of gaming space; |
| • | approximately 2,330 slot machines, 75 table games, including blackjack, roulette and craps, and an 18-table poker room; |
| • | live harness racing and simulcast and off-track wagering; |
| • | a 238-room hotel, including a spa and fitness center; |
| • | approximately 20,000 square feet of convention space; |
| • | 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, Molly O'Sheas, an authentic Irish pub and eatery, Elixir Bistro Bar, Timbers Buffet, a 300-seat Mohegan Indian cultural heritage themed multi-station buffet, and a food court, including: Johnny Rockets, Puck Express by Wolfgang Puck and Ben & Jerry's Ice Cream, for a total seating of approximately 2,500; |
| • | four retail shops, one of which we own, offering products ranging from Mohegan Sun Pocono 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 current gaming operations in Southern New England offering traditional slot machines and live table games, with the other operation being our sole gaming competitor in the state of Connecticut, Foxwoods Resort Casino, or Foxwoods. Foxwoods is owned by the Mashantucket Pequot Tribe and is located approximately 10 miles from Mohegan Sun. We also face competition from gaming facilities in Massachusetts, Rhode Island, New York and New Jersey. In addition, we face competition in and from the northeastern Pennsylvania gaming market. Please refer to “Part I. Item 1.
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Business-Market and Competition from Other Gaming Operations” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 and our other reports and filings with the SEC for further details regarding current and potential competition from other gaming operations.
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, 2017.
Results of Operations
Summary Operating Results
As of March 31, 2018, we own and operate, either directly or through subsidiaries: (1) Mohegan Sun, the Connecticut Sun franchise, the Mohegan Sun Golf Club and the New England Black Wolves franchise, or collectively, the Connecticut facilities, and (2) Mohegan Sun Pocono and its off-track wagering facilities, or collectively, the Pennsylvania facilities. Substantially all of our revenues are derived from these operations. The Connecticut Sun franchise, the Mohegan Sun Golf Club and the New England Black Wolves franchise 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 facilities and the Pennsylvania facilities on a separate basis. Accordingly, we have two separate reportable segments: (1) Mohegan Sun, which includes the operations of the Connecticut facilities and (2) Mohegan Sun Pocono, which includes the operations of the Pennsylvania facilities. Our operations related to investments in unconsolidated affiliates and certain other Corporate development and management operations have not been identified as separate reportable segments; therefore, these operations are included in Corporate and other in the following segment disclosures to reconcile to consolidated results.
The following table summarizes our results on a property basis (in thousands, except where noted):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Net revenues: | |||||||||||||||||||||||||||||
| Mohegan Sun | $ | 260,354 | $ | 264,994 | $ | (4,640 | ) | (1.8 | )% | $ | 523,291 | $ | 524,197 | $ | (906 | ) | (0.2 | )% | |||||||||||
| Mohegan Sun Pocono | 67,130 | 68,303 | (1,173 | ) | (1.7 | )% | 131,934 | 136,721 | (4,787 | ) | (3.5 | )% | |||||||||||||||||
| Corporate and other | 4,593 | 3,587 | 1,006 | 28.0 | % | 8,396 | 7,018 | 1,378 | 19.6 | % | |||||||||||||||||||
| Inter-segment revenues | (60 | ) | (60 | ) | — | — | (120 | ) | (120 | ) | — | — | |||||||||||||||||
| Total | $ | 332,017 | $ | 336,824 | $ | (4,807 | ) | (1.4 | )% | $ | 663,501 | $ | 667,816 | $ | (4,315 | ) | (0.6 | )% | |||||||||||
| Income (loss) from operations: | |||||||||||||||||||||||||||||
| Mohegan Sun | $ | 57,779 | $ | 66,485 | $ | (8,706 | ) | (13.1 | )% | $ | 114,172 | $ | 115,834 | $ | (1,662 | ) | (1.4 | )% | |||||||||||
| Mohegan Sun Pocono | 8,872 | 9,691 | (819 | ) | (8.5 | )% | 16,547 | 17,601 | (1,054 | ) | (6.0 | )% | |||||||||||||||||
| Corporate and other | (10,579 | ) | (16,752 | ) | 6,173 | 36.8 | % | (19,647 | ) | (24,591 | ) | 4,944 | 20.1 | % | |||||||||||||||
| Total | $ | 56,072 | $ | 59,424 | $ | (3,352 | ) | (5.6 | )% | $ | 111,072 | $ | 108,844 | $ | 2,228 | 2.0 | % | ||||||||||||
| Net income (loss) attributable to Mohegan Tribal Gaming Authority | $ | 28,608 | $ | 31,470 | $ | (2,862 | ) | (9.1 | )% | $ | 57,817 | $ | (20,152 | ) | $ | 77,969 | N.M. | ||||||||||||
| Operating margin: | |||||||||||||||||||||||||||||
| Mohegan Sun | 22.2 | % | 25.1 | % | (2.9 | )% | (11.6 | )% | 21.8 | % | 22.1 | % | (0.3 | )% | (1.4 | )% | |||||||||||||
| Mohegan Sun Pocono | 13.2 | % | 14.2 | % | (1.0 | )% | (7.0 | )% | 12.5 | % | 12.9 | % | (0.4 | )% | (3.1 | )% | |||||||||||||
| Total | 16.9 | % | 17.6 | % | (0.7 | )% | (4.0 | )% | 16.7 | % | 16.3 | % | 0.4 | % | 2.5 | % | |||||||||||||
_________
N.M. - Not meaningful.
The most significant factors and trends that we believe impacted our operating and financial performance were as follows:
| • | lower overall gaming revenues; |
| • | a weaker entertainment calendar at Mohegan Sun; |
| • | a repositioning of promotional offers at Mohegan Sun Pocono; |
| • | lower Corporate expenses; |
| • | competitive gaming markets; and |
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| • | a $73.8 million non-operating loss on modification and early extinguishment of debt in the six months ended March 31, 2017. |
The declines in net revenues for the three months and six months ended March 31, 2018 compared to the same periods in the prior year were primarily driven by lower gaming revenues.
Income from operations for the three months ended March 31, 2018 compared to the same period in the prior year declined primarily as a result of the decrease in net revenues. The increase in income from operations for the six months ended March 31, 2018 compared to the same period in the prior year primarily resulted from lower Corporate expenses, partially offset by the decrease in net revenues.
The decrease in net income attributable to Mohegan Tribal Gaming Authority for the three months ended March 31, 2018 compared to the same period in the prior year was primarily driven by the decline in income from operations, combined with higher interest expense. The increase in net income attributable to Mohegan Tribal Gaming Authority for the six months ended March 31, 2018 compared to the same period in the prior year was primarily due to the loss on modification and early extinguishment of debt in the prior period.
Mohegan Sun
Revenues
Revenues consisted of the following (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Gaming | $ | 226,131 | $ | 229,912 | $ | (3,781 | ) | (1.6 | )% | $ | 452,877 | $ | 452,092 | $ | 785 | 0.2 | % | ||||||||||||
| Food and beverage | 15,643 | 15,613 | 30 | 0.2 | % | 31,945 | 31,736 | 209 | 0.7 | % | |||||||||||||||||||
| Hotel (1) | 13,723 | 13,794 | (71 | ) | (0.5 | )% | 27,380 | 27,136 | 244 | 0.9 | % | ||||||||||||||||||
| Retail, entertainment and other | 23,348 | 24,060 | (712 | ) | (3.0 | )% | 50,525 | 52,679 | (2,154 | ) | (4.1 | )% | |||||||||||||||||
| Gross revenues | 278,845 | 283,379 | (4,534 | ) | (1.6 | )% | 562,727 | 563,643 | (916 | ) | (0.2 | )% | |||||||||||||||||
| Less-Promotional allowances | 18,491 | 18,385 | 106 | 0.6 | % | 39,436 | 39,446 | (10 | ) | 0.0 | % | ||||||||||||||||||
| Net revenues | $ | 260,354 | $ | 264,994 | $ | (4,640 | ) | (1.8 | )% | $ | 523,291 | $ | 524,197 | $ | (906 | ) | (0.2 | )% | |||||||||||
_________
| (1) | The 400-room Earth Hotel Tower opened on November 10, 2016. |
The following table summarizes the percentage of gross revenues from each of the four revenue sources:
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||
| Gaming | 81.1 | % | 81.1 | % | 80.4 | % | 80.2 | % | |||
| Food and beverage | 5.6 | % | 5.5 | % | 5.7 | % | 5.6 | % | |||
| Hotel | 4.9 | % | 4.9 | % | 4.9 | % | 4.8 | % | |||
| Retail, entertainment and other | 8.4 | % | 8.5 | % | 9.0 | % | 9.4 | % | |||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Promotional Allowances
The retail value of promotional allowances was included in gross revenues as follows (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Food and beverage | $ | 6,078 | $ | 5,831 | $ | 247 | 4.2 | % | $ | 12,459 | $ | 12,207 | $ | 252 | 2.1 | % | |||||||||||||
| Hotel | 3,897 | 4,026 | (129 | ) | (3.2 | )% | 7,748 | 7,743 | 5 | 0.1 | % | ||||||||||||||||||
| Retail, entertainment and other | 8,516 | 8,528 | (12 | ) | (0.1 | )% | 19,229 | 19,496 | (267 | ) | (1.4 | )% | |||||||||||||||||
| Total | $ | 18,491 | $ | 18,385 | $ | 106 | 0.6 | % | $ | 39,436 | $ | 39,446 | $ | (10 | ) | 0.0 | % | ||||||||||||
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The estimated cost of promotional allowances was included in gaming costs and expenses as follows (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Food and beverage | $ | 5,518 | $ | 5,173 | $ | 345 | 6.7 | % | $ | 11,068 | $ | 10,643 | $ | 425 | 4.0 | % | |||||||||||||
| Hotel | 2,419 | 2,653 | (234 | ) | (8.8 | )% | 4,947 | 4,828 | 119 | 2.5 | % | ||||||||||||||||||
| Retail, entertainment and other | 8,023 | 7,875 | 148 | 1.9 | % | 18,036 | 18,818 | (782 | ) | (4.2 | )% | ||||||||||||||||||
| Total | $ | 15,960 | $ | 15,701 | $ | 259 | 1.6 | % | $ | 34,051 | $ | 34,289 | $ | (238 | ) | (0.7 | )% | ||||||||||||
The following table presents data related to gaming operations (in thousands, except where noted):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Slots: | |||||||||||||||||||||||||||||
| Handle | $ | 1,823,811 | $ | 1,794,537 | $ | 29,274 | 1.6 | % | $ | 3,626,235 | $ | 3,590,267 | $ | 35,968 | 1.0 | % | |||||||||||||
| Gross revenues | $ | 146,653 | $ | 147,464 | $ | (811 | ) | (0.5 | )% | $ | 291,817 | $ | 295,645 | $ | (3,828 | ) | (1.3 | )% | |||||||||||
| Net revenues | $ | 140,205 | $ | 142,213 | $ | (2,008 | ) | (1.4 | )% | $ | 279,928 | $ | 284,148 | $ | (4,220 | ) | (1.5 | )% | |||||||||||
| Free promotional slot plays (1) | $ | 14,961 | $ | 14,593 | $ | 368 | 2.5 | % | $ | 31,189 | $ | 29,159 | $ | 2,030 | 7.0 | % | |||||||||||||
| Weighted average number of machines (in units) | 4,830 | 5,009 | (179 | ) | (3.6 | )% | 4,855 | 5,053 | (198 | ) | (3.9 | )% | |||||||||||||||||
| Hold percentage (gross) | 8.0 | % | 8.2 | % | (0.2 | )% | (2.4 | )% | 8.0 | % | 8.2 | % | (0.2 | )% | (2.4 | )% | |||||||||||||
| Win per unit per day (gross) (in dollars) | $ | 337 | $ | 327 | $ | 10 | 3.1 | % | $ | 330 | $ | 321 | $ | 9 | 2.8 | % | |||||||||||||
| Table games: | |||||||||||||||||||||||||||||
| Drop | $ | 475,461 | $ | 468,837 | $ | 6,624 | 1.4 | % | $ | 967,567 | $ | 984,122 | $ | (16,555 | ) | (1.7 | )% | ||||||||||||
| Revenues | $ | 82,745 | $ | 84,516 | $ | (1,771 | ) | (2.1 | )% | $ | 166,701 | $ | 161,714 | $ | 4,987 | 3.1 | % | ||||||||||||
| Weighted average number of games (in units) | 275 | 274 | 1 | 0.4 | % | 275 | 273 | 2 | 0.7 | % | |||||||||||||||||||
| Hold percentage (2) | 17.4 | % | 18.0 | % | (0.6 | )% | (3.3 | )% | 17.2 | % | 16.4 | % | 0.8 | % | 4.9 | % | |||||||||||||
| Win per unit per day (in dollars) | $ | 3,348 | $ | 3,432 | $ | (84 | ) | (2.4 | )% | $ | 3,327 | $ | 3,250 | $ | 77 | 2.4 | % | ||||||||||||
| Poker: | |||||||||||||||||||||||||||||
| Revenues | $ | 2,266 | $ | 2,363 | $ | (97 | ) | (4.1 | )% | $ | 4,509 | $ | 4,530 | $ | (21 | ) | (0.5 | )% | |||||||||||
| Weighted average number of tables (in units) | 42 | 42 | — | — | 42 | 42 | — | — | |||||||||||||||||||||
| Revenue per unit per day (in dollars) | $ | 600 | $ | 625 | $ | (25 | ) | (4.0 | )% | $ | 590 | $ | 593 | $ | (3 | ) | (0.5 | )% | |||||||||||
_________
| (1) | Free promotional slot plays are included in slot handle, but not reflected in slot revenues. |
| (2) | Table game hold percentage is relatively predictable over longer periods of time, but can significantly fluctuate over shorter periods. |
The decrease in gaming revenues for the three months ended March 31, 2018 compared to the same period in the prior year primarily resulted from declines in both slot and table game revenues driven by lower year-over-year hold percentages. Gaming revenues for the six months ended March 31, 2018 compared to the same period in the prior year were relatively flat reflecting higher table game revenues, partially offset by lower slot revenues.
The following table presents data related to food and beverage operations (in thousands, except where noted):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Meals served | 708 | 721 | (13 | ) | (1.8 | )% | 1,466 | 1,423 | 43 | 3.0 | % | ||||||||||||||||||
| Average price per meal served (in dollars) | $ | 15.92 | $ | 15.62 | $ | 0.30 | 1.9 | % | $ | 15.84 | $ | 15.92 | $ | (0.08 | ) | (0.5 | )% | ||||||||||||
Food and beverage revenues for the three months and six months ended March 31, 2018 compared to the same periods in the prior year were relatively flat.
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The following table presents data related to hotel operations (in thousands, except where noted):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Rooms occupied | 133 | 135 | (2 | ) | (1.5 | )% | 266 | 257 | 9 | 3.5 | % | ||||||||||||||||||
| Occupancy rate | 94.4 | % | 96.5 | % | (2.1 | )% | (2.2 | )% | 93.5 | % | 96.4 | % | (2.9 | )% | (3.0 | )% | |||||||||||||
| Average daily room rate (in dollars) | $ | 100 | $ | 99 | $ | 1 | 1.0 | % | $ | 99 | $ | 102 | $ | (3 | ) | (2.9 | )% | ||||||||||||
| Revenue per available room (in dollars) | $ | 94 | $ | 95 | $ | (1 | ) | (1.1 | )% | $ | 93 | $ | 98 | $ | (5 | ) | (5.1 | )% | |||||||||||
Hotel revenues for the three months and six months ended March 31, 2018 compared to the same periods in the prior year were relatively flat.
The following table presents data related to entertainment operations (in thousands, except where noted):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Arena events (in events) | 30 | 30 | — | — | 59 | 60 | (1 | ) | (1.7 | )% | |||||||||||||||||||
| Arena tickets | 178 | 184 | (6 | ) | (3.3 | )% | 344 | 393 | (49 | ) | (12.5 | )% | |||||||||||||||||
| Average price per arena ticket (in dollars) | $ | 33.56 | $ | 38.84 | $ | (5.28 | ) | (13.6 | )% | $ | 46.52 | $ | 49.40 | $ | (2.88 | ) | (5.8 | )% | |||||||||||
Retail, entertainment and other revenues for the three months and six months ended March 31, 2018 compared to the same periods in the prior year declined primarily as a result of lower entertainment revenues driven, in part, by a weaker overall entertainment calendar featuring fewer headliner shows. These results were partially offset by higher gasoline revenues.
Operating Costs and Expenses
Operating costs and expenses consisted of the following (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Gaming | $ | 116,424 | $ | 114,760 | $ | 1,664 | 1.4 | % | $ | 236,733 | $ | 237,712 | $ | (979 | ) | (0.4 | )% | ||||||||||||
| Food and beverage | 8,765 | 8,732 | 33 | 0.4 | % | 17,494 | 17,201 | 293 | 1.7 | % | |||||||||||||||||||
| Hotel (1) | 6,142 | 6,506 | (364 | ) | (5.6 | )% | 12,614 | 12,163 | 451 | 3.7 | % | ||||||||||||||||||
| Retail, entertainment and other | 9,447 | 11,278 | (1,831 | ) | (16.2 | )% | 20,941 | 26,193 | (5,252 | ) | (20.1 | )% | |||||||||||||||||
| Advertising, general and administrative | 42,134 | 42,265 | (131 | ) | (0.3 | )% | 84,846 | 84,510 | 336 | 0.4 | % | ||||||||||||||||||
| Depreciation and amortization | 16,424 | 15,105 | 1,319 | 8.7 | % | 33,268 | 30,246 | 3,022 | 10.0 | % | |||||||||||||||||||
| (Gain) loss on disposition of assets | 418 | (111 | ) | 529 | N.M. | 322 | (91 | ) | 413 | N.M. | |||||||||||||||||||
| Severance | 2,792 | — | 2,792 | 100.0 | % | 2,792 | — | 2,792 | 100.0 | % | |||||||||||||||||||
| Pre-opening | 29 | (26 | ) | 55 | N.M. | 109 | 429 | (320 | ) | N.M. | |||||||||||||||||||
| Total | $ | 202,575 | $ | 198,509 | $ | 4,066 | 2.0 | % | $ | 409,119 | $ | 408,363 | $ | 756 | 0.2 | % | |||||||||||||
_________
| (1) | The 400-room Earth Hotel Tower opened on November 10, 2016. |
N.M. - Not meaningful.
The increase in gaming costs and expenses for the three months ended March 31, 2018 compared to the same period in the prior year was primarily driven by higher payroll costs, including increased medical insurance costs, combined with higher costs related to Momentum Dollar redemptions at Mohegan Sun-owned outlets. Gaming costs and expenses for the six months ended March 31, 2018 compared to the same period in the prior year were relatively flat reflecting lower promotional expenses due, in part, to certain one-time expenditures in the prior period related to Mohegan Sun’s 20th anniversary festivities during the month of October 2016. These results were partially offset by increased payroll costs, including higher medical insurance costs. Gaming costs and expenses for the three months and six months ended March 31, 2018 reflect lower combined slot win and free promotional slot play contribution expenses commensurate with the declines in slot revenues. Expenses associated with the combined slot win and free promotional slot play contributions totaled $36.6 million and $73.1 million for the three months and six months ended March 31, 2018, respectively, and $36.9 million and $73.9 million for the three months and six months ended March 31, 2017, respectively. Gaming costs and expenses as a percentage of gaming revenues were 51.5% and 52.3% for the three
30
months and six months ended March 31, 2018, respectively, and 49.9% and 52.6% for the three months and six months ended March 31, 2017, respectively.
Food and beverage costs and expenses for the three months ended March 31, 2018 compared to the same period in the prior year were relatively flat. Food and beverage costs and expenses for the six months ended March 31, 2018 compared to the same period in the prior year increased primarily as a result of higher payroll costs, including increased medical insurance costs, partially offset by higher amounts of food and beverage complimentaries related costs being allocated to gaming costs and expenses.
The decline in hotel costs and expenses for the three months ended March 31, 2018 compared to the same period in the prior year primarily resulted from lower lease expenses following the purchase of the connector which connects the Earth Hotel Tower to the Sky Hotel lobby, which was subleased from an instrumentality of the Tribe. These results were partially offset by lower amounts of hotel complimentaries related costs being allocated to gaming costs and expenses. The increase in hotel costs and expenses for the six months ended March 31, 2018 compared to the same period in the prior year was primarily driven by additional costs and expenses, including lease expenses, associated with a full period of operations of the Earth Hotel Tower, which is subleased from an instrumentality of the Tribe.
Retail, entertainment and other costs and expenses for the three months and six months ended March 31, 2018 compared to the same periods in the prior year declined primarily as a result of lower direct entertainment costs driven, in part, by a weaker overall entertainment calendar featuring fewer headliner shows. These results were partially offset by higher gasoline cost of goods sold commensurate with the increases in gasoline revenues. Retail, entertainment and other costs and expenses for the six months ended March 31, 2018 also reflect lower amounts of retail, entertainment and other complimentaries related costs being allocated to gaming costs and expenses.
Advertising, general and administrative costs and expenses for the three months and six months ended March 31, 2018 compared to the same periods in the prior year were relatively flat reflecting higher utility costs, partially offset by lower consulting expenses.
Severance costs and expenses for the three months and six months ended March 31, 2018 resulted from ongoing efforts to streamline staffing levels in anticipation of pending competition from the Commonwealth of Massachusetts. The costs associated with related post-employment severance benefits were expensed at the time the termination was communicated to the employees.
Mohegan Sun Pocono
Revenues
Revenues consisted of the following (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Gaming | $ | 62,604 | $ | 63,824 | $ | (1,220 | ) | (1.9 | )% | $ | 122,864 | $ | 126,719 | $ | (3,855 | ) | (3.0 | )% | |||||||||||
| Food and beverage | 5,527 | 6,118 | (591 | ) | (9.7 | )% | 11,045 | 13,051 | (2,006 | ) | (15.4 | )% | |||||||||||||||||
| Hotel | 1,234 | 1,125 | 109 | 9.7 | % | 2,484 | 2,486 | (2 | ) | (0.1 | )% | ||||||||||||||||||
| Retail, entertainment and other | 1,937 | 1,890 | 47 | 2.5 | % | 3,865 | 4,317 | (452 | ) | (10.5 | )% | ||||||||||||||||||
| Gross revenues | 71,302 | 72,957 | (1,655 | ) | (2.3 | )% | 140,258 | 146,573 | (6,315 | ) | (4.3 | )% | |||||||||||||||||
| Less-Promotional allowances | 4,172 | 4,654 | (482 | ) | (10.4 | )% | 8,324 | 9,852 | (1,528 | ) | (15.5 | )% | |||||||||||||||||
| Net revenues | $ | 67,130 | $ | 68,303 | $ | (1,173 | ) | (1.7 | )% | $ | 131,934 | $ | 136,721 | $ | (4,787 | ) | (3.5 | )% | |||||||||||
The following table summarizes the percentage of gross revenues from each of the four revenue sources:
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||
| Gaming | 87.8 | % | 87.5 | % | 87.6 | % | 86.5 | % | |||
| Food and beverage | 7.8 | % | 8.4 | % | 7.9 | % | 8.9 | % | |||
| Hotel | 1.7 | % | 1.5 | % | 1.8 | % | 1.7 | % | |||
| Retail, entertainment and other | 2.7 | % | 2.6 | % | 2.7 | % | 2.9 | % | |||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
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Promotional Allowances
The retail value of promotional allowances was included in gross revenues as follows (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Food and beverage | $ | 3,421 | $ | 3,822 | $ | (401 | ) | (10.5 | )% | $ | 6,737 | $ | 7,899 | $ | (1,162 | ) | (14.7 | )% | |||||||||||
| Hotel | 376 | 450 | (74 | ) | (16.4 | )% | 741 | 898 | (157 | ) | (17.5 | )% | |||||||||||||||||
| Retail, entertainment and other | 375 | 382 | (7 | ) | (1.8 | )% | 846 | 1,055 | (209 | ) | (19.8 | )% | |||||||||||||||||
| Total | $ | 4,172 | $ | 4,654 | $ | (482 | ) | (10.4 | )% | $ | 8,324 | $ | 9,852 | $ | (1,528 | ) | (15.5 | )% | |||||||||||
The estimated cost of promotional allowances was included in gaming costs and expenses as follows (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Food and beverage | $ | 2,289 | $ | 2,500 | $ | (211 | ) | (8.4 | )% | $ | 4,478 | $ | 5,144 | $ | (666 | ) | (12.9 | )% | |||||||||||
| Hotel | 220 | 302 | (82 | ) | (27.2 | )% | 439 | 566 | (127 | ) | (22.4 | )% | |||||||||||||||||
| Retail, entertainment and other | 236 | 305 | (69 | ) | (22.6 | )% | 568 | 801 | (233 | ) | (29.1 | )% | |||||||||||||||||
| Total | $ | 2,745 | $ | 3,107 | $ | (362 | ) | (11.7 | )% | $ | 5,485 | $ | 6,511 | $ | (1,026 | ) | (15.8 | )% | |||||||||||
The following table presents data related to gaming operations (in thousands, except where noted):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Slots: | |||||||||||||||||||||||||||||
| Handle | $ | 606,051 | $ | 626,828 | $ | (20,777 | ) | (3.3 | )% | $ | 1,198,718 | $ | 1,244,407 | $ | (45,689 | ) | (3.7 | )% | |||||||||||
| Gross revenues | $ | 50,904 | $ | 51,091 | $ | (187 | ) | (0.4 | )% | $ | 99,405 | $ | 100,736 | $ | (1,331 | ) | (1.3 | )% | |||||||||||
| Net revenues | $ | 50,831 | $ | 51,276 | $ | (445 | ) | (0.9 | )% | $ | 99,305 | $ | 100,912 | $ | (1,607 | ) | (1.6 | )% | |||||||||||
| Free promotional slot plays (1) | $ | 9,653 | $ | 10,860 | $ | (1,207 | ) | (11.1 | )% | $ | 21,046 | $ | 21,460 | $ | (414 | ) | (1.9 | )% | |||||||||||
| Weighted average number of machines (in units) | 2,331 | 2,235 | 96 | 4.3 | % | 2,330 | 2,240 | 90 | 4.0 | % | |||||||||||||||||||
| Hold percentage (gross) | 8.4 | % | 8.2 | % | 0.2 | % | 2.4 | % | 8.3 | % | 8.1 | % | 0.2 | % | 2.5 | % | |||||||||||||
| Win per unit per day (gross) (in dollars) | $ | 242 | $ | 255 | $ | (13 | ) | (5.1 | )% | $ | 234 | $ | 248 | $ | (14 | ) | (5.6 | )% | |||||||||||
| Table games: | |||||||||||||||||||||||||||||
| Drop | $ | 48,342 | $ | 47,923 | $ | 419 | 0.9 | % | $ | 97,440 | $ | 99,168 | $ | (1,728 | ) | (1.7 | )% | ||||||||||||
| Revenues | $ | 9,512 | $ | 10,129 | $ | (617 | ) | (6.1 | )% | $ | 18,737 | $ | 20,693 | $ | (1,956 | ) | (9.5 | )% | |||||||||||
| Weighted average number of games (in units) | 73 | 73 | — | — | 73 | 73 | — | — | |||||||||||||||||||||
| Hold percentage (2) | 19.7 | % | 21.1 | % | (1.4 | )% | (6.6 | )% | 19.2 | % | 20.9 | % | (1.7 | )% | (8.1 | )% | |||||||||||||
| Win per unit per day (in dollars) | $ | 1,448 | $ | 1,542 | $ | (94 | ) | (6.1 | )% | $ | 1,410 | $ | 1,558 | $ | (148 | ) | (9.5 | )% | |||||||||||
| Poker: | |||||||||||||||||||||||||||||
| Revenues | $ | 566 | $ | 655 | $ | (89 | ) | (13.6 | )% | $ | 1,140 | $ | 1,333 | $ | (193 | ) | (14.5 | )% | |||||||||||
| Weighted average number of tables (in units) | 18 | 18 | — | — | 18 | 18 | — | — | |||||||||||||||||||||
| Revenue per unit per day (in dollars) | $ | 376 | $ | 404 | $ | (28 | ) | (6.9 | )% | $ | 361 | $ | 407 | $ | (46 | ) | (11.3 | )% | |||||||||||
_________
| (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 decreases in gaming revenues for the three months and six months ended March 31, 2018 compared to the same periods in the prior year primarily resulted from declines in both slot and table game revenues. The declines in slot revenues were driven by lower volumes, while table game revenues were negatively impacted by lower year-over-year hold percentages.
32
The following table presents data related to food and beverage operations (in thousands, except where noted):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Meals served | 107 | 121 | (14 | ) | (11.6 | )% | 214 | 265 | (51 | ) | (19.2 | )% | |||||||||||||||||
| Average price per meal served (in dollars) | $ | 20.74 | $ | 21.42 | $ | (0.68 | ) | (3.2 | )% | $ | 21.19 | $ | 22.00 | $ | (0.81 | ) | (3.7 | )% | |||||||||||
Food and beverage revenues for the three months and six months ended March 31, 2018 compared to the same periods in the prior year declined primarily due to decreases in meals served resulting, in part, from a repositioning of our promotional offers.
The following table presents data related to hotel operations (in thousands, except where noted):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Rooms occupied | 18 | 19 | (1 | ) | (5.3 | )% | 36 | 39 | (3 | ) | (7.7 | )% | |||||||||||||||||
| Occupancy rate | 82.6 | % | 90.9 | % | (8.3 | )% | (9.1 | )% | 83.0 | % | 91.7 | % | (8.7 | )% | (9.5 | )% | |||||||||||||
| Average daily room rate (in dollars) | $ | 62 | $ | 55 | $ | 7 | 12.7 | % | $ | 63 | $ | 60 | $ | 3 | 5.0 | % | |||||||||||||
| Revenue per available room (in dollars) | $ | 52 | $ | 50 | $ | 2 | 4.0 | % | $ | 53 | $ | 55 | $ | (2 | ) | (3.6 | )% | ||||||||||||
The increase in hotel revenues for the three months ended March 31, 2018 compared to the same period in the prior year was primarily driven by a shift in hotel occupancy from casino patrons to higher paying transient guests. Hotel revenues for the six months ended March 31, 2018 compared to the same period in the prior year were relatively flat.
Retail, entertainment and other revenues for the three months ended March 31, 2018 compared to the same period in the prior year increased primarily as a result of additional revenues earned on valet parking services. Retail, entertainment and other revenues for the six months ended March 31, 2018 compared to the same period in the prior year decreased primarily due to lower retail revenues resulting, in part, from a repositioning of our promotional offers. The decline in retail, entertainment and other revenues also reflected lower entertainment revenues driven by a decrease in the number of shows held at our 1,500-seat entertainment venue.
Operating Costs and Expenses
Operating costs and expenses consisted of the following (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Gaming | $ | 45,377 | $ | 45,440 | $ | (63 | ) | (0.1 | )% | $ | 89,383 | $ | 91,870 | $ | (2,487 | ) | (2.7 | )% | |||||||||||
| Food and beverage | 1,415 | 1,509 | (94 | ) | (6.2 | )% | 2,875 | 3,369 | (494 | ) | (14.7 | )% | |||||||||||||||||
| Hotel | 505 | 465 | 40 | 8.6 | % | 1,038 | 1,011 | 27 | 2.7 | % | |||||||||||||||||||
| Retail, entertainment and other | 142 | 304 | (162 | ) | (53.3 | )% | 265 | 776 | (511 | ) | (65.9 | )% | |||||||||||||||||
| Advertising, general and administrative | 7,461 | 7,928 | (467 | ) | (5.9 | )% | 15,126 | 16,079 | (953 | ) | (5.9 | )% | |||||||||||||||||
| Depreciation and amortization | 3,366 | 2,966 | 400 | 13.5 | % | 6,691 | 6,015 | 676 | 11.2 | % | |||||||||||||||||||
| (Gain) loss on disposition of assets | (8 | ) | — | (8 | ) | (100.0 | )% | 9 | — | 9 | 100.0 | % | |||||||||||||||||
| Total | $ | 58,258 | $ | 58,612 | $ | (354 | ) | (0.6 | )% | $ | 115,387 | $ | 119,120 | $ | (3,733 | ) | (3.1 | )% | |||||||||||
The declines in gaming costs and expenses for the three months and six months ended March 31, 2018 compared to the same periods in the prior year were primarily due to lower costs related to Momentum Dollar redemptions at Mohegan Sun Pocono-owned outlets, as well as lower payroll costs and certain casino marketing and promotional expenses. The declines in gaming costs and expenses also reflected lower Pennsylvania table game tax expenses commensurate with the declines in table game revenues. These results were partially offset by increased Pennsylvania slot machine tax expenses driven, in part, by a 1% increase in the tax rate assessed by the Pennsylvania Gaming Control Board, which went into effect on January 1, 2018. Expenses associated with the Pennsylvania slot machine tax totaled $29.1 million and $56.3 million for the three months and six months ended March 31, 2018, respectively, and $28.2 million and $55.9 million for the three months and six months ended March 31, 2017, respectively. Expenses associated with the Pennsylvania table game tax totaled $1.5 million and $3.1 million for the three months and six months ended March 31, 2018, respectively, and $1.7 million and $3.5 million for the three months and six months ended March
33
31, 2017, respectively. Gaming costs and expenses as a percentage of gaming revenues were 72.5% and 72.7% for the three months and six months ended March 31, 2018, respectively, and 71.2% and 72.5% for the three months and six months ended March 31, 2017, respectively.
Food and beverage costs and expenses for the three months and six months ended March 31, 2018 compared to the same periods in the prior year decreased primarily as a result of lower cost of goods sold commensurate with the reductions in food and beverage revenues. These results were partially offset by lower amounts of food and beverage complimentaries related costs being allocated to gaming costs and expenses.
The increases in hotel costs and expenses for the three months and six months ended March 31, 2018 compared to the same periods in the prior year were primarily due to lower amounts of hotel complimentaries related costs being allocated to gaming costs and expenses, partially offset by lower payroll costs.
Retail, entertainment and other costs and expenses for the three months and six months ended March 31, 2018 compared to the same periods in the prior year decreased primarily as a result of lower entertainment costs driven by reductions in the number of shows held at our 1,500-seat entertainment venue. The reductions in retail, entertainment and other costs and expenses also reflected lower retail cost of goods sold commensurate with the declines in retail revenues. These results were partially offset by lower amounts of retail, entertainment and other complimentaries related costs being allocated to gaming costs and expenses.
The decreases in advertising, general and administrative costs and expenses for the three months and six months ended March 31, 2018 compared to the same periods in the prior year were primarily due to lower payroll and insurance costs, partially offset by higher advertising expenses.
Corporate and Other
Corporate and other consisted of the following (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Gross revenues | $ | 4,624 | $ | 3,618 | $ | 1,006 | 27.8 | % | $ | 8,467 | $ | 7,097 | $ | 1,370 | 19.3 | % | |||||||||||||
| Less-Promotional allowances | 31 | 31 | — | — | 71 | 79 | (8 | ) | (10.1 | )% | |||||||||||||||||||
| Net revenues | $ | 4,593 | $ | 3,587 | $ | 1,006 | 28.0 | % | $ | 8,396 | $ | 7,018 | $ | 1,378 | 19.6 | % | |||||||||||||
| Expenses | $ | 14,150 | $ | 20,320 | $ | (6,170 | ) | (30.4 | )% | $ | 26,363 | $ | 31,568 | $ | (5,205 | ) | (16.5 | )% | |||||||||||
| Depreciation and amortization | 38 | 19 | 19 | 100.0 | % | 76 | 41 | 35 | 85.4 | % | |||||||||||||||||||
| Pre-opening (1) | 984 | — | 984 | 100.0 | % | 1,604 | — | 1,604 | 100.0 | % | |||||||||||||||||||
| Total expenses | $ | 15,172 | $ | 20,339 | $ | (5,167 | ) | (25.4 | )% | $ | 28,043 | $ | 31,609 | $ | (3,566 | ) | (11.3 | )% | |||||||||||
_________
| (1) | Project Inspire. |
The increases in Corporate and other revenues for the three months and six months ended March 31, 2018 compared to the same periods in the prior year were primarily driven by management fees earned in connection with our management arrangement with ilani Casino Resort, which opened in April 2017.
The reductions in Corporate and other expenses for the three months and six months ended March 31, 2018 compared to the same periods in the prior year primarily reflected the impact of share-based compensation that was recorded in the second quarter of fiscal 2017 in connection with Project Inspire. These results were partially offset by higher development costs associated with our various diversification initiatives, including Project Inspire and other development efforts in Asia.
34
Other Income (Expense)
Other income (expense) consisted of the following (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | 2018 | 2017 | Variance | Percentage Variance | ||||||||||||||||||||||
| Accretion of discounts (1) | $ | (65 | ) | $ | — | $ | (65 | ) | (100.0 | )% | $ | (1,798 | ) | $ | — | $ | (1,798 | ) | (100.0 | )% | |||||||||
| Interest income (2) | 3,877 | 2,678 | 1,199 | 44.8 | % | 7,746 | 5,578 | 2,168 | 38.9 | % | |||||||||||||||||||
| Interest expense, net of capitalized interest | (30,806 | ) | (28,594 | ) | (2,212 | ) | (7.7 | )% | (59,142 | ) | (58,629 | ) | (513 | ) | (0.9 | )% | |||||||||||||
| Loss on modification and early extinguishment of debt (3) | — | — | — | — | — | (73,796 | ) | 73,796 | 100.0 | % | |||||||||||||||||||
| Loss from unconsolidated affiliates | (596 | ) | (2,114 | ) | 1,518 | 71.8 | % | (421 | ) | (2,845 | ) | 2,424 | 85.2 | % | |||||||||||||||
| Other income (expense), net | (63 | ) | 2 | (65 | ) | N.M. | (348 | ) | 3 | (351 | ) | N.M. | |||||||||||||||||
| Total other expense | $ | (27,653 | ) | $ | (28,028 | ) | $ | 375 | 1.3 | % | $ | (53,963 | ) | $ | (129,689 | ) | $ | 75,726 | 58.4 | % | |||||||||
_________
| (1) | Represented accretion of the discount to the present value of certain liabilities for the impact of the time value of money. |
| (2) | Primarily represented interest earned on long-term receivables. |
| (3) | Represented financing fees expensed in connection with the modification or refinancing of debt. |
N.M. - Not meaningful.
The increase in interest expense for the three months ended March 31, 2018 compared to the same period in the prior year was driven by higher weighted average interest rate and weighted average outstanding debt. Interest expense for the six months ended March 31, 2018 compared to the same period in the prior year was relatively flat. Weighted average interest rate was 6.8% and 6.7% for the three months and six months ended March 31, 2018, respectively, compared to 6.4% and 6.6% for the three months and six months ended March 31, 2017, respectively. Weighted average outstanding debt was $1.81 billion and $1.77 billion for the three months and six months ended March 31, 2018, respectively, compared to $1.77 billion and $1.78 billion for the three months and six months ended March 31, 2017, respectively.
Seasonality
The gaming market in the Northeastern United States is seasonal in nature, with peak gaming activities often occurring at Mohegan Sun and Mohegan Sun Pocono during the months of May through August. Accordingly, our operating results for the three months and six months ended March 31, 2018 are not necessarily indicative of operating results for other interim periods or an entire fiscal year.
Liquidity and Capital Resources
Our cash flows consisted of the following (in thousands):
| For the Six Months Ended March 31, | ||||||||||||||
| 2018 | 2017 | Variance | Percentage Variance | |||||||||||
| Net cash provided by operating activities | $ | 103,784 | $ | 113,235 | $ | (9,451 | ) | (8.3 | )% | |||||
| Net cash used in investing activities | (70,766 | ) | (26,852 | ) | (43,914 | ) | (163.5 | )% | ||||||
| Net cash used in financing activities | (21,139 | ) | (89,264 | ) | 68,125 | 76.3 | % | |||||||
| Net increase (decrease) in cash and cash equivalents | $ | 11,879 | $ | (2,881 | ) | $ | 14,760 | N.M. | ||||||
_________
N.M. - Not meaningful.
As of March 31, 2018 and September 30, 2017, we held cash and cash equivalents of $101.1 million and $89.0 million, respectively. As a result of the cash-based nature of our business, operating cash flow levels tend to follow trends in our operating income, excluding the effects of non-cash charges, such as depreciation and amortization, amortization of debt issuance costs, premiums and discounts, provision for losses on receivables and loss on modification and early extinguishment of debt.
The decline in cash provided by operating activities for the six months ended March 31, 2018 compared to the same period in the prior year resulted from higher working capital requirements, partially offset by increased net income after factoring in non-cash items.
Operating activities are a significant source of our cash flows. We utilize cash flows from operations for scheduled interest payments, debt reduction, distributions to the Tribe, capital expenditures and projected working capital needs, as well as to make
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investments, from time to time. There are numerous factors which may cause a substantial reduction in the amount of such cash flows, including, but not limited to, the following:
| • | reduced discretionary spending by patrons on activities such as gaming, leisure and hospitality; |
| • | increased competition, including the legalization or expansion of gaming in New England, New York, New Jersey, Pennsylvania or other states in the mid-Atlantic region, or the expansion of on-line gaming in the United States; |
| • | unfavorable weather conditions; |
| • | changes in applicable laws or policies regarding smoking or alcohol service at Mohegan Sun or Mohegan Sun Pocono; |
| • | an infrastructure or transportation disruption, such as the closure of a major highway near Mohegan Sun or Mohegan Sun Pocono, for an extended period of time; and |
| • | an act of terrorism on the United States. |
The increase in cash used in investing activities for the six months ended March 31, 2018 compared to the same period in the prior year was primarily due to higher capital expenditures related to the Mohegan Sun Exposition and Convention Center and Project Inspire.
The decrease in cash used in financing activities for the six months ended March 31, 2018 compared to the same period in the prior year was primarily driven by payments of tender offer and repurchase costs and financing fees related to our October 2016 refinancing transactions in the prior period.
External Sources of Liquidity
As of March 31, 2018, our outstanding indebtedness was as follows (excluding unamortized debt issuance costs and discounts):
| • | $41.0 million Senior Secured Credit Facility - Revolving; |
| • | $351.5 million Senior Secured Credit Facility - Term Loan A; |
| • | $755.3 million Senior Secured Credit Facility - Term Loan B; |
| • | $500.0 million Senior Unsecured Notes; |
| • | $20.6 million Line of Credit; |
| • | $23.9 million Mohegan Expo Credit Facility; |
| • | $1.9 million in other indebtedness; and |
| • | $114.8 million Redemption Note Payable. |
Please refer to “Part I. Item 1. Note 3—Long-Term Debt and Note 6—Mohegan Ventures-Northwest, LLC (Cowlitz Project)” to this Quarterly Report on Form 10-Q which summarizes the terms of our indebtedness as of March 31, 2018.
The senior secured credit facilities contain customary covenants applicable to us and our restricted subsidiaries, including covenants governing: incurrence of indebtedness, incurrence of liens, payment of dividends and other distributions, investments, asset sales, affiliate transactions, mergers or consolidations and capital expenditures. Additionally, the senior secured credit facilities include financial maintenance covenants pertaining to total leverage, senior secured leverage and minimum fixed charge coverage.
Maximum total leverage ratio covenant, or ratio of total debt to Consolidated EBITDA for the Test Period, as such terms are defined under the senior secured credit facilities:
| Fiscal Quarters Ending: | |
March 31, 2018 and June 30, 2018 | 5.50:1.00 |
September 30, 2018 and December 31, 2018 | 5.25:1.00 |
March 31, 2019 and June 30, 2019 | 5.00:1.00 |
September 30, 2019 and each fiscal quarter ending thereafter | 4.75:1.00 |
Maximum senior secured leverage ratio covenant, or ratio of secured debt to Consolidated EBITDA for the Test Period, as such terms are defined under the senior secured credit facilities:
| Fiscal Quarters Ending: | |
March 31, 2018 and June 30, 2018 | 3.75:1.00 |
September 30, 2018 and December 31, 2018 | 3.50:1.00 |
March 31, 2019 and June 30, 2019 | 3.25:1.00 |
September 30, 2019 and each fiscal quarter ending thereafter | 3.00:1.00 |
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Minimum fixed charge coverage ratio covenant, as defined under the senior secured credit facilities:
| Fiscal Quarters Ending: | |
| March 31, 2018 and thereafter | 1.05:1.00 |
As of March 31, 2018, we and the Tribe were in compliance with all respective covenant requirements under all relevant credit facilities and note indentures.
Capital Expenditures
The following table presents data related to capital expenditures (in millions):
| Capital Expenditures | |||||||||||
| Six Months Ended | Remaining Forecasted | Total Forecasted | |||||||||
| March 31, 2018 | Fiscal Year 2018 | Fiscal Year 2018 | |||||||||
| Mohegan Sun: | |||||||||||
| Maintenance | $ | 13.7 | $ | 19.6 | $ | 33.3 | |||||
| Development | 8.3 | 0.2 | 8.5 | ||||||||
| Expansion - Mohegan Sun Exposition and Convention Center | 34.5 | 23.8 | 58.3 | ||||||||
| Subtotal | 56.5 | 43.6 | 100.1 | ||||||||
| Mohegan Sun Pocono: | |||||||||||
| Maintenance | 3.8 | 4.1 | 7.9 | ||||||||
| Subtotal | 3.8 | 4.1 | 7.9 | ||||||||
| Corporate: | |||||||||||
| Maintenance | — | 0.5 | 0.5 | ||||||||
| Other - Project Inspire | 12.2 | 88.8 | 101.0 | ||||||||
| Subtotal | 12.2 | 89.3 | 101.5 | ||||||||
| Total | $ | 72.5 | $ | 137.0 | $ | 209.5 | |||||
We primarily rely on cash flows provided by operating activities to fund maintenance capital expenditures at Mohegan Sun and Mohegan Sun Pocono. The construction costs for the Mohegan Sun Exposition and Convention Center are being funded through a combination of borrowings under the Mohegan Expo Credit Facility and investments by us. Construction on the Mohegan Sun Exposition and Convention Center commenced in March 2017 and it is expected to open in the summer of 2018. We plan to fund any additional development or expansion capital expenditures at Mohegan Sun and Mohegan Sun Pocono through a combination of existing cash, cash flows provided by operating activities and draws under our revolving facility. The construction costs for Project Inspire are currently being funded by restricted cash and cash equivalents held by Inspire Integrated Resort.
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Interest Expense
The following table presents our interest expense, net of capitalized interest (in thousands):
| For the Three Months Ended March 31, | For the Six Months Ended March 31, | ||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Prior senior secured credit facility - revolving | $ | — | $ | — | $ | — | $ | 29 | |||||||
| Prior senior secured credit facility - term loan A | — | — | — | 204 | |||||||||||
| Prior senior secured credit facility - term loan B | — | — | — | 1,840 | |||||||||||
| Senior secured credit facility - revolving | 825 | 846 | 1,506 | 1,750 | |||||||||||
| Senior secured credit facility - term loan A | 5,503 | 5,932 | 11,168 | 11,168 | |||||||||||
| Senior secured credit facility - term loan B | 11,301 | 11,410 | 22,485 | 21,318 | |||||||||||
| 2013 9 3/4% senior unsecured notes | — | — | — | 2,252 | |||||||||||
| 2016 7 7/8% senior unsecured notes | 10,178 | 10,151 | 20,349 | 18,771 | |||||||||||
| 2015 senior unsecured notes | — | — | — | 237 | |||||||||||
| 2012 11% senior subordinated notes | — | — | — | 417 | |||||||||||
| Prior line of credit | — | — | — | 7 | |||||||||||
| Line of credit | 148 | 89 | 251 | 172 | |||||||||||
| Mohegan expo credit facility | 398 | — | 695 | — | |||||||||||
| Downs Lodging credit facility | — | — | — | 70 | |||||||||||
| 2012 Mohegan Tribe Minor's Trust promissory note | — | — | — | 23 | |||||||||||
| 2013 Mohegan Tribe promissory note | — | — | — | 10 | |||||||||||
Redemption note payable | 2,116 | — | 2,523 | — | |||||||||||
| Capital leases | — | — | — | 2 | |||||||||||
| Amortization of debt issuance costs on revolving credit facilities | 187 | 166 | 373 | 359 | |||||||||||
| Capitalized interest | 150 | — | (208 | ) | — | ||||||||||
| Total interest expense | $ | 30,806 | $ | 28,594 | $ | 59,142 | $ | 58,629 | |||||||
Contractual Obligations
The following table presents estimated future payment obligations related to our debt and the timing of those payments as of March 31, 2018 (in thousands):
| Payments due by period | |||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year (1) | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||
| Long-term debt and redemption note payable, including current portions (excludes unamortized debt issuance costs and discounts) | $ | 1,808,983 | $ | 92,009 | $ | 140,497 | $ | 335,412 | $ | 1,241,065 | |||||||||
| Interest payments on long-term debt | 621,820 | 109,504 | 219,585 | 187,752 | 104,979 | ||||||||||||||
| Total | $ | 2,430,803 | $ | 201,513 | $ | 360,082 | $ | 523,164 | $ | 1,346,044 | |||||||||
| (1) | Represents payment obligations from April 1, 2018 to March 31, 2019. |
There has been no material change to the other contractual obligations previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
Sufficiency of Resources
We believe that existing cash balances, proceeds from long-term receivables, financing arrangements and operating cash flows will provide us with sufficient resources to meet our existing debt obligations, distributions to the Tribe and foreseeable capital expenditures for at least the next twelve months; however, we can provide no assurance in this regard. Please refer to “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017 for further details regarding risks relating to our sufficiency of resources. Inclusive of letters of credit, which reduce borrowing availability under the revolving facility, we had approximately $106.2 million of borrowing capacity under the revolving facility and line of credit as of March 31, 2018. Distributions to the Tribe are anticipated to total approximately $60.0 million for fiscal 2018.
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Critical Accounting Policies and Estimates
There has been no material change from the critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
Impact of Inflation
Absent changes in competitive and economic conditions or in specific prices affecting the hospitality and gaming industry, we do not expect that inflation will have a significant impact on our operations. Changes in specific prices, such as fuel and transportation prices, relative to the general rate of inflation may have a material adverse effect on the hospitality and gaming industry in general.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. As of March 31, 2018, our primary exposure to market risk was interest rate risk associated with our credit facilities which accrued interest on the basis of a base rate formula or a Eurodollar rate formula, plus applicable rates, as defined under the credit facilities.
We attempt to manage our interest rate risk through a controlled combination of long-term fixed rate borrowings and variable rate borrowings in accordance with established policies and procedures. We do not hold or issue financial instruments for speculative or trading purposes.
The following table presents information about our debt obligations as of March 31, 2018 that were sensitive to changes in interest rates. The table presents principal payments and related weighted average interest rates by expected maturity dates. Weighted average variable interest rates were based on implied forward rates in respective yield curves, which should not be considered to be precise indicators of actual future interest rates. Fair values for our debt obligations were based on quoted market prices or prices of similar instruments as of March 31, 2018.
| Expected Maturity Date | Total | Fair Value | |||||||||||||||||||||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | ||||||||||||||||||||||||||
| Liabilities (in thousands) | |||||||||||||||||||||||||||||||
| Long-term debt and redemption note payable, including current portions (1): | |||||||||||||||||||||||||||||||
| Fixed rate | $ | 369 | $ | 10,005 | $ | 23,324 | $ | 23,298 | $ | 23,151 | $ | 536,528 | $ | 616,675 | $ | 614,175 | |||||||||||||||
| Average interest rate | — | — | — | — | — | 7.3 | % | 6.4 | % | ||||||||||||||||||||||
| Variable rate | $ | 57,864 | $ | 60,930 | $ | 46,504 | $ | 43,722 | $ | 263,271 | $ | 720,017 | $ | 1,192,308 | $ | 1,189,233 | |||||||||||||||
| Average interest rate (2) | 5.5 | % | 6.2 | % | 6.4 | % | 6.5 | % | 6.4 | % | 6.7 | % | 6.5 | % | |||||||||||||||||
| (1) | Excludes unamortized debt issuance costs and discounts. |
| (2) | A 100 basis point change in average interest rate would impact annual interest expense by approximately $11.9 million. |
| Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures. Management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on an evaluation of our disclosure controls and procedures as of March 31, 2018, our Chief Executive Officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
In connection with the Company’s expansion project in East Windsor, Connecticut, the Mohegan Tribe of Indians of Connecticut, or the Tribe, entered into an agreement to amend the Mohegan Compact and an agreement to amend the Memorandum of Understanding with the State of Connecticut, which were signed by the Governor of Connecticut on July 20, 2017 and submitted to the United States Secretary of the Interior for approval or disapproval on or about August 2, 2017. The Secretary of the Interior returned the amendments, along with substantially similar amendments submitted by the Mashantucket Pequot Tribe, or the MPT, by letter dated September 15, 2017, but did not approve or disapprove the amendments or publish notice of approval in the Federal Register. On November 29, 2017, the State of Connecticut, joined by the Tribe and MPT, filed suit in United States District Court for the District of Columbia to compel the Secretary of the Interior to publish notice of approval. On December 22, 2017, the State of Connecticut, the Tribe and MPT filed a motion for summary judgment. On February 5, 2018, the federal defendants filed a motion for partial dismissal, seeking the dismissal of claims with regard to MPT, including any claims by the State of Connecticut or the Tribe related to MPT’s gaming procedures under federal law.
For additional information regarding the Company’s legal proceedings please refer to “Part I. Item 1—Notes to Condensed Consolidated Financial Statements, Note 5—Commitments and Contingencies—Litigation and Legal Proceedings” to this Quarterly Report on Form 10-Q.
| Item 1A. | Risk Factors |
There has been no material change from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
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Item 6. Exhibits
| Exhibit No. | Description | |
| 10.1* | ||
| 10.2 | ||
| 31.1 | ||
| 31.2 | ||
| 32.1 | ||
| 32.2 | ||
| 101.INS** | XBRL Instance Document (filed herewith). | |
| 101.SCH** | XBRL Taxonomy Extension Schema (filed herewith). | |
| 101.CAL** | XBRL Taxonomy Calculation Linkbase (filed herewith). | |
| 101.DEF** | XBRL Taxonomy Extension Definition Linkbase (filed herewith). | |
| 101.LAB** | XBRL Taxonomy Extension Label Linkbase (filed herewith). | |
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase (filed herewith). | |
____________
| * | Management contract or compensatory plan or arrangement. |
| ** | Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed to be "filed" for purposes of Section 18 of the Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Mohegan Tribal Gaming Authority has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
| MOHEGAN TRIBAL GAMING AUTHORITY | |||
| Date: | May 15, 2018 | By: | /S/ KEVIN P. BROWN |
Kevin P. Brown Chairman and Member, Management Board | |||
| Date: | May 15, 2018 | By: | /S/ MARIO C. KONTOMERKOS |
Mario C. Kontomerkos Chief Executive Officer, Mohegan Tribal Gaming Authority (Principal Executive, Financial and Accounting Officer) | |||
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