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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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: June 30, 2001
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 033-80655
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MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of registrant as specified in its charter)
Connecticut 06-1436334
(State or other jurisdiction of (IRS employer
incorporation or organization) Identification No.)
One Mohegan Sun Boulevard, 06382
Uncasville, CT (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code (860) 862-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [_]
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MOHEGAN TRIBAL GAMING AUTHORITY
INDEX TO FORM 10-Q
Page
Number
------
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements
Review Report of Independent Public Accountants....................... 1
Balance Sheets of Mohegan Tribal Gaming Authority as of June 30, 2001
(unaudited) and September 30, 2000................................... 2
Statements of Income of Mohegan Tribal Gaming Authority for the Three
and Nine Months Ended June 30, 2001 and 2000 (unaudited)............. 3
Statements of Capital of Mohegan Tribal Gaming Authority for the Nine
Months Ended June 30, 2001 and 2000 (unaudited)...................... 4
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the
Nine Months Ended June 30, 2001 and 2000 (unaudited)................. 5
Notes to Financial Statements of Mohegan Tribal Gaming Authority...... 6-13
Item 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 14-20
Item 3--Quantitative and Qualitative Disclosure of Market Risk.......... 21
PART II--OTHER INFORMATION
Item 1--Legal Proceedings............................................... 22
Item 2--Changes in Securities........................................... 22
Item 3--Defaults upon Senior Securities................................. 22
Item 4--Submission of Matters to a Vote of Security Holders............. 22
Item 5--Other Information............................................... 22
Item 6--Exhibits and Reports on Form 8-K................................ 22
Signatures--Mohegan Tribal Gaming Authority............................. 23
REVIEW REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Mohegan Tribal Gaming Authority:
We have reviewed the accompanying balance sheet of the Mohegan Tribal Gaming
Authority (the "Authority") as of June 30, 2001 and the related statements of
income for the three and nine month periods ended June 30, 2001 and 2000 and
the statements of capital and cash flows for the nine months ended June 30,
2001 and 2000. These financial statements are the responsibility of the
Authority's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with auditing standards generally accepted in the United States,
the objective of which is the expression of an opinion regarding the financial
statements as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet of the Mohegan Tribal Gaming
Authority as of September 30, 2000, and the related statements of income,
capital and cash flows for the three years then ended (not presented separately
herein) and in our report dated December 1, 2000, we expressed an unqualified
opinion on those financial statements. In our opinion, the information set
forth in the accompanying balance sheet of the Mohegan Tribal Gaming Authority
as of September 30, 2000, is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
Arthur Andersen LLP
Hartford, Connecticut
August 8, 2001
MOHEGAN TRIBAL GAMING AUTHORITY
BALANCE SHEETS
(in thousands)
June 30, September 30,
2001 2000
----------- -------------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 76,239 $ 115,731
Receivables, net.................................... 7,891 7,161
Due from Tribe...................................... 27,637 824
Inventories......................................... 9,217 7,577
Other current assets................................ 5,904 4,478
---------- ----------
Total current assets.............................. 126,888 135,771
Non-current assets:
Property and equipment, net......................... 350,424 338,243
Construction in process............................. 640,554 264,999
Trademark, net...................................... 120,551 123,128
Other assets, net................................... 18,444 23,238
---------- ----------
Total assets...................................... $1,256,861 $ 885,379
========== ==========
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations........ $ 1,739 $ 4,055
Current portion of relinquishment liability......... 46,897 56,646
Accounts payable and accrued expenses............... 79,986 57,601
Accrued interest payable............................ 21,540 10,625
---------- ----------
Total current liabilities......................... 150,162 128,927
Non-current liabilities:
Long-term debt...................................... 774,000 500,000
Relinquishment liability............................ 626,736 616,234
Capital lease obligations, net of current portion... 222 2,336
Other long-term liabilities......................... 45 --
---------- ----------
Total liabilities................................. 1,551,165 1,247,497
---------- ----------
Commitments and contingencies (Notes 5 and 7)
Capital:
Retained Earnings (Deficit)......................... (292,733) (362,118)
Accumulated other comprehensive loss................ (1,571) --
---------- ----------
(294,304) (362,118)
---------- ----------
Total liabilities and capital..................... $1,256,861 $ 885,379
========== ==========
The accompanying accountants' review report and notes to the financial
statements
should be read in conjunction with the financial statements
2
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF INCOME
(in thousands)
For the For the For the For the
Quarter Ended Quarter Ended Nine Months Ended Nine Months Ended
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Gaming................. $192,053 $177,993 $547,616 $518,512
Food and beverage...... 12,849 11,242 34,610 34,239
Retail and other....... 14,014 12,286 42,590 38,319
-------- -------- -------- --------
Gross revenues........ 218,916 201,521 624,816 591,070
Less--Promotional
allowances............ (18,374) (16,712) (53,404) (50,741)
-------- -------- -------- --------
Net revenues............ 200,542 184,809 571,412 540,329
-------- -------- -------- --------
Cost and expenses:
Gaming................. 86,965 78,108 243,123 225,527
Food and beverage...... 6,442 5,565 18,462 17,429
Retail and other....... 7,002 3,771 22,476 15,896
General and
administration........ 32,009 32,094 103,798 98,120
Pre-opening costs...... 3,724 1,381 7,040 3,398
Management fee......... -- -- -- 13,634
Depreciation and
amortization.......... 8,503 7,500 22,025 22,786
-------- -------- -------- --------
Total costs and
expenses............ 144,645 128,419 416,924 396,790
-------- -------- -------- --------
Income from operations.. 55,897 56,390 154,488 143,539
-------- -------- -------- --------
Other income (expense):
Relinquishment
liability reassessment
(Note 7).............. (8,958) (5,763) (26,874) (17,290)
Interest and other
income................ 648 2,892 2,390 10,437
Interest expense....... (6,011) (8,132) (17,826) (31,291)
Loss on disposition of
assets................ (114) -- (114) --
Change in fair value of
derivative instruments
(Note 3).............. (810) -- (2,088) --
-------- -------- -------- --------
(15,245) (11,003) (44,512) (38,144)
-------- -------- -------- --------
Income from continuing
operations............. 40,652 45,387 109,976 105,395
Loss from discontinued
operations............ (64) (159) (591) (465)
-------- -------- -------- --------
Net income.............. $ 40,588 $ 45,228 $109,385 $104,930
======== ======== ======== ========
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with the financial statements
3
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CAPITAL
(in thousands)
For the Nine Months For the Nine Months
Ended June 30, 2001 Ended June 30, 2000
------------------- -------------------
(unaudited) (unaudited)
Beginning balance...................... $(362,118) $(458,052)
Net income............................. 109,385 104,930
Accumulated other comprehensive loss... (1,571) --
Distributions to Tribe................. (40,000) (32,245)
--------- ---------
Ending balance......................... $(294,304) $(385,367)
========= =========
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with the financial statements
4
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine For the Nine
Months Ended Months Ended
June 30, 2001 June 30, 2000
------------- -------------
(unaudited) (unaudited)
Cash flows provided by operating activities:
Net income....................................... $ 109,385 $ 104,930
Adjustments to reconcile net income to net cash
flow provided by operating activities:
Depreciation and amortization.................. 22,025 22,786
Loss on disposition of assets.................. 114 182
Provision for losses on receivables............ 288 542
Relinquishment liability reassessment.......... 26,874 17,290
Change in fair value of derivative
instruments................................... 2,088 --
Changes in operating assets and liabilities:
Increase in receivables and other assets....... (30,281) (32,210)
Increase in accounts payable and accrued
expenses...................................... 33,345 12,924
--------- ---------
Net cash flows provided by operating
activities.................................. 163,838 126,444
--------- ---------
Cash flows used in investing activities:
Purchase of property and equipment............... (28,524) (70,863)
Increase in construction in process.............. (375,555) (79,834)
Proceeds from asset sale......................... 89 --
--------- ---------
Net cash flows used in investing activities.. (403,990) (150,697)
--------- ---------
Cash flows provided by (used in) financing
activities:
Distributions to Tribe........................... (40,000) (32,245)
Relinquishment payments.......................... (26,121) (4,948)
Payment on equipment financing................... (4,430) (9,076)
Proceeds from issuance of long-term debt......... 274,000 --
Capitalized financing fees....................... (2,789) --
Defeasance trust asset........................... -- 135,507
Defeasance liability............................. -- (140,344)
--------- ---------
Net cash flows provided by (used in)
financing activities........................ 200,660 (51,106)
--------- ---------
Net decrease in cash and cash equivalents.... (39,492) (75,359)
Cash and cash equivalents at beginning of period... 115,731 276,598
--------- ---------
Cash and cash equivalents at end of period......... $ 76,239 $ 201,239
========= =========
Supplemental disclosures:
Cash paid during the period for interest......... $ 25,078 $ 22,148
========= =========
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with the financial statements
5
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
The Mohegan Tribal Gaming Authority (the "Authority"), established on July
15, 1995, is an instrumentality of the Mohegan Tribe of Indians of Connecticut
(the "Tribe"). The Tribe established the Authority with the exclusive power to
conduct and regulate gaming activities for the Tribe. Under the Indian Gaming
Regulatory Act of 1988, federally recognized Indian tribes are permitted to
conduct full-scale casino gaming operations on tribal land, subject to, among
other things, the negotiation of a tribal state compact with the affected
state. The Tribe and the State of Connecticut have entered into such a compact
(the "Mohegan Compact"), that was approved by the Secretary of the Interior.
The Authority is governed by a Management Board, which consists of the nine
members of the Tribal Council.
The accompanying financial statements have been prepared in accordance with
the accounting policies described in the Authority's 2000 Annual Report on Form
10-K and should be read in conjunction with the Notes to Financial Statements
which appear in that report. The balance sheet at September 30, 2000, contained
herein, was taken from audited financial statements, but does not include all
disclosures contained in the Form 10-K and required by accounting principles
generally accepted in the United States.
Certain amounts in the 2000 financial statements have been reclassified. The
reclassification has no effect on the Authority's net income.
In the opinion of the Authority, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods have been included. The results reflected in the financial
statements for the three and nine months ended June 30, 2001 are not
necessarily indicative of expected results for the full year, as the casino
industry in Connecticut is seasonal in nature.
New Accounting Standard
On June 30, 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142 "Goodwill and Other Intangible Assets" to be effective for fiscal
years beginning after December 15, 2001. Upon adoption of the Standard, the
trademark will continue to be amortized on a straight-line basis over its
estimated period of benefit, which was determined to be 37 years. However,
under the new standard, the trademark will also be subject to at least an
annual assessment for impairment. The Company believes no impairment of the
trademark will be necessary upon adoption of this standard.
2. Discontinued Operations:
On November 29, 2000 the Authority discontinued bingo operations in order to
build a smoke-free slot area. Pursuant to Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30"), the financial statements of the
Authority have been restated to reflect the disposition of bingo operations as
discontinued operations. Accordingly, the revenues, costs and expenses have
been excluded from the captions in the Statements of Income and have been
reported as "Loss from discontinued operations." For the three and nine month
periods ended June 30, 2001, $64,000 and $591,000 was recorded as loss from
discontinued operations, respectively. The loss relates to severance pay and
the disposal of bingo inventory.
6
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Financing Facilities:
During 1999, the Authority issued $200 million in Senior Notes and $300
million in Senior Subordinated Notes and entered into a $500 million Bank
Credit Facility. The proceeds from the financing were used to extinguish the
existing Senior Secured Notes, defease the then existing Subordinated Notes,
pay transaction costs for the financing and fund costs related to the expansion
of Mohegan Sun ("Project Sunburst").
Senior Notes
On March 3, 1999, the Authority issued the Senior Notes with fixed interest
payable at a rate of 8.125 % per annum. Interest on the Senior Notes is payable
semi-annually on January 1 and July 1. The notes mature on January 1, 2006. The
Senior Notes are unsecured general obligations of the Authority and are
subordinated to the syndicated $500.0 million reducing, revolving secured
credit facility ("Bank Credit Facility") (see below). A total of 50% of the
Relinquishment Agreement payment to Trading Cove Associates ("TCA") (see Note
7), a Connecticut general partnership, will rank equal in right of payment to
the Senior Notes and the remaining 50% of this payment will rank junior in
right of payment to the Senior Notes. As of June 30, 2001, accrued interest on
the Senior Notes was $8.1 million.
Senior Subordinated Notes
On March 3, 1999, the Authority issued the Senior Subordinated Notes with
fixed interest payable at a rate of 8.75% per annum. Interest on the Senior
Subordinated Notes is payable semi-annually on January 1 and July 1. The notes
mature on January 1, 2009. The Senior Subordinated Notes are unsecured general
obligations of the Authority and are subordinated to the Bank Credit Facility
(see below), to the Senior Notes and to 50% of the Relinquishment Agreement
payment to TCA (see Note 7). The Senior Subordinated Notes rank equally to the
remaining 50% of the Authority's Relinquishment Agreement payment obligations.
As of June 30, 2001, accrued interest on the Senior Subordinated Notes was
$13.1 million.
Bank Credit Facility
On March 3, 1999, the Authority entered into the $425.0 million Bank Credit
Facility, which will mature in March of 2004. The Bank Credit Facility
agreement provided the Authority the right to increase the Bank Credit Facility
to an aggregate amount of $500.0 million within two years subsequent to the
closing. In November 1999, the Bank Credit Facility was increased to $459.5
million. On November 30, 2000, the Authority exercised its right to increase
the Bank Credit Facility to $500.0 million. The Bank Credit Facility is secured
by a lien on substantially all of the Authority's assets, by a leasehold
mortgage on the land on which Mohegan Sun is located, and by each of the
Authority's cash operating accounts. At the Authority's option, interest will
accrue on the basis of a 1-month, 3-month or 6-month London Inter-Bank Offer
Rate ("LIBOR") based formula plus applicable spreads (based on the Authority's
Total Leverage Ratio as defined in the Bank Credit Facility). One-month LIBOR
as of June 30, 2001 was 3.86% and the applicable spread was 1.63%. Interest on
each LIBOR loan, which is for a term of three months or less, shall be due and
payable on the last day of the related interest period. Interest on each LIBOR
loan, which is for a term of more than three months, is due and payable on the
date which is three months after the date such LIBOR loan was made and every
three months thereafter on the last day of the related interest period. The
Bank Credit Facility will automatically reduce by 10% of the commitment as of
the earlier of March 31, 2002 or the last full day of the first full fiscal
quarter following the completion date of Project Sunburst. The Authority draws
on the Bank Credit Facility primarily in connection with Project Sunburst. As
of June 30, 2001, the Authority has borrowed $274.0 million under the Bank
Credit Facility. Accrued interest on the Bank Credit Facility was $290,000 as
of June 30, 2001.
7
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Authority's debt agreements require, among other restrictions, the
maintenance of various financial covenants and terms including a fixed charge
coverage ratio, and certain debt leverage ratios. As of June 30, 2001 and 2000,
the Authority was in compliance with all financial covenant requirements.
Derivative Instruments
The Authority uses derivative instruments, including interest rate caps,
collars and swaps in its strategy to manage interest rate risk associated with
the variable interest rate on the Bank Credit Facility. The Authority's
objective in managing interest rate risk is to ensure the Authority has
appropriate income and sufficient liquidity to meet the Tribe and debt-holder
obligations. The Authority does not believe that there is any material risk
exposure with respect to derivative or other financial instruments. The
Authority continually monitors these exposures and makes the appropriate
adjustments to manage these risks within management's established limits.
The Authority analyzes interest rate risk using various models that forecast
cash flows of the liabilities and their supporting assets, including derivative
instruments.
The Authority is considered an "end user" of derivative instruments and
engages in derivative transactions for risk management purposes only. On
October 1, 2000, the Authority adopted SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", designated all derivative instruments as
cash flow hedging instruments and marked them to market. The Authority excludes
the change in time value when assessing the effectiveness of the hedging
relationships. All derivatives are evaluated quarterly and were deemed to be
effective at June 30, 2001.
Notional Cost Market
----------- -------- -----------
Interest Rate Cap
Strike Rate--8%.......................... $39,621,200 $410,000 $ 3,000
Interest Rate Collar
Ceiling Strike Rate--8%
Floor Strike Rate--6%.................... 25,704,800 295,000 (1,732,268)
Interest Rate Swap
Pay fixed--6.35%
Receive Variable......................... 12,852,400 221,000 (1,003,760)
----------- -------- -----------
Total ................................. $78,178,400 $926,000 $(2,733,028)
=========== ======== ===========
All derivative instruments are based on one-month LIBOR. One-month LIBOR was
3.86% on June 30, 2001.
For the quarter ended June 30, 2001, the Authority recognized a net loss of
$810,000 relating to the change in fair value of its derivative instruments, as
reflected in the statements of income. The net loss is due to a decrease in the
market value of the derivative instrument of approximately $90,000, offset by a
reclassification of approximately $720,000 from accumulated other comprehensive
loss. For the nine months ended June 30, 2001, the Authority recognized a net
loss of $2.1 million relating to the change in the fair value of its derivative
instruments, as reflected in the statements of income.
Letters of Credit
The Authority has available a $250,000 unsecured letter of credit that will
expire on August 31, 2001 and a $550,000 letter of credit agreement that
expires on April 16, 2002. The $550,000 letter of credit was reduced from $1.0
million on April 13, 2001. As of June 30, 2001, no amounts were drawn on the
letters of credit.
8
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Leases:
At June 30, 2001, the Authority was obligated under capital leases to make
future minimum lease payments as follows:
For the fiscal year ending September 30,
----------------------------------------
(In Thousands)
2001.............................................................. $ 554
2002.............................................................. 1,493
2003.............................................................. --
-------
Total minimum lease payments...................................... 2,047
Amount representing interest...................................... (86)
-------
Total obligation under capital leases............................. 1,961
Less: Amount due within one year.................................. (1,739)
-------
Amount due after one year......................................... $ 222
=======
On April 18, 2001, the Authority paid $1.4 million to buy out two of its
capital lease obligations.
Operating lease expenses, excluding costs to obtain assets, were $1.8
million for the nine months ended June 30, 2000. No operating leases existed
during the nine months ended June 30, 2001.
5. Commitments and Contingencies:
Project Sunburst
The Authority has received authorization from the Tribe to expend up to
$960.0 million, excluding capitalized interest, on Project Sunburst. As of June
30, 2001, the Authority has spent $616.0 million, excluding capitalized
interest on Project Sunburst. Project Sunburst expenditures for the remainder
of fiscal 2001 are expected to total $158.5 million. The remaining $185.5
million is anticipated to be spent during fiscal 2002.
The Mohegan Compact
The Mohegan Compact stipulates that a portion of the revenues earned on slot
machines must be paid to the State of Connecticut ("Slot Win Contribution").
For each 12-month period commencing July 1, 1995, the Slot Win Contribution
shall be the lesser of (a) 30% of gross revenues from slot machines, or (b) the
greater of (i) 25% of gross revenues from slot machines or (ii) $80 million.
The Slot Win Contribution payments will not be required if the State of
Connecticut legalizes any other gaming operations with slot machines or other
commercial casino games within Connecticut (except those consented to by the
Tribe and the Mashantucket Pequot Tribe). For the three months ended June 30,
2001 and 2000 the Authority incurred expenses associated with the Slot Win
Contribution of $37.6 million and $34.2 million, respectively. The Authority
incurred expenses associated with Slot Win Contribution totaling $104.4 million
and $97.8 million, respectively for the nine months ended June 30, 2001 and
2000.
Town of Montville Agreement
On June 16, 1994, the Tribe and the Town of Montville (the "Town") entered
into an agreement whereby the Tribe agreed to pay to the Town a recurring
annual payment of $500,000 to minimize the impact to the Town resulting from
decreased tax revenues on reservation land held in trust. Additionally, the
Tribe agreed to
9
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
make a one-time payment of $3.0 million towards infrastructure improvements to
the Town's water system. As of June 30, 2001, the Authority has fulfilled this
obligation and paid $3.0 million to the Town of Montville for improvements to
the municipal water system, which has been included in other assets in the
accompanying balance sheets and is being amortized over 40 years. The Tribe has
assigned its rights and obligations in this agreement to the Authority.
Expansion Construction Management Agreement with Perini Building Company, Inc.
The Authority has engaged Perini Building Company, Inc. ("Perini") as
Construction Manager to provide construction management services for Project
Sunburst. As Construction Manager, Perini will receive a fee of $20.5 million
for services including, but not limited to, pre-construction review and
construction phase contract administration. As of June 30, 2001, Perini has
received $12.5 million of the $20.5 million fee which has been included in
construction in process in the accompanying balance sheets. As a construction
industry standard, the Authority retains a portion of the construction payments
until satisfactory completion of individual contracts. As of June 30, 2001,
construction retainage totaled $27.3 million, which has been included in
accounts payable and accrued expenses in the accompanying balance sheets. The
Construction Management Agreement contains a limited waiver of sovereign
immunity to permit the commencement, maintenance and enforcement of any
dispute, claim and/or cause of action arising under the Construction Management
Agreement. In conjunction with the limited waiver of sovereign immunity, Perini
may seek satisfaction of judgment against the undistributed and/or future
revenues of Project Sunburst and/or the existing Mohegan Sun facility.
Litigation
The Authority is a defendant in certain litigation incurred in the normal
course of business. In the opinion of management, based on the advice of
counsel, the aggregate liability, if any, arising from such litigation will not
have a material adverse effect on the Authority's financial position or results
of operations.
6. Related Party Transactions:
The Tribe provides governmental and administrative services to the Authority
in conjunction with the operation of Mohegan Sun. For the quarters ended June
30, 2001 and 2000, the Authority incurred expenses of $2.7 million and $2.0
million, respectively for such services. The Authority incurred $8.2 million
and $6.8 million for the nine months ended June 30, 2001 and 2000,
respectively, for such services. Pursuant to the Priority Distribution
Agreement between the Authority and the Tribe, Priority Distributions to the
Tribe totaled $11.0 million and $1.0 million for the three months ended June
30, 2001 and 2000, respectively. Other Distributions to the Tribe for each of
the three month periods ended June 30, 2001 and 2000 were $9.0 million.
Priority Distributions to the Tribe for the nine months ended June 30, 2001 and
2000 were $13.0 million and $5.2 million, respectively. Other Distributions to
the Tribe were $27.0 million for each of the nine month periods ended June 30,
2001 and 2000.
7. TCA Agreements:
Management Agreement
Previously, the Tribe and TCA had entered into the Amended and Restated
Gaming Facility Management Agreement (the "Management Agreement"), pursuant to
which the Tribe retained and engaged TCA, on an independent contractor basis,
to operate, manage and market Mohegan Sun.
10
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Tribe assigned its rights and obligations under the Management Agreement
to the Authority. TCA had a responsibility to manage Mohegan Sun in exchange
for payments ranging from 30% to 40% of net income, before management fees, as
defined, depending upon profitability levels. Management fees totaled
$13.6 million for the nine months ended June 30, 2000. There were no management
fees for the quarters ended June 30, 2001 and 2000 and for the nine months
ended June 30, 2001 due to the termination of the Management Agreement. (See
discussion of Relinquishment Agreement below.)
Relinquishment Agreement
In February 1998, the Authority and TCA entered into an agreement (the
"Relinquishment Agreement") which superseded the Management Agreement effective
January 1, 2000 (the "Relinquishment Date"). The Relinquishment Agreement
provides that the Authority will make certain payments to TCA out of, and
determined as a percentage of, the revenues generated by Mohegan Sun over a 15-
year period commencing on the Relinquishment Date. The payments ("Senior
Relinquishment Payments" and "Junior Relinquishment Payments"), each of which
are calculated as 2.5% of Revenues, as defined, have separate payment schedules
and priority. Payment of Senior Relinquishment Payments commenced on April 25,
2000, twenty-five days subsequent to the end of the first three-month period
following the Relinquishment Date, and continue at the end of each three-month
period occurring thereafter until April 25, 2015. Junior Relinquishment
Payments commenced on July 25, 2000, twenty-five days subsequent to the end of
the first six-month period following the Relinquishment Date and continue at
the end of each six-month period occurring thereafter until July 25, 2015. Each
Senior Relinquishment Payment and Junior Relinquishment Payment is an amount
equal to 2.5% of the Revenues generated by Mohegan Sun over the immediately
preceding three-month or six-month payment period, as the case may be.
"Revenues" are defined as gross gaming revenues (other than Class II gaming
revenue) and all other facility revenues (including, without limitation, hotel
revenues, room service, food and beverage sales, ticket revenues, fees or
receipts from convention /events center in the expansion and all rental or
other receipts from lessees and concessionaires operating in the facility, but
not the gross receipts of such lessees, licenses and concessionaires). TCA has
notified the Authority that it does not agree with the Authority's treatment of
certain marketing transactions that, in TCA's opinion, has resulted in a
reduction in revenues subject to the Relinquishment Agreement. The Authority
believes TCA's claim is without merit in its dispute of the treatment of
marketing transactions. The amount in dispute does not have a material effect
on the Authority's financial statements as of June 30, 2001.
The Authority, in accordance with Financial Accounting Standards Board
Statement No. 5 ("SFAS No. 5"), "Accounting for Contingencies," has recorded a
relinquishment liability of the estimated present value of its obligations
under the Relinquishment Agreement. A relinquishment liability of $549.1
million was established at September 30, 1998 based on the present value of the
estimated future Mohegan Sun revenues utilizing the Authority's risk free
investment rate. At June 30, 2001, the relinquishment liability was reassessed
to be $673.6 million from $672.9 million as of September 30, 2000. For the
three and nine months ended June 30, 2001, the reassessment for the time value
of money due to the passage of time was $9.0 million and $26.9 million,
respectively. For the three months ended June 30, 2001, the Authority made
Senior Relinquishment Payments of $5.1 million. For the nine months ended June
30, 2001, the Authority made Senior Relinquishment Payments of $15.6 million
and Junior Relinquishment Payments of $10.5 million. At June 30, 2001,
approximately $10.6 million and $5.5 million were included in the
relinquishment liability resulting from junior relinquishment fees earned from
January 1, 2001 through June 30, 2001 and senior relinquishment fees earned
from April 1, 2001 through June 30, 2001, respectively.
Development Agreement
The Authority has negotiated an agreement with TCA (the "Development
Agreement"), pursuant to which TCA has been made the exclusive developer of
Project Sunburst. Under the Development Agreement,
11
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
TCA oversees the planning, design and construction of Project Sunburst and will
receive compensation of $14.0 million for such services based on the
incremental completed percentage of Project Sunburst. As of June 30, 2001, TCA
had earned $9.3 million of the $14.0 million in development fees, of which $7.1
million has been paid. This fee is included in construction in process.
8. Employee Benefits Plans:
The Authority maintains a retirement savings plan for its employees under
Section 401(k) of the Internal Revenue Code ("401(k) Plan"). The plan allows
employees of the Authority to defer up to the lesser of the maximum amount
prescribed by the Internal Revenue Code or 15% of their income on a pre-tax
basis, through contributions to the 401(k) Plan. The Authority matches 100% of
eligible employees' contributions up to a maximum of 3% of their individual
earnings. The Authority recorded matching contributions of approximately
$801,000 and $724,000 respectively, to the 401(k) Plan for the quarters ended
June 30, 2001 and 2000. Cumulative contributions have totaled $2.4 million and
$2.1 million for the nine months ended June 30, 2001 and 2000, respectively
The Authority, together with the Tribe, maintains a Non-Qualified Deferred
Compensation Plan (the "Deferred Compensation Plan"), for certain key
employees. This plan allows participants to defer up to 100% of their pre-tax
income to the plan. For the quarter ended June 30, 2001, contributions, net of
withdrawals, by Authority employees totaled $447,000. For the nine months ended
June 30, 2001 and 2000, contributions, net of withdrawals, by Authority
employees totaled $677,000 and $641,000. Cumulative contributions by Authority
employees to the Deferred Compensation Plan have totaled $1.5 million.
On April 18, 2001, the Authority announced a Defined Retirement Plan (the
"Retirement Plan") for all employees sponsored by the Authority. The Retirement
Plan will go into effect on July 2, 2001 and contributions by the Authority
will be based on hours worked. Employees become eligible after 90 days of
employment and will be fully vested at the completion of seven years of
employment.
9. Due from the Tribe:
At June 30, 2001, amounts due from the Tribe of $27.6 million relate to
payments made by the Authority on behalf of the Tribe for various operating
expenses and the construction of the Utilities and the Public Safety Facility
that will service the Mohegan Reservation.
10. Comprehensive Income:
SFAS No. 130 "Reporting Comprehensive Income", requires that the Authority
disclose comprehensive income and its components. The objective of SFAS No. 130
is to report a measure of all changes in the equity of a company that result
from transactions and other economic events of the period other than
transactions with stockholders. Comprehensive income is the total of net income
and all other non-stockholder changes in equity ("Other Comprehensive Income").
The Authority has recorded the intrinsic value associated with its
derivative instruments in accordance with SFAS No. 133 upon becoming effective
as of January 1, 2001.
For the For the Nine
Quarter Ended Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Net Income....................................... $40,588 $109,385
Derivative Instruments adjustment................ 720 (1,571)
------- --------
Comprehensive Income............................. $41,308 $107,814
======= ========
12
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Subsequent Events:
On July 26, 2001, the Authority issued $150 million of Senior Subordinated
Notes due 2011 with fixed interest payable at a rate of 8.375% per annum. The
proceeds from this financing, net of fees, will be used in conjunction with
Project Sunburst. On July 30, 2001, the Authority paid down $90.0 million on
the Bank Credit Facility with the proceeds from the financing.
On August 7, 2001 the Tribe obtained tax-exempt financing which, among other
things, was used to repay the Authority in full.
On August 8, 2001, the Tribe reimbursed the Authority $27.6 million. The
reimbursement relates to construction that will service the Mohegan
Reservation, initially funded by the Authority, and other various operating
expenses.
13
Item 2--Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Comparison of Operating Results for the Three Months Ended June 30, 2001 and
2000:
Net revenues for the three months ended June 30, 2001 were $200.5 million
compared to $184.8 million reported for the same period of the prior year. This
8.5% increase is primarily attributable to an increase in gaming revenues.
Gaming revenues totaled $192.0 million for the three months ended June 30,
2001 compared to $178.0 million for the three months ended June 30, 2000. The
7.9% increase in gaming revenues is due to an 8.7% growth in slot machine
revenues and a 6.2% increase in table game revenues.
For the three months ended June 30, 2001, food and beverage revenues were
$12.8 million compared to $11.2 million for the three months ended June 30,
2000. The 14.3% increase in food and beverage revenues is attributable to a
0.9% increase in food covers and a 9.3% increase in the average check for the
three months ended June 30, 2001 as compared to the same period in the prior
year.
Retail and other revenues were $14.0 million and $12.3 million for the three
months ended June 30, 2001 and 2000, respectively. This represents growth of
$1.7 million, or 14.1%, over the same period in the prior year. Of the $1.7
million increase in retail and other revenues, $937,000 is attributable to the
increased sales at the Mohegan Sun gasoline and convenience center and $811,000
is attributable to increased entertainment revenue as a result of the Uncas
Pavilion, a temporary entertainment structure used for special events.
Promotional allowances totaled $18.4 million for the three months ended June
30, 2001, representing a $1.7 million, or 9.9%, increase over the same period
in the prior year. The growth is attributable to increased redemption of
Mohegan Sun Player's Club points by patrons. Promotional allowances as a
percentage of gaming revenues were 9.6% and 9.4% for the three months ended
June 30, 2001 and 2000, respectively.
Total costs and expenses were $144.6 million for the three months ended June
30, 2001, an increase of $16.2 million or 12.6% over the same period in the
prior year. The increase is primarily the result of increases in gaming and
retail expenses.
Gaming costs and expenses were $87.0 million for the three months ended June
30, 2001, an increase of $8.9 million, or 11.3%, over the same period in the
prior year. The slot win contribution totaled $37.6 million and $34.2 million
for the three months ended June 30, 2001 and 2000, respectively. The Slot Win
Contribution increase of $3.4 million, or 10.0%, over the same period in the
prior year is attributable to the $11.8 million, or 8.7%, increase in slot
revenues.
Food and beverage costs were $6.4 million for the three months ended June
30, 2001, an increase of $877,000, or 15.8%, over the same period in the prior
year. The increase is primarily attributable to higher labor and benefit costs.
Retail and other costs were $7.0 million for the three months ended June 30,
2001, an increase of $3.2 million, or 85.7%, over the same period in the prior
year. The increase is directly attributable to 14.1% growth in retail and other
revenues, which is attributable to the shift of complimentary point redemption
from food and beverage to retail outlets and the Mohegan Sun gasoline and
convenience center. In addition, costs associated with the Uncas Pavilion, a
temporary entertainment structure used for special events, increased $1.5
million over the same quarter in the prior year.
General and administrative costs were $32.0 million for the three months
ended June 30, 2001. The decrease of $85,000, or 0.3%, over the same period in
the prior year is attributable to the Authority's effort to manage general and
administrative costs.
14
Pre-opening costs totaled $3.7 million for the three months ended June 30,
2001 and are primarily comprised of pre-opening labor and advertising costs
associated with the Project Sunburst expansion. Mohegan Sun incurred pre-
opening expansion costs of $1.4 million for the three months ended June 30,
2000.
For the three months ended June 30, 2001, depreciation and amortization
increased by $1.0 million or 13.4%, over the same period in the prior year. The
increase is attributable to increased depreciation on furniture and equipment,
versus the same period in the prior year due to a decrease in useful life of
certain equipment and the capitalization of the 637-unit smoke free slot area
("Hall of the Lost Tribes"). Depreciation and amortization for the three months
ended June 30, 2001 and 2000 were $8.5 million and $7.5 million, respectively.
Income from operations for the three months ended June 30, 2001 totaled
$55.9 million, compared to $56.4 million for the same period in the prior year.
This represents a $493,000 or 0.9% decrease over the same period in the prior
year.
For the three months ended June 30, 2001, the relinquishment liability
reassessment was $9.0 million compared to $5.8 million for the same period in
the prior year. This increase of $3.2 million, or 55.4%, is due to the
Authority's quarterly reassessment of the liability to reflect the impact of
the time value of money due to the passage of time.
Interest and other income were $648,000 for the three months ended June 30,
2001, a decrease of $2.2 million, or 77.6%, over the same period in the prior
year. The decrease in interest income resulted from the liquidation of
investments to fund Project Sunburst. The weighted average invested cash was
$39.3 million and $173.5 million for the three months ended June 30, 2001 and
2000, respectively. The Authority invests its excess cash in investment-grade
commercial paper having maturities of not more than six months from the date of
acquisition.
Interest expense of $6.0 million for the three months ended June 30, 2001
represented a decrease of $2.1 million, or 26.1%, over the same period in the
prior year. This decrease was mainly attributable to a lower average interest
rate and increased capitalization of interest related to Project Sunburst,
partially offset by an increase in average debt outstanding. Capitalized
interest was $7.5 million for the three months ended June 30, 2001 compared to
$2.7 million for the same period in the prior year. The weighted average
interest rate for the three months ended June 30, 2001 was 7.7 %, compared to
8.4% for the three months ended June 30, 2000. The weighted average outstanding
debt was $730.7 million for the three months ended June 30, 2001, compared to
$511.3 million for the three months ended June 30, 2000.
The change in fair value of derivative instruments for the three months
ended June 30, 2001 of $810,000 was attributable to a net decrease in the
market value of the derivative instruments held at June 30, 2001 of $90,000.
This was offset by a reclassification of $720,000 to accumulated other
comprehensive loss. The Authority held no derivative instruments during the
quarter ended June 30, 2000.
Comparison of Operating Results for the Nine Months Ended June 30, 2001 and
2000:
Net revenues for the nine months ended June 30, 2001 were $571.4 million
compared to $540.3 million reported for the same period of the prior year. This
5.8% increase is primarily attributable to growth in gaming revenues.
Gaming revenues totaled $547.6 million for the nine months ended June 30,
2001 compared to $518.5 million for the nine months ended June 30, 2000. The
increase of $29.1 million or 5.6% in gaming revenues is due to a 5.6% growth in
slot machine revenues and a 6.5% increase in table game revenues.
For the nine months ended June 30, 2001, food and beverage revenues were
$34.6 million compared to $34.2 million for the nine months ended June 30,
2000. The $371,000 or 1.1% increase in food and beverage revenues is
attributable to a 7.2% increase in the average check partially offset by a 5.0%
decrease in food covers for the nine months ended June 30, 2001 as compared to
the same period in the prior year.
15
Retail and other revenues were $42.6 million and $38.3 million for the nine
months ended June 30, 2001 and 2000, respectively. This represents growth of
$4.3 million or 11.1%, over the same period in the prior year. Of the $4.3
million increase in retail and other revenues, $1.6 million is attributable to
increased retail revenues and $2.4 million is attributable to the increased
sales at the Mohegan Sun gasoline and convenience center. The increase is also
attributable to entertainment revenue growth of $679,000 related to the Uncas
Pavilion, a temporary entertainment structure used for special events.
Promotional allowances totaled $53.4 million for the nine months ended June
30, 2001, representing a $2.7 million, or 5.2%, increase over the same period
in the prior year. The growth is primarily attributable to increased redemption
of Mohegan Sun Player's Club points by patrons. Promotional allowances as a
percentage of gaming revenues were 9.8% for both the nine months ended June 30,
2001 and 2000.
Total costs and expenses were $416.9 million for the nine months ended June
30, 2001, an increase of $20.1 million or 5.1% over the same period in the
prior year. The increase is primarily the result of increases in gaming, retail
and general administrative costs, partially offset by a reduction in management
fees due to the termination of the Management Agreement.
Gaming costs and expenses were $243.1 million for the nine months ended June
30, 2001, an increase of $17.6 million, or 7.8%, over the same period in the
prior year. The Slot Win Contribution totaled $104.4 million and $97.8 million
for the nine months ended June 30, 2001 and 2000, respectively. The Slot Win
Contribution increase of $6.6 million, or 6.8%, over the same period in the
prior year is attributable to the $21.6 million, or 5.6%, increase in slot
revenues.
Food and beverage costs were $18.5 million for the nine months ended June
30, 2001, an increase of $1.0 million, or 5.9%, over the same period in the
prior year. The increase is primarily attributable to higher labor and benefit
costs.
Retail and other costs were $22.5 million for the nine months ended June 30,
2001, an increase of $6.6 million, or 41.4%, over the same period in the prior
year. The increase is attributable to the 11.1% growth in retail and other
revenues, which is attributable to the shift of complimentary point redemption
from food and beverage to retail outlets and the Mohegan Sun gasoline and
convenience center. In addition, costs associated with the Uncas Pavilion, a
temporary entertainment structure used for special events, increased $5.6
million over the prior year.
General and administrative costs were $103.8 million for the nine months
ended June 30, 2001. The increase of $5.7 million, or 5.8%, over the same
period in the prior year is attributable to continued marketing and advertising
campaigns, combined with higher utility costs. Management believes marketing
programs have increased patronage and have expanded Mohegan Sun brand awareness
and market share.
Pre-opening costs totaled $7.0 million for the nine months ended June 30,
2001 and are primarily comprised of pre-opening labor and advertising costs
associated with the Project Sunburst expansion. Mohegan Sun incurred pre-
opening expansion costs of $3.4 million for the nine months ended June 30,
2000.
For the nine months ended June 30, 2001, depreciation and amortization
decreased by $761,000, or 3.3%, over the same period in the prior year. The
decrease is attributable to decreased depreciation on furniture and equipment
versus the same period in the prior year, and the prior year acceleration of
the amortization of the trademark and capitalized interest. Depreciation and
amortization for the nine months ended June 30, 2001 and 2000 were $22.0
million and $22.8 million, respectively.
Income from operations for the nine months ended June 30, 2001 totaled
$154.5 million, compared to $143.5 million for the same period in the prior
year. This represents a $10.9 million or 7.6% increase over the same period in
the prior year.
16
For the nine months ended June 30, 2001, the relinquishment liability
reassessment was $26.9 million compared to $17.3 million for the same period in
the prior year. This increase of $9.6 million, or 55.4%, is due to the
Authority's quarterly reassessment of the liability to reflect the impact of
the time value of money due to the passage of time.
Interest and other income were $2.4 million for the nine months ended June
30, 2001, a decrease of $8.0 million, or 77.1%, over the same period in the
prior year. The decrease in interest income resulted from the liquidation of
investments to fund Project Sunburst. The weighted average invested cash was
$14.2 million and $73.5 million for the nine months ended June 30, 2001 and
2000, respectively. The Authority invests in investment-grade commercial paper
having maturities of not more than six months from the date of acquisition.
Interest expense of $17.8 million for the nine months ended June 30, 2001
represented a decrease of $13.5 million, or 43.0%, over the same period in the
prior year. This decrease was mainly attributable to a lower average interest
rate and increased capitalization of interest related to Project Sunburst,
partially offset by an increase in average debt outstanding. Capitalized
interest was $18.2 million for the nine months ended June 30, 2001 compared to
$5.6 million for the same period in the prior year. The weighted average
interest rate for the nine months ended June 30, 2001 was 8.0%, compared to
8.4% for the nine months ended June 30, 2000. The weighted average outstanding
debt was $610.5 million for the nine months ended June 30, 2001, compared to
$514.3 million for the nine months ended June 30, 2000.
Other non-operating expense was $114,000 for the nine months ended June 30,
2001, representing the disposal of assets. There was no non-operating expense
for the same period in the prior year.
The change in fair value of derivative instruments of $2.1 million was
attributable to the decrease in the market value of derivative instruments held
at June 30, 2001 of $3.7 million. This was offset by a reclassification of $1.6
million to accumulated other comprehensive loss. The Authority held no
derivative instruments during the nine months ended June 30, 2000.
Liquidity, Capital Resources and Capital Spending
As of June 30, 2001 and September 30, 2000, the Authority held cash and cash
equivalents of $76.2 million and $115.7 million, respectively. Cash provided by
operating activities was $163.8 million for the nine months ended June 30, 2001
compared to cash provided by operating activities of $126.4 million for the
same period in the prior year. During fiscal 2001, the Authority has drawn
$274.0 million from the Bank Credit Facility. During fiscal 2000, the Authority
tendered $90.0 million of Subordinated Notes using the defeasance trust asset
established in fiscal 1999, for the sum of $140.3 million, including all
accrued and deferred interest on December 30, 1999.
On March 3, 1999, the Authority entered into a syndicated $425.0 million
Bank Credit Facility maturing in March 2004. In November 2000, the Authority
exercised its right to arrange for increases in the Bank Credit Facility to an
aggregate amount of $500.0 million. At the Authority's option, interest will
accrue on the basis of a 1-month, 3-month or 6-month London Inter-bank Offer
Rate ("LIBOR") based formula plus applicable spreads. Interest on each LIBOR
loan, which is for a term of three months or less, shall be due and payable on
the last day of the related interest period. Interest on each LIBOR loan which
is for a term of more than three months is due and payable on the date which is
three months after the date such LIBOR loan was made and every three months
thereafter on the last day of the interest period. The Bank Credit Facility
will automatically reduce by 10% of the commitment as of the earlier of March
31, 2002 or the last full day of the first full quarter following the
completion date of Project Sunburst. As of June 30, 2001, there was $274.0
million outstanding on the Bank Credit Facility. The Authority draws on the
Bank Credit Facility primarily in connection with Project Sunburst. On July 30,
2001 the Authority paid down $90.0 million on the Bank Credit Facility from a
portion of the proceeds from the Authority's $150 million 8.375% Senior
Subordinated Notes, due 2011, issued on July 26, 2001. The Authority
anticipates net Bank Credit Facility amounts outstanding to total $285.2
million for the fiscal year ended September 2001. The Authority has entered
into certain hedging
17
transactions effective October 1, 2000 and January 2, 2001, to mitigate against
the exposure to interest rate fluctuations on the Bank Credit Facility.
On October 13, 2000, the Mohegan Tribal Council approved a formal resolution
increasing the expansion budget from $800.0 million to $960.0 million
(excluding capitalized interest). The Authority, in conjunction with the Tribe,
has increased the Project Sunburst budget to $960.0 million for three reasons:
(1) enhancements to project scope such as an increase in the number of slot
machines from 2,000 to 2,550; (2) quality improvements to the hotel and public
areas; and (3) expected increases in Project Sunburst labor costs because of
the extremely competitive nature of the Northeast construction labor market. As
a result of the increase to the Project Sunburst budget, the Authority issued
an additional $150.0 million of 8.375% Senior Subordinated Notes, due 2011, on
July 26, 2001. The remainder of the increase will be funded through internally
generated funds. In addition to the financing provided by the Senior Notes,
Senior Subordinated Notes and the Bank Credit Facility, the Tribe has set
aside, with a trustee, a $40.0 million, fully-funded construction reserve
account that, in certain circumstances, may be used to pay costs in excess of
the Project Sunburst budget.
The Authority's capital spending has increased significantly with the
commencement of the Project Sunburst expansion. Capital expenditures totaled
$404.1 million, including capitalized interest, for the nine months ended June
30, 2001 versus $150.7 million for the same period in the prior year. Project
Sunburst construction costs of $351.1 million, excluding $18.2 million of
capitalized interest, were expended during the nine months ended June 30, 2001.
The Casino of the Sky, Mohegan Sun Arena and the Shops at Mohegan Sun are
expected to open in late September 2001. The 1,200-room hotel and the
convention space are expected to open in April 2002. Property maintenance
capital expenditures for furniture, fixtures and equipment totaled $14.8
million and $11.5 million for the nine months ended June 30, 2001 and 2000,
respectively. Expenditures for the Eagleview employee parking center ("Employee
Parking Center") totaled $24.9 million of which $1.2 million was spent during
nine months ended June 30, 2001. Expenditures on the property's utility
enhancements have totaled $23.7 million, of which $6.7 million was spent during
the nine months ended June 30, 2001. Expenditures for the Hall of the Lost
Tribes have totaled $12.1 million through June 30, 2001.
Cumulative Project Sunburst construction costs totaled $616.0 million,
excluding capitalized interest of $28.6 million, through June 30, 2001. For the
remainder of fiscal 2001, based on TCA estimates, the Authority anticipates
Project Sunburst spending to be $158.5 million, excluding capitalized interest.
For fiscal 2001, the Authority expects capital expenditures to total
approximately $25.0 million on facility improvements and maintenance capital
expenditures, $509.6 million, excluding capitalized interest, on Project
Sunburst construction, $1.0 million on an employee day care center and $8.0
million on an additional patron parking garage. The Authority anticipates
spending $18.0 million on The Hall of the Lost Tribes, which opened on April
18, 2001, $2.0 million below the $20.0 million budget.
The Authority commenced construction of an electrical and water system
infrastructure ("Infrastructure Improvements"), estimated to cost $35.0
million, that will service Mohegan Sun and other facilities. The upgrades
provide the most efficient manner of handling the increased utility demands of
the expanded facility that are attributable to the Project Sunburst expansion.
The construction was funded by the Authority, and is expected to be complete
concurrent with the opening of Project Sunburst. As of June 30, 2001,
approximately $23.7 million has been incurred. Infrastructure Improvement
spending for the final three months of fiscal 2001 is anticipated to be $11.3
million.
The Authority, in conjunction with the Project Sunburst expansion, commenced
construction on the Employee Parking Center in March 1999. The Employee Parking
Center includes 2,700 parking spaces and amenities such as a dry cleaning
service, on-site banking, an employee computer/training center and a 15,000
square foot exercise facility. The Employee Parking Center opened in June 2000.
The total cost of the Employee Parking Center was $24.9 million. The Employee
Parking Center was completed in January 2001.
18
The Tribe commenced construction of a Public Safety Facility, within the
Eagleview complex, that will service the Mohegan Reservation. Construction was
initially funded by the Authority and subsequently reimbursed by the Tribe. The
total cost of the Public Safety Facility is $6.8 million. The Authority has
also initially funded other Tribal projects, including the construction of a
temporary Tribal office, construction of roads and improvements made to the
Town of Montville's wastewater collection and treatment facilities. The total
amount incurred by the Authority for these projects, including the Public
Safety spaces referred to above, is $42.2 million. To date $16.3 million has
been reimbursed by the Tribe, and $25.9 million is reflected in amounts due
from Tribe in the Authority's balance sheet as of June 30, 2001 for these
projects. The due from Tribe amount on the balance sheet also includes $1.7
million of operational receivables. On August 8, 2001, the Tribe reimbursed the
Authority $27.6 million. The reimbursement relates to construction that will
service the Mohegan Reservation that was initially funded by the Authority and
other various operating expenses.
During fiscal year 1998, the Authority finalized contract negotiations with
TCA for Project Sunburst ("Development Agreement"). Under the Development
Agreement, TCA will oversee the planning, design and construction of the
expansion at Mohegan Sun and will receive a development fee of $14.0 million
for such services. As of June 30, 2001, TCA has earned $9.3 million of the
development fee of which $7.1 million has been paid.
Under the terms of the Relinquishment Agreement, TCA continued to manage the
existing property under the Management Agreement through December 31, 1999. On
January 1, 2000, the Management Agreement terminated, and the Authority assumed
day-to-day management of Mohegan Sun. The Authority, as a result of the
termination of the Management Agreement, has agreed to pay to TCA 5% of gross
revenues (as defined in the Relinquishment Agreement) generated from Mohegan
Sun beginning January 1, 2000 and ending December 31, 2014. The present value
of this liability is estimated to be $673.6 million as of June 30, 2001. In
October 2000, the Authority paid $5.5 million in Senior Relinquishment
Payments. On January 25, 2001, the Authority paid $5.1 million in Senior
Relinquishment payments and $10.5 million in Junior Relinquishment Payments. On
April 25, 2001, the Authority paid $5.1 million in Senior Relinquishment
Payments. On July 25, 2001, the Authority paid $5.5 million in Senior
Relinquishment payments and $10.6 million in Junior Relinquishment Payments.
During the nine months ended June 30, 2001 and 2000, the Authority
distributed $40.0 million and $32.2 million, respectively, to the Tribe.
Management believes that existing cash balances, financing arrangements and
operating cash flow will provide the Authority with sufficient resources to
meet its existing debt obligations, relinquishment payments, tribal
distributions, and foreseeable capital expenditure requirements with respect to
current operations and Project Sunburst for at least the next 12 months.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and the other materials filed or to be
filed by the Authority with the Securities and Exchange Commission contain
statements about future events, including, without limitation, information
relating to plans for future expansion and other business development
activities as well as other capital spending, financing sources and the effect
of regulation (including gaming and tax regulation) and competition. All
statements other than statements of historical fact are, or may be deemed to
be, forward-looking statements within the meaning of section 27A of the
Securities Act and section 21E of the Securities Exchange Act of 1934. These
forward-looking statements generally can be identified by use of statements
that include phrases such as "believe," "expect," "anticipate," "intend,"
"plan," "foresee," "likely," "will" or other similar words or phrases.
Similarly, statements that describe our objectives, plans or goals are or may
be forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be different from any future results,
performance or achievements expressed or implied by these statements.
19
The following important factors could affect future results, causing these
results to differ materially from those expressed in our forward-looking
statements:
. the expansion and construction activities for the new casino, the new
hotel and the convention center and related upgrades and amenities;
. the financial performance of the existing casino;
. its dependence on existing management;
. its level of leverage and ability to meet its debt service obligations;
. increased competition from new or existing gaming operations;
. general domestic and global economic conditions;
. changes in gaming laws or regulations (including potential legalization
of gaming in certain jurisdictions;
. maintenance of licenses required under gaming laws and regulations and
construction permits and approvals required under applicable laws and
regulations.
These factors are not necessarily all of the important factors that could
cause actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors also could
have material adverse effects on our future results. 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 have and we do not undertake any obligation
to publicly update any forward-looking statements to reflect subsequent events
or circumstances. We cannot assure you that projected results or events will be
achieved.
20
Item 3--Quantitative and Qualitative Disclosure of Market Risk
The Authority is exposed to inherent market risk on the following:
At the Authority's option, Bank Credit Facility interest will accrue on the
basis of a base rate formula or a LIBOR-based formula, plus applicable spreads.
As of June 30, 2001, the Authority has drawn $274.0 million on the Bank Credit
Facility. On July 30, 2001, the Authority paid down $90.0 million on the Bank
Credit Facility.
The Authority uses derivative instruments, including interest rate caps,
collars and swaps in its strategy to manage interest rate risk associated with
the variable interest rate on the Bank Credit Facility. The Authority's
objective in managing interest rate risk is to ensure the Authority has
appropriate income and sufficient liquidity to meet the Tribe and debt-holder
obligations. The Authority does not believe that there is any material risk
exposure with respect to derivative or other financial instruments. The
Authority continually monitors these exposures and makes the appropriate
adjustments to manage these risks within management's established limits.
The Authority analyzes interest rate risk using various models that forecast
cash flows of the liabilities and their supporting assets, including derivative
instruments.
The Authority is considered an "end user" of derivative instruments and
engages in derivative transactions for risk management purposes only. On
October 1, 2000 the Authority adopted SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," designated all derivative instruments as
cash flow hedging instruments and marked them to market. The impact of the
adoption of SFAS No. 133 was not material to the financial position of the
Authority taken as a whole. The Authority excludes the change in time value
when assessing the effectiveness of the hedging relationships. All derivatives
are evaluated quarterly and were deemed to be effective at June 30, 2001.
Derivative instruments held by the Authority at June 30, 2001 are as
follows:
Effective Date Maturity Date Notional Cost Market
--------------- --------------- ----------- -------- -----------
Interest Rate Cap
Strike Rate--8%....... October 1, 2000 October 1, 2003 $39,621,200 $410,000 $ 3,000
Interest Rate Collar
Ceiling Strike Rate--
8%
Floor Strike Rate--
6%................... January 2, 2001 March 1, 2004 25,704,800 295,000 (1,732,268)
Interest Rate Swap
Pay fixed--6.35%
Receive Variable...... January 2, 2001 March 1, 2004 12,852,400 221,000 (1,003,760)
----------- -------- -----------
Total .............. $78,178,400 $926,000 $(2,733,028)
=========== ======== ===========
All derivative instruments are based upon one-month LIBOR, which was 3.86%
on June 30, 2001.
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PART II--OTHER INFORMATION:
Item 1--Legal Proceedings
The Authority is a defendant in certain litigation incurred in the normal
course of business. In the opinion of management, based on the advice of
counsel, the aggregate liability, if any, arising from such litigation will not
have a material adverse effect on the Authority's financial condition or
results of operations.
Item 2--Changes in Securities
None
Item 3--Defaults Upon Senior Securities
None
Item 4--Submission of Matters to a Vote of Security Holders
None
Item 5--Other Information
None
Item 6--Exhibits and Reports on Form 8-K
A(1). Exhibits
Exhibit No. Description
----------- -----------
10.1 Priority Distribution Agreement between Mohegan Tribal Gaming
Authority and Mohegan Tribe of Indians dated August 1, 2001
10.2 Administrative Services Agreement between Mohegan Tribal Gaming
Authority and Fleet Retirement Plan Services dated July 30,
2001
A(2). Reports on Form 8-K
On July 18, 2001 the Authority a Form 8-K to disclose to the SEC a press
release issued on that date.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mohegan Tribal Gaming Authority
Signature Title Date
--------- ----- ----
/s/ Mark F. Brown Chairman, Management Board August 10, 2001
______________________________________
Mark F. Brown
/s/ William J. Velrado President and General August 10, 2001
______________________________________ Manager
William J. Velrado
/s/ Jeffrey E. Hartmann Executive Vice President August 10, 2001
______________________________________ Finance/Chief Financial
Jeffrey E. Hartmann Officer (Principal
Financial and Accounting
Officer)
23