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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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: March 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period to .
Commission file number: 033-80655
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MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of Registrant as specified in its charter)
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N/A 06-1436334
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Mohegan Sun Boulevard, Uncasville, CT 06382
(Address of principal executive offices) (Zip Code)
(860) 204-8000
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the Registrants (1) have 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) have been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Total number of pages in this report: 21
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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 March 31, 1999
(unaudited) and September 30, 1998..................................... 2
Statements of Income of Mohegan Tribal Gaming Authority for the Three-
and Six-Months Ended March 31, 1999 and 1998 (unaudited)............... 3
Statements of Capital of Mohegan Tribal Gaming Authority for the Six-
Months Ended March 31, 1999 and 1998 (unaudited)....................... 4
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the Six-
Months Ended March 31, 1999 and 1998 (unaudited)....................... 5
Notes to Financial Statements of Mohegan Tribal Gaming Authority........ 6-11
ITEM 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 12-17
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings............................................. 18
ITEM 2 -- Changes in Securities......................................... 18
ITEM 3 -- Defaults upon Senior Securities............................... 18
ITEM 4 -- Submission of Matters to a Vote of Security Holders........... 18
ITEM 5 -- Other Information............................................. 18
ITEM 6 -- Exhibits and Reports on Form 8-K.............................. 18
Signatures -- Mohegan Tribal Gaming Authority........................... 19
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 March 31, 1999, and the related statements of
income (loss), capital and cash flows for the six-month periods ended March 31,
1999 and 1998. 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 generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of the Mohegan Tribal Gaming Authority as of
September 30, 1998, and the related statements of income (loss), capital and
cash flows for the year ended September 30, 1998 (not present herein) and in
our report dated December 21, 1998, 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, 1998, is fairly stated, in all material respects, in relation to
the balance sheet from which it has been derived.
Arthur Andersen llp
Hartford, Connecticut
May 8, 1999
MOHEGAN TRIBAL GAMING AUTHORITY
BALANCE SHEETS
(in thousands)
March 31, September 30,
1999 1998
----------- -------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 262,785 $ 36,264
Restricted cash..................................... 1,000 74,466
Defeasance trust asset (Note 2)..................... 135,507 --
Receivables, net.................................... 2,727 3,067
Inventories......................................... 6,141 5,027
Other current assets................................ 2,516 2,136
---------- ---------
Total current assets.............................. 410,676 120,960
---------- ---------
Non-Current Assets:
Property and equipment, net......................... 300,539 296,440
Trademark, net...................................... 129,141 130,000
Other assets, net................................... 18,803 7,080
---------- ---------
Total assets...................................... $ 859,159 $ 554,480
========== =========
LIABILITIES AND CAPITAL
Current Liabilities:
Current portion of capital lease obligations........ 11,329 11,004
Defeasance trust liability (Note 2)................. 128,893 --
Accounts payable and accrued expenses............... 49,764 46,857
Accrued interest payable............................ 3,306 14,692
---------- ---------
Total current liabilities......................... 193,292 72,553
---------- ---------
Non-Current Liabilities:
Long-term debt...................................... 500,000 296,539
Relinquishment liability............................ 560,132 549,125
Capital lease obligations, net of current portion... 13,743 18,563
---------- ---------
Total liabilities................................. 1,267,167 936,780
---------- ---------
Commitments and Contingencies (Note 4)
Capital:
Total capital..................................... (408,008) (382,300)
---------- ---------
Total liabilities and capital..................... $ 859,159 $ 554,480
========== =========
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with the financial statements
2
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF INCOME (LOSS)
(in thousands)
For the Three For the Three For the Six For the Six
Months Ended Months Ended Months Ended Months Ended
March 31, 1999 March 31, 1998 March 31, 1999 March 31,1998
-------------- -------------- -------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Gaming................ $ 149,169 $133,275 $301,841 $253,073
Food and beverage..... 14,417 13,474 29,430 26,070
Retail and other...... 11,216 7,229 24,503 17,254
Bingo operations...... 3,727 5,982 7,169 6,912
--------- -------- -------- --------
Gross revenues........ 178,529 159,960 362,943 303,309
Less--Promotional
allowances........... (19,956) (14,943) (40,512) (31,149)
--------- -------- -------- --------
Net revenues.......... 158,573 145,017 322,431 272,160
--------- -------- -------- --------
Cost and expenses:
Gaming................ 65,861 59,431 132,451 115,739
Food and beverage..... 4,931 5,790 10,317 10,730
Retail and other...... 6,977 4,429 16,091 10,818
Bingo operations...... 2,506 5,466 5,883 6,171
General and
administration....... 23,906 21,297 51,528 45,036
Management fee........ 14,398 12,593 28,043 19,997
Depreciation and
amortization......... 5,506 4,122 10,175 8,922
--------- -------- -------- --------
Total costs and
expenses............. 124,085 113,128 254,488 217,413
--------- -------- -------- --------
Income from
operations........... 34,488 31,889 67,943 54,747
--------- -------- -------- --------
Other income (expense):
Relinquishment
liability
reassessment......... (11,007) -- (11,007) --
Interest and other
income............... 1,204 592 1,818 1,240
Interest expense...... (12,806) (12,414) (25,616) (24,192)
--------- -------- -------- --------
(22,609) (11,822) (34,805) (22,952)
--------- -------- -------- --------
Income before
extraordinary items.. 11,879 20,067 33,138 31,795
Extraordinary items
(Note 8)............. (39,423) (332) (39,423) (332)
--------- -------- -------- --------
Net income (loss)..... ($27,544) $19,735 ($6,285) $31,463
========= ======== ======== ========
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 Six Months Ended For the Six Months Ended
March 31, 1999 March 31, 1998
------------------------ ------------------------
(unaudited) (unaudited)
Beginning balance........... $(382,300) $21,931
Net income.................. (6,285) 31,463
Capital contribution by
Tribe...................... 51,243 --
Distributions to Tribe...... (70,666) (19,483)
--------- -------
Ending balance.............. $(408,008) $33,911
========= =======
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with the financial statements.
4
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months Ended For the Six Months Ended
March 31, 1999 March 31, 1998
------------------------ ------------------------
(unaudited) (unaudited)
Cash flows provided by
operating activities:
Net income.................. ($ 6,285) $31,463
Adjustments to reconcile net
income to net cash flow
provided by operating
activities:
Depreciation and
amortization............. 10,175 8,922
Loss on early
extinguishment of debt... 33,717 332
Write off of financing
fees..................... 5,706 --
Loss on asset disposal.... 335 22
Provision for losses on
receivables.............. 147 243
Relinquishment liability
reassessment............. 11,007 --
Changes in operating assets
and liabilities:
(Increase) decrease in
receivables and other
assets................... (2,550) 487
(Decrease) increase in
accounts payable and
accrued expenses......... (1,126) 17,425
-------- -------
Net cash flows provided by
operating activities..... 51,126 58,894
-------- -------
Cash flows used in investing
activities:
Purchase of property and
equipment.................. (13,184) (19,882)
Decrease in construction
payable.................... -- (3,604)
-------- -------
Net cash flows used in
investing activities..... (13,184) (23,486)
-------- -------
Cash flows provided by (used
in) financing activities:
Distributions to Tribe...... (70,666) (19,483)
Contribution of capital by
Tribe...................... 51,243 --
Proceeds from issuance of
long-term borrowings....... 500,000 650
Capitalized financing fees.. (16,745) --
Defeasance trust asset...... (135,507) --
Proceeds from equipment
financing.................. 879 --
Payment on equipment
financing.................. (5,347) (9,251)
Extinguishment of Senior
Secured Notes.............. (208,717) --
-------- -------
Net cash flows provided by
(used in) financing
activities............... 115,113 (28,084)
-------- -------
Net increase in cash and
cash equivalents......... 153,055 7,324
Cash and cash equivalents at
beginning of period........ 110,730 88,844
-------- -------
Cash and cash equivalents at
end of period.............. $263,785 $96,168
-------- -------
Supplemental Disclosures:
Cash paid during the
period for interest...... $ 30,177 $17,446
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
March 31, 1999
(Unaudited)
1. 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. On
October 12, 1996, the Authority opened a casino known as Mohegan Sun Casino
("Mohegan Sun").
The Authority is governed by a Management Board, which consists of the nine
members of the Tribal Council. The Management Board has engaged Trading Cove
Associates ("TCA"), a Connecticut general partnership, to manage the operation
of Mohegan Sun pursuant to a seven year contract (the "Management Agreement").
TCA is 50% owned by Sun Cove Limited, an affiliate of Sun International Hotels
Limited ("Sun International"), and 50% owned by Waterford Gaming L.L.C. (See
Note 6 for discussion of Relinquishment Agreement between the Tribe and TCA).
The accompanying financial statements have been prepared in accordance with
the accounting policies described in the Authority's 1998 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, 1998, contained
herein, was taken from audited financial statements, but does not include all
disclosures contained in the Form 10-K and required by generally accepted
accounting principles.
Certain amounts in the 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 six-months ended March 31, 1999 are not
necessarily indicative of expected results for the full year, as the casino
industry in Connecticut is seasonal in nature.
2. Long-Term Debt:
Bank Credit Facility
On March 3, 1999, the Authority entered into a syndicated $425 million
reducing, revolving, secured credit facility ("Bank Credit Facility") maturing
in March of 2004. The Authority has the right, within two years following the
closing of the Bank Credit Facility, to arrange for increases in the loan
amounts to an aggregate amount of $500 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 casino 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 base rate formula or a Reserve Adjusted
LIBOR based formula plus applicable spreads. As of March 31, 1999, there are no
borrowings outstanding on the Bank Credit Facility. The Authority plans to draw
on the Bank Credit Facility primarily in connection with the expansion of
Mohegan Sun.
6
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-Term Debt
Long-term debt, as described below, consisted of the following (in
thousands):
March September 30,
31, 1999 1998
-------- -------------
Senior Notes.......................................... $200,000 $ --
Senior Subordinated Notes............................. 300,000 --
Senior Secured Notes.................................. -- 175,000
Subordinated Notes.................................... -- 121,539
-------- --------
$500,000 $296,539
======== ========
Senior Notes
On March 3, 1999, the Authority issued $200 million in Senior Notes with
fixed interest payable at a rate of 8 1/8%. 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 Bank Credit Facility. Fifty percent of the
Relinquishment Agreement (Note 6) payment to Trading Cove Associates 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.
Senior Subordinated Notes
On March 3, 1999, the Authority issued $300 million in Senior Subordinated
Notes with fixed interest payable at a rate of 8 3/4%. 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,
to the Senior Notes and to 50% of the Relinquishment Agreement payment to
Trading Cove Associates. The Senior Subordinated Notes rank equally to the
remaining 50% of the Authority's Relinquishment Agreement payment obligations.
Senior Secured Notes
On March 3, 1999 the Authority extinguished the $175 million Senior Secured
Notes due 2002 ("Senior Secured Notes") for $208.7 million including a tender
premium of $33.7 million but excluding $11.3 million in accrued interest.
Sources of funding for the extinguishment of the Senior Secured Notes include
the issuance of $200 million in Senior Notes and $300 million in Senior
Subordinated Notes.
Subordinated Notes
The Authority has agreed to redeem the outstanding Subordinated Notes on
January 1, 2000, the first permitted redemption date, at a price of 100% of the
principal amount plus accrued and unpaid interest, less $500,000. To do this,
the Authority has exercised its rights under the original purchase agreement
for the Subordinated Notes to effect a defeasance of these Notes. The Authority
has established a separate trust account with First Union National Bank, the
defeasance agent, in the form of U.S. Government securities, in an amount that
is estimated to be sufficient to redeem the Subordinated Notes plus accrued
interest on January 1, 2000. All Subordinated Notes are currently held by Sun
International Hotels Limited, the parent company of a partner in Trading Cove
Associates, and by Waterford Gaming L.L.C., also a partner in Trading Cove
Associates.
7
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Letters of Credit
Subsequent to the closing of the Bank Credit Facility, the Authority
replaced its $2.5 million secured line-of-credit and letter of credit
arrangement with Fleet National Bank with a $250,000 unsecured letter of credit
with Fleet National Bank that will expire on June 30, 2000, and with a $1.6
million letter of credit agreement with Bank of America, which expires in April
2000.
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.
3. Leases:
At March 31, 1999, the Authority was obligated under non-cancelable
operating leases and capital leases to make future minimum lease payments as
follows:
Operating Capital
For the fiscal year ending September 30, Leases Leases
---------------------------------------- --------- --------
(In Thousands)
1999..................................................... $1,800 $ 6,648
2000..................................................... 2,680 13,297
2001..................................................... 84 5,075
2002..................................................... -- 2,358
2003..................................................... -- 64
------ --------
Total minimum lease payment.............................. $4,564 27,442
======
Amount representing interest............................. (2,370)
--------
Total obligation under capital leases.................... 25,072
Less: Amount due within one year......................... (11,329)
--------
Amount due after one year................................ $ 13,743
========
Rent expense on the non-cancelable operating leases was $900,000 for each of
the quarters ended March 31, 1999 and 1998.
4. Commitments and Contingencies:
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").
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
Mashantucket Pequot Tribe and the Mohegan Tribe). The Authority has reflected
$27.9 million and $24.3 million of gaming expense in its financial statements
for the required Slot Win Contribution for the quarters ended March 31, 1999
and 1998, respectively. For the six-months ended March 31, 1999 and 1998 the
Slot Win Contribution totaled $56.3 million and $46.3 million, respectively.
8
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 an annual payment
of $500,000 to minimize the impact to the Town resulting from decreased tax
revenues on reservation land held in trust. Two annual $500,000 payments
payable beginning one year after the commencement of slot machine gaming
activities, were remitted to the Town of Montville in October 1998 and 1997,
respectively. Additionally, the Tribe agreed to make a payment of $3.0 million
for infrastructure improvements to the Town's water system. If the Town does
not expend the funds, the Authority has no obligation to the Town. The Tribe
has assigned its rights and obligations in this agreement to the Authority. The
Town is billing the Authority for the infrastructure improvements as the Town's
costs are incurred. As of March 31, 1999, the Authority has paid $1.9 million
to the Town of Montville for improvements to the municipal water system. The
incurred cost has been included in other assets in the accompanying balance
sheet and will be amortized over 40 years.
5. 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 March
31, 1999 and 1998, the Authority incurred expenses of $2.0 million and $1.8
million, respectively, for such services. Expenses for governmental and
administrative services totaled $3.9 million and $3.6 million for the six-
months ended March 31, 1999 and 1998, respectively.
6. TCA Agreements:
Management Agreement
The Tribe and TCA 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.
The Tribe assigned its rights and obligations under the Management Agreement
to the Authority. TCA holds 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 $14.4
million and $12.6 million, respectively, for the quarters ended March 31, 1999
and 1998. For the six-months ended March 31, 1999 and 1998, management fees
were $28.0 million and $20.0 million, respectively. At March 31, 1999, $5.8
million was owed to TCA in connection with the Management Agreement.
Relinquishment Agreement
In February 1998, the Authority and TCA entered into the "Relinquishment
Agreement". The Relinquishment Agreement supercedes the Management Agreement,
effective January 1, 2000 and provides that the Authority shall make certain
payments to TCA out of, and determined as a percentage of, the gross revenues
generated by Mohegan Sun over a 15-year period commencing on January 1, 2000
("the Relinquishment Date"). The payments ("Senior Relinquishment Payments" and
"Junior Relinquishment Payments"), are calculated as 2.5% of Revenues each, as
defined, but each has its own payment schedule and priority. Payments of Senior
Relinquishment Payments commence at the end of the first three-month period,
9
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
March 31, 2000, following the Relinquishment Date and continue at the end of
each three-month period occurring thereafter until December 31, 2014. Junior
Relinquishment Payments commence at the end of the first six-month period, June
30, 2000, following the Relinquishment Date and continue at the end of each
six-month period occurring thereafter until December 31, 2014. 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, 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). Fifty percent of
the Relinquishment Agreement will rank equal in right of payment to the Senior
Notes and be subordinated to the Bank Credit Facility and the remaining 50% of
this payment will rank junior in right of payment to the Senior Notes and Bank
Credit Facility and equal to the Senior Subordinated Notes.
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 obligation under
the Relinquishment Agreement. The liability is estimated to be $560 million as
of March 31, 1999 and will be reassessed periodically. This amount was derived
by discounting the present value of the projected payments to TCA by the
Authority at the Authority's risk free investment rate. The Authority has also
recognized the value of the trademarks associated with the Mohegan Sun brand
name. The Mohegan Sun trademarks, which were appraised by an independent
consultant, were valued at $130 million. The Authority is amortizing these
trademarks over 38 years, the remaining life of the facility and land
improvements. As of March 31, 1999, the accumulated amortization was $859,000.
Development Agreement
The Authority has negotiated an agreement with TCA (the "Development
Agreement"), which will make TCA the exclusive developer of the planned
expansion of Mohegan Sun. Under the Development Agreement, TCA will oversee the
planning, design and construction of the expansion of Mohegan Sun and will
receive compensation of $14 million for such services.
7. Employee Benefits Plans
Effective January 1, 1999, pursuant to Section 401 of the Internal Revenue
Code, the Authority increased the employer matching contribution of its
retirement savings plan. The Authority now matches 100% of eligible employees'
contribution up to a maximum of 3% of their individual earnings. These
contributions vest over a five year period. 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 this plan.
Effective September 1998, the Authority adopted a Nonqualified Deferred
Retirement Plan for certain key employees. The Nonqualified Deferred Retirement
Plan allows participants to defer, on a pre-tax basis, a portion of their
salary and accumulate tax-deferred earnings, plus interest, as a retirement
fund. These deferrals are in addition to those allowed under the Authority's
401(k) savings plan. All deferred amounts vest immediately. There are no
employer matching contributions made under this plan. The full amount vested in
a participant's account will be distributed to a participant following
termination of employment, normal retirement or in the event of disability or
death.
10
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Extraordinary Items
On March 3, 1999, the Authority extinguished the $175 million Senior Secured
Notes for $208.7 million including a tender premium of $33.7 million but
excluding $11.3 million of accrued interest. The Authority also wrote-off $5.7
million in financing fees related to the $175 million Senior Secured Notes.
Both the tender premium and the financing fee write-off have been reflected as
extraordinary items.
11
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 March 31, 1999 and
1998:
Consolidated net revenues for the three-months ended March 31, 1999 were
$158.6 million compared with $145.0 million reported for the same period of the
prior year. This 9.3% increase is primarily attributable to an increase in
gaming revenues.
Gaming revenues totaled $149.2 million for the three-months ended March 31,
1999, marking an increase of $15.9 million or 12% over the three-months ended
March 31, 1998. The increase in gaming revenues is primarily due to a 15%
growth in slot machine revenues. Mohegan Sun slot growth for the quarter
exceeded the 7% growth in the Connecticut market for the quarter. Also
contributing is the continued growth of the Mohegan Sun patron base. Membership
in the Mohegan Sun Player's Club totaled 1.0 million patrons and 739,354
patrons as of March 31, 1999 and 1998, respectively.
For the three-months ended March 31, 1999, food and beverage revenues were
$14.4 million, indicating a growth of $1.0 million or 7.0% over the prior year.
Retail and other revenues were $11.2 million, a growth of $4.0 million or 55.0%
over the same period in the prior year. The increase in retail and other
revenues is primarily attributed to the addition of the Autobody Express retail
outlet in April 1998 and the opening of the on-site fueling facility in
December 1998. Bingo revenues decreased by $2.3 million during the three-months
ended March 31, 1999 compared to the same period in the prior year as a result
of fewer bingo sessions in the three-months ended March 31, 1999.
Promotional allowances totaled $20.0 million for the three-months ended
March 31, 1999, representing a $5.0 million or 33.5% increase over the prior
year. The increase is attributable to growth in the Mohegan Sun patron base as
well as increased utilization of the Mohegan Sun Player's Club complimentary
program. Promotional allowances as a percentage of gaming revenue were 13.4%
and 11.2% for the three-months ending March 31, 1999 and 1998, respectively.
Total costs and expenses were $124.1 million for the three-months ended
March 31, 1999, an increase of $11.0 million or 9.7% over the prior year.
Gaming costs and expenses were $65.9 million for the quarter, an increase of
$6.4 million or 10.8% over the same period in the prior year. The slot win
contribution for the three-months ended March 31, 1999 totaled $27.9 million.
This represents an increase of $3.6 million over the same period in the prior
year, which is directly attributable to a $14.8 million increase in slot
revenues.
Food and beverage costs were $4.9 million for the three-months ended March
31, 1999, a decrease of $860,000 or 15% from the same period in the prior year.
This is due to increased efficiencies in food production costs.
Retail and other costs were $7.0 million for the three-months ended March
31, 1999, an increase of $2.5 million or 57% from the same period in the prior
year. The increase is primarily a result of the on-site fueling facility that
opened in December 1998 as well as increased utilization of the Mohegan Sun
complimentary program in the retail outlets.
Bingo operation costs of $2.5 million for the three-months ended March 31,
1999 decreased $2.9 million or 54% due to improved operating efficiencies and
changes in the bingo session calendar.
General and administrative costs were $23.9 million for the three-months
ended March 31, 1999. The increase of $2.6 million or 12.3% is attributable to
the increased frequency of patron visits for the three-months ended March 31,
1999, as compared to the same period in the prior year.
12
Management fees earned by Trading Cove Associates totaled $14.4 million for
the three-months ended March 31, 1999, an increase of $1.8 million or 14.3%.
The increase in management fees is a direct result of the increase in operating
income.
For the three-months ended March 31, 1999, depreciation and amortization
increased by $1.4 million over the same period in the prior year. The increase
is primarily attributable to the $859,000 amortization of the trademark asset.
Income from operations for the three-months ended March 31, 1999 totaled
$34.5 million, compared to $31.9 million in the same period in the prior year.
The year over year increase of $2.6 million or 8.2% is primarily due to
increased gaming revenues and the increased efficiencies in food and beverage
and bingo operations.
Interest and other income were $1.2 million for the three-months ended March
31, 1999, an increase of $612,000 or 103.2% over prior year. The increase in
interest income is related to the closing on the $200 million Senior Notes and
the $300 Senior Subordinated Notes on March 3, 1999. Although a portion of the
financing was utilized to pay off existing debt, $129.4 million has been
invested to fund future construction of the expansion.
Interest expense of $12.8 million for the three-months ended March 31, 1999
represented an increase of $392,000 or 3.2% over prior period interest expense.
This increase was mainly attributable to the additional interest on the $200
million 8 1/8% Senior Notes and $300 million 8 3/4% Senior Subordinated Notes
during the month of March. This is partially offset by the tender of the
existing Senior Secured Notes that had a coupon rate of 13.5%.
Comparison of Operating Results for the Six-Months Ended March 31, 1999 and
1998:
Consolidated net revenues for the six-months ended March 31, 1999 were
$322.4 million compared with $272.2 million reported for the same period of the
prior year. This 18.5% increase is mainly attributable to an increase in gaming
revenues.
Gaming revenues of $301.8 million for the six-months ended March 31, 1999,
marked an increase of $48.8 million or 19% over the period ended March 31,
1999. The increase in gaming revenues is primarily due to a 12.0% growth in the
Connecticut slot market and the continued growth of the Mohegan Sun patron
base. Membership in the Mohegan Sun Player's Club totaled 1.0 million and
739,354 as of March 31, 1999 and 1998, respectively. Additionally, the racebook
facility opened in September 1998, which has increased gaming revenue by $3.3
million over the same period in the prior year.
For the six-months ended March 31, 1999, food and beverage revenues were
$29.4 million, indicating a growth of $3.4 million or 12.9% over the prior
year. Retail and other revenues were $24.5 million, a growth of $7.2 million or
42.0% over the same period in the prior year. The increase in non-gaming
revenues is primarily attributed to increased utilization of complimentaries,
the addition of the Autobody Express retail outlet in April 1998 and the
opening of the on-site fueling facility in December 1998.
Bingo revenues totaled $7.2 million for the six-months ended March 31, 1998,
representing a $257,000 increase over the same period in the prior year. The
increase is a result of an improved market awareness of the bingo operation.
Promotional allowances totaled $40.5 million for the six-months ended March
31, 1999, representing a $9.4 million or 30.1% increase over the prior year.
The increase is attributable to a growth in the Mohegan Sun patron base as well
as an increased utilization of the Mohegan Sun Player's Club complimentary
program. Promotional allowances as a percentage of gaming revenue was 13.4% and
12.3% for the six-months ended March 31, 1999 and 1998, respectively.
Total costs and expenses were $254.5 million for the six-months ended March
31, 1999, an increase of $37.1 million or 17.1% over the prior year.
13
Gaming costs and expenses were $132.5 million for the six-months ended March
31,1999, an increase of $16.7 million or 14.5% over the same period in the
prior year. The increase in gaming costs and expenses is directly attributable
to the $9.9 million increase in the slot win contribution over the same period
in the prior year.
Food and beverage costs were $10.3 million for the six-months ended March
31, 1999, a decrease of $413,000 or 4% from the same period in the prior year.
This is due to increased efficiencies in food production costs.
Retail and other costs were $16.1 million for the six-months ended March 31,
1999, an increase of $5.3 million or 49% from the same period in the prior
year. The increase is primarily a result of the on-site fueling facility that
opened in December 1998 as well as increased utilization of the Mohegan Sun
complimentary program in the retail outlets.
Bingo operation costs of $5.9 million for the six-months ended March 31,
1999 decreased $288,000 or 4.7% due to increased operating efficiencies and
fewer bingo sessions.
General and administrative costs were $51.5 million for the six-months ended
March 31, 1999. The increase of $6.5 million or 14.4% is partially attributable
to the increased frequency of patron visits for the six-months ended March 1999
as compared to the same period in the prior year.
Management fees earned by Trading Cove Associates totaled $28.0 million for
the six-months ended March 31, 1999, an increase of $8.0 million or 40.2%. The
increase in management fees is a direct result of the 13.7% increase in
operating income.
For the six-months ended March 31, 1999, depreciation and amortization
increased by $1.3 million or 14.5% over the same period in the prior year. The
increase is attributable to the $859,000 amortization of the trademark asset.
Also contributing to the increase in depreciation are newly acquired capital
assets utilized in the racebook and gas station facilities.
Income from operations for the six-months ended March 31, 1999 totaled $67.9
million, compared to $54.7 million in the same period in the prior year. The
year over year increase of $13.2 million or 24.1% is primarily due to the 19.3%
increase in gaming revenues and improved operating efficiencies.
Interest and other income were $1.8 million for the six-months ended March
31, 1999, an increase of $578,000 or 46.6% over prior year. The increase in
interest income is related to the closing on the $200 million 8 1/8% Senior
Notes and the $300 million 8 3/4% Senior Subordinated Notes on March 3, 1999. A
portion of the financing was used to pay off existing debt and the remainder
has been invested for construction of the expansion.
Interest expense of $25.6 million for the six-months ended March 31, 1999
represented an increase of $1.4 million or 5.9% over prior period interest
expense. This increase was mainly attributable to the additional interest on
the $200 million 8 1/8% Senior Notes and $300 million 8 3/4% Senior
Subordinated Notes during the month of March. This is partially offset by the
tender of the existing Senior Secured Notes that earned interest at a rate of
13.5%.
Liquidity, Capital Resources and Capital Spending
As of March 31, 1999 and September 30, 1998 the Authority held cash and cash
equivalents of $263.8 million and $110.7 million, respectively. Net cash flows
provided by operating activities for the six-months ended March 31, 1999 and
1998 were $51.1 million and $58.9 million, respectively.
The Authority's capital expenditures for the three-months ended March 31,
1999 and 1998 approximated $8.2 million and $2.4 million, respectively. Capital
expenditures for the six-months ended March 31, 1999 and 1998 totaled $14.3
million and $20.3 million, respectively. Capital expenditures for the current
quarter included
14
$4.6 million for facility improvements and the acquisition of new capital
assets, $709,000 for construction costs associated with the construction of the
on-site fueling facility, $331,000 associated with racebook, and $2.6 million
on preliminary spending associated with the expansion of Mohegan Sun. Capital
spending for the six-months ended March 31, 1999 includes $7.4 million for
facility improvements and the acquisition of new capital assets, $2.6 million
for construction costs associated with the on-site fueling facility, $1.3
million associated with racebook, and $3.0 million on preliminary spending
associated with the expansion of Mohegan Sun. Capital spending in fiscal 1998
of $4.1 million included the purchase of new capital assets, $3.6 million in
the settlement of construction claims with Morse Diesel, Inc. related to the
initial construction of Mohegan Sun, and the remaining $12.6 million for the
purchase of assets previously held under operating leases.
Expenditures associated with the on-site fueling facility have totaled $5.4
million at March 31, 1999; $2.8 million of which were incurred during the
fiscal year ended September 30, 1998. The total cost of the on-site fueling
facility is expected to be $5.9 million. The fueling facility opened on
December 7, 1998.
During 1998, the Authority finalized contract negotiations with Trading Cove
Associates ("TCA"), a Connecticut general partnership, for the expansion of
Mohegan Sun, which is currently estimated to cost $750 million (excluding
capitalized interest and excluding a $50 million project contingency). TCA is
50% owned by Sun Cove Limited, an affiliate of Sun International Hotels Limited
("Sun International"), and 50% owned by Waterford Gaming L.L.C. The proposed
development plans include 100,000 square feet of additional gaming space, a
luxury hotel with approximately 1,500 rooms, and a convention/events center
with seating for 10,000 patrons and 100,000 square feet of convention space.
The Tribe also plans to include additional retail and restaurant facilities
into its design. Current plans would also require significant upgrades and
additions to the facility's parking and infrastructure systems. The Tribe has
chosen a site master planning firm, an architect and a project developer for
the expansion. Preliminary construction of an employee parking garage and
patron parking garage commenced in March 1999. TCA will oversee the planning,
design and construction of the expansion at Mohegan Sun and will receive
compensation of $14 million for such services.
Under the terms of the Relinquishment Agreement, TCA will continue to manage
the existing property under the Management Agreement until December 31, 1999.
On January 1, 2000, the Management Agreement will terminate, and the Authority
will assume 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 and from the planned expansion, beginning January 1, 2000 and
ending December 31, 2014. The liability is estimated at $560 million as of
March 31, 1998 and will be reassessed periodically.
For the remainder of fiscal 1999, the Authority expects capital expenditures
to be approximately $9.4 million on facility improvements and $40.9 million on
the expansion of Mohegan Sun.
During the three-months ended March 31, 1999 and 1998, the Authority,
subsequent to meeting its operating expenses and required deposits to reserve
funds under the Senior Secured Notes, distributed a total of $8.7 million and
$7.0 million, respectively, to the Tribe. During the six-months ended March 31,
1999 and 1998, the Authority distributed a total of $70.7 million and $19.5
million respectively, to the Tribe. As required under the Senior Secured Notes,
the Authority made an Excess Cash Purchase Offer of $51.2 million to all
holders of the Senior Secured Notes on December 30, 1998. The Excess Cash
Purchase Offer expired, by its terms, on January 29, 1999, and none of the
holders of the Senior Secured Notes accepted the offer. On February 1, 1999,
pursuant to the Subordinated Note purchase agreement, an offer to repurchase in
the amount of the Excess Cash Purchase Offer was made to the holders of the
Subordinated Notes. On February 3, 1999, the holders of the Subordinated Notes
also rejected the offer. On February 4, 1999, as permitted by Section 4.07(g)
of the Senior Secured Notes, the Authority distributed the Excess Cash Purchase
Offer of $51.2 million to the Tribe, and subsequently, the Tribe contributed
the $51.2 million back to the Authority.
15
On January 15, 1999, the Authority initiated a tender offer and consent
solicitation for the repurchase of all $175 million aggregate principal amount
outstanding of its 13.5% Senior Secured Notes due 2002. The offer expired on
February 12, 1999. The tender offer price for the Senior Secured Notes was
$208.7 million, or 119% of face amount plus $11.3 million of accrued interest.
Funding of the tender offer and consent solicitation occurred on March 3, 1999.
Additional sources of funding for the tender offer included issuance of Senior
Notes and Senior Subordinated Notes.
The Authority has agreed to redeem the Authority's outstanding Subordinated
Notes on January 1, 2000, the first permitted redemption date under the
Relinquishment Agreement, at a price of 100% of the principal amount plus
accrued and unpaid interest less $500,000. To do this, the Authority has
exercised its rights under the original purchase agreement for the Subordinated
Notes to effect a defeasance of these Notes. The Authority has established a
separate trust account with a defeasance agent with cash funds estimated to be
sufficient to redeem the Subordinated Notes on January 1, 2000. All
Subordinated Notes are currently held by Sun International Hotels Limited, the
parent company of a partner in Trading Cove Associates, and by Waterford Gaming
L.L.C., also a partner in Trading Cove Associates.
On November 15, 1998 and 1997, the Authority made interest payments of $11.8
million each to the holders of the Senior Secured Notes and payments of $5.8
million and $4.1 million, respectively, in Cash Flow Participation Interest on
such dates to such debtholders. There are no cash interest payment requirements
on the Junior Subordinated Notes as interest is accrued and deferred until a
portion of the Senior Secured Notes are offered to be repurchased or retired,
as defined.
Management believes that existing cash balances, operating cash flow and
available credit facilities will provide the Authority with sufficient
resources to meet its existing debt obligations and foreseeable capital
expenditure requirements with respect to current operations for at least the
next 12 months.
Year 2000 Readiness Disclosure
Background
Many computer systems and applications currently use two-digit date fields
to designate a year. As the century date change occurs, date-sensitive systems
will recognize the year 2000 as 1900, or not at all. This inability to
recognize or properly treat the year 2000 may cause systems to process
financial and operational information incorrectly resulting in system failures
and other business problems.
Risk Factors
The Authority, like many organizations, depends on fully operational
computer systems in all areas of its operations. Additionally, the Authority is
dependent upon many vendors to provide uninterrupted service for its operation
to run effectively. Exposure to both of these risk factors are issues for which
the Authority is formulating an approach to handle these issues.
Approach
With the assistance of an outside consultant, the Authority has implemented
a Year 2000 program to provide an independent analysis of the Authority's Year
2000 preparedness and the adequacy of the Authority's Year 2000 plans. The
program includes inventorying entities, identifying problems, planning
compliance, calculating time and cost estimates and generating implementation
strategies, attempting to correct the problems and testing the solutions. The
consultant will examine the methodology being used to approach risks in the
facilities' embedded systems and in products in the Authority's supply chain.
While the Authority's efforts are designed to be successful, because of the
complexity of the Year 2000 issues and the interdependence of organizations
using computer systems, there can be no assurance that the Authority's efforts,
or those of a third party with whom the Authority interacts, will be
satisfactorily completed in a timely fashion. This could result in a material
adverse effect on future operations.
16
Status
As of March 31, 1999, the Authority is approximately 76% in conformance with
the Gartner Group Year 2000 best practices model. The Authority's mission
critical system applications that run the Authority's financial, payroll and
casino operating systems were remediated in April 1999. As of March 31, 1999,
the Authority has received compliance correspondence from 80% of its mission
critical vendors and is 80% complete with its embedded system testing. These
embedded systems include slot machine heating and cooling machinery and
equipment and related infrastructure. Upon review of its program, the Authority
now anticipates completion by July 31, 1999. If at that time it is determined
that the project plan will not be completed, a contingency plan will be
developed to eliminate any disruption to operations.
Cost
The Authority has incurred approximately $446,000 in costs associated with
the Year 2000 Program as of March 31, 1999. The Authority does not separately
track costs, except for labor incurred by the information systems group and
outside consulting fees, incurred for the Year 2000 program. Although there can
be no assurances, it is anticipated that costs associated with the remediation
and verification to become Year 2000 compliant will not exceed $1.0 million and
will not have a material adverse impact on the Authority's financial position,
results of operations, or cash flow.
Certain Forward Looking Statements
Certain information included in this Form 10-Q and other materials filed or
to be filed by the Authority with the Securities and Exchange Commission
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.
Such statements include information relating to plans for future expansion and
other business development activities as well as other capital spending,
financing sources and the effects of regulation (including gaming and tax
regulation) and competition. Such forward-looking information involves
important risks and uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the
Authority. These risks and uncertainties include, but are not limited to, those
relating to development and construction activities, dependence on existing
management, leverage and debt service, domestic or global economic conditions,
issues related to the Year 2000, pending litigation, changes in federal tax
laws or the administration of such laws and changes in gaming laws or
regulations (including the legalization of gaming in certain jurisdictions).
17
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
On January 15, 1999, the Authority initiated a tender offer and consent
solicitation for the repurchase of all $175 million aggregate principal amount
outstanding of its 13.5% Senior Secured Notes due 2002. The offer expired on
February 12, 1999. The tender offer price for the Senior Secured Notes was
$208.7 million, or 119% of face amount plus $11.3 million of accrued interest.
Funding of the tender offer and consent solicitation occurred on March 3, 1999.
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. Exhibit 27: Financial Data Schedule for Mohegan Tribal Gaming Authority
b. Current reports on Form 8-K: None
c. Exhibit 10.17: Loan Agreement dated as of March 3, 1999 among the
Mohegan Tribal Gaming Authority, as borrower, the Mohegan Tribe of
Indians of Connecticut, as an additional obligor with respect to certain
representations, warranties and covenants and Bank of America National
Trust and Savings Association as Administrative Agent
18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOHEGAN TRIBAL GAMING AUTHORITY
Date: May 14, 1999 By: /s/ Roland J. Harris
------------------ ------------------------------------
Roland J. Harris
Chairman, Management Board
Date: May 14, 1999 By: /s/ William J. Velardo
------------------ ------------------------------------
William J. Velardo
Executive Vice President and
General Manager
Date: May 14, 1999 By: /s/ Jeffrey E. Hartmann
------------------ ----------------------------------
Jeffrey E. Hartmann, Senior Vice
President,
Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer)
19