SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission file number 033-80655
MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of registrant as specified in its charter)
Connecticut 06-1436334
(State or other jurisdiction of (IRS employer
incorporation or organization) Identification No.)
One Mohegan Sun Boulevard, Uncasville, CT 06382
(Address of principal executive offices) (Zip Code)
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:
NONE
- ------------------------
(Title of Class)
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
PART I -- FINANCIAL INFORMATION Page
Number
------
Item 1 -- Financial Statements
Review Report of Independent Public Accountants 1
Balance Sheets of Mohegan Tribal Gaming Authority as of December 31, 2000 (unaudited) 2
and September 30, 2000.
Statements of Income of Mohegan Tribal Gaming Authority for the Three Months Ended 3
December 31, 2000 and 1999 (unaudited).
Statements of Capital of Mohegan Tribal Gaming Authority for the Three Months Ended 4
December 31, 2000 and 1999 (unaudited).
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the Three Months Ended 5
December 31, 2000 and 1999 (unaudited).
Notes to Financial Statements of Mohegan Tribal Gaming Authority. 6-12
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of 13-16
Operations.
Item 3 -- Quantitative and Qualitative Disclosure of Market Risk 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 December 31, 2000, and the related statements
of income, capital and cash flows for the three month periods ended December 31,
2000 and 1999. 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(loss),
capital and cash flows for the year 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
February 2, 2001
Mohegan Tribal Gaming Authority
-------------------------------
Balance Sheets
--------------
(in thousands)
--------------
December 31, September 30,
2000 2000
-------------- ---------------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $68,544 $115,731
Receivables, net 8,702 6,337
Due from Tribe 5,854 1,648
Inventories 7,057 7,577
Other current assets 3,411 4,478
-------------- ---------------
Total current assets 93,568 135,771
Non-current assets:
Property and equipment, net 338,145 338,243
Construction in process 341,588 264,999
Trademark, net 122,269 123,128
Other assets, net 20,857 23,238
-------------- ---------------
Total assets $916,427 $885,379
============== ===============
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations $2,671 $4,055
Current portion of relinquishment liability 61,630 56,646
Accounts payable and accrued expenses 59,331 57,601
Accrued interest payable 21,250 10,625
-------------- ---------------
Total current liabilities 144,882 128,927
Non-current liabilities:
Long-term debt 500,000 500,000
Relinquishment liability 614,751 616,234
Capital lease obligations, net of current portion 1,650 2,336
-------------- ---------------
Total liabilities 1,261,283 1,247,497
-------------- ---------------
Commitments and contingencies (Note 5)
Capital (344,856) (362,118)
-------------- ---------------
Total liabilities and capital $916,427 $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
Quarter Ended Quarter Ended
December 31, 2000 December 31, 1999
----------------- -----------------
(unaudited) (unaudited)
Revenues:
Gaming $174,958 $164,925
Food and beverage 10,724 11,317
Retail and other 16,595 15,452
-------------------- --------------------
Gross revenues 202,277 191,694
Less - Promotional allowances (19,187) (18,383)
-------------------- --------------------
Net revenues 183,090 173,311
-------------------- --------------------
Cost and expenses:
Gaming 78,389 73,209
Food and beverage 6,078 6,008
Retail and other 5,835 5,639
General and administration 41,505 34,417
Pre-opening costs 1,389 907
Management fee 6,579 13,634
Depreciation and amortization - 7,526
-------------------- --------------------
Total costs and expenses 139,775 141,340
-------------------- --------------------
Income from operations 43,315 31,971
-------------------- --------------------
Other income (expense):
Relinquishment liability reassessment (Note 7) (8,958) (5,763)
Interest and other income 1,164 3,245
Interest expense (5,925) (14,028)
Change in fair value of derivative instruments (Note 3) (2,142) -
-------------------- --------------------
(15,861) (16,546)
-------------------- --------------------
Income from continuing operations 27,454 15,425
Loss from discontinued operations (192) (266)
-------------------- --------------------
Net income $ 27,262 $ 15,159
==================== ====================
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 Quarter For the Quarter
Ended December 31, 2000 Ended December 31, 1999
----------------------- -----------------------
(unaudited) (unaudited)
Beginning balance $(362,118) $(458,052)
Net income 27,262 15,159
Distributions to Tribe (10,000) (10,247)
-------------- --------------
Ending balance $(344,856) $(453,140)
============== ==============
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 Quarter Ended For the Quarter Ended
December 31, 2000 December 31, 1999
----------------- -----------------
(unaudited) (unaudited)
Cash flows provided by operating activities:
Net income $27,262 $ 15,159
Adjustments to reconcile net income to
net cash flow provided by operating activities:
Depreciation and amortization 6,579 7,526
Loss on asset disposal - 138
Provision for losses on receivables 117 167
Relinquishment liability reassessment 8,958 5,763
Changes in operating assets and liabilities:
Increase in receivables and other assets (2,343) (1,078)
Decrease (increase) in accounts payable and accrued
expenses 12,355 (11,406)
------------ ------------
Net cash flows provided by operating activities 52,928 16,269
------------ ------------
Cash flows used in investing activities:
Purchase of property and equipment (4,630) (4,123)
Increase in construction in process (76,589 (49,538)
------------ ------------
Net cash flows used in investing activities (81,219) (53,661)
------------ ------------
Cash flows used in financing activities:
Distributions to Tribe (10,000) (10,247)
Relinquishment payments (5,457) -
Payment on equipment financing (2,071) (3,032)
Capitalized financing fees (1,368) -
Defeasance trust asset - 135,507
Defeasance liability - (140,344)
------------ ------------
Net cash flows used in financing activities (18,896) (18,116)
------------ ------------
Net decrease in cash and cash (47,187) (55,508)
equivalents
Cash and cash equivalents at beginning of period 115,731 276,598
------------ ------------
Cash and cash equivalents at end of period $68,544 $221,090
============ ============
Supplemental disclosures:
Cash paid during the period for interest $ 112 $ 21,618
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 Management Board previously engaged Trading
Cove Associates ("TCA"), a Connecticut general partnership, to manage the
operations of Mohegan Sun pursuant to a seven year contract (the "Management
Agreement"). The Management Agreement between the Tribe and TCA concluded on
January 1, 2000. (See Note 7 for a discussion of the Relinquishment Agreement
between the Authority and TCA).
Certain amounts in the 1999 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 months ended December 31, 2000 are not necessarily
indicative of expected results for the full year, as the casino industry in
Connecticut is seasonal in nature.
2. Discontinued operations:
On October 13, 2000, the Authority announced it would discontinue 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." On November 29,
2000 the Authority discontinued bingo operations.
3. Financing Facilities:
During 1999, the Authority issued $200 million in Senior Notes and $300 million
in Senior Subordinated Notes. The proceeds from this financing were used to
extinguish the existing Senior Secured Notes, defease the existing Subordinated
Notes, pay transaction costs for the financing of the newly issued Senior and
Senior Subordinated Notes, and fund initial 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 (see Note 7) to TCA 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 December 31, 2000,
accrued interest on the Senior Notes was $8.1 million.
6
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
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 December 31, 2000, 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 arrange for increases in 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. 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. As of
December 31, 2000, there were no borrowings outstanding on the Bank Credit
Facility. 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 plans to draw on the Bank Credit Facility primarily in connection with
Project Sunburst. As of January 31, 2001, the Authority has borrowed $55.0
million under the Bank Credit Facility.
Effective November 30, 2000, the Authority amended certain financial covenants
and capital spending limitations of the Bank Credit Facility agreement.
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 December 31, 2000 and
1999, the Authority was in compliance with all financial covenant requirements.
Derivative Instruments
The Authority uses derivative instruments, including interest rate caps, collars
and swaps as 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 generate 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 the
established limits.
7
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
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 December 31, 2000.
Notional Cost Market
- -------------------------------------------------------------------------------
Interest Rate Cap
Strike Rate - 8% $2,647,400 $410,000 $ 10,000
- -------------------------------------------------------------------------------
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% 451,267 295,000 ( 777,632)
- -------------------------------------------------------------------------------
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable 225,633 221,000 ( 448,124)
- -------------------------------------------------------------------------------
Total $3,324,300 $926,000 ($1,215,756)
- -------------------------------------------------------------------------------
As of December 31, 2000, there were no drawdowns on the Bank Credit Facility
(See discussion of Bank Credit Facility above).
All derivative instruments are based on one-month LIBOR (London Inter-bank
Offered Rates). LIBOR was 6.56% and 6.61% on December 31, 2000 and September
30, 2000, respectively.
The Authority sold and purchased two derivative instruments during November
2000. There was no gain or loss recognized on the sale of the derivative
instruments. For the three months ended December 31, 2000, the Authority
recognized a net loss of $2.1 million due to the change in the fair value of its
derivative instruments, which is reflected as other expense in the statements of
income.
8
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
Letters of Credit
The Authority has available a $250,000 unsecured letter of credit with Fleet
National Bank that will expire on August 31, 2001 and a $1.0 million letter of
credit agreement with Bank of America that expires in April 2001. The Authority
also had a $250,000 letter of credit with Peoples Bank that expired on January
11, 2001. As of December 31, 2000, no amounts were drawn on the letters of
credit.
4. Leases:
At December 31, 2000, 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 $ 2,178
2002 2,357
2003 65
-------
Total minimum lease payments 4,600
Amount representing interest (279)
-------
Total obligation under capital leases 4,321
Less: Amount due within one year (2,671)
-------
Amount due after one year $ 1,650
=======
Operating lease expenses, excluding costs to obtain assets were $902,000 for the
three months ended December 31, 1999. No operating leases existed during the
three months ended December 31, 2000.
5. Commitments and Contingencies:
Project Sunburst
The Authority has received authorization from the Tribe to expend up to $960.0
million, excluding capitalized interest, for completion of Project Sunburst. As
of December 31, 2000, the Authority has spent $334.7 million, excluding
capitalized interest, on Project Sunburst. Project Sunburst expenditures for
the remainder of fiscal 2001 are expected to total $424.1 million. The
remaining $201.2 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 table games within Connecticut (except those consented to by
the Tribe and/or the Mashantucket Pequot Tribe). The Authority reflected
expenses associated with Slot Win Contribution totaling $33.0 million and $30.9
million, respectively for the quarters ended December 31, 2000 and
1999.
9
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
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 make a one-time payment of $3.0 million towards infrastructure improvements
to the Town's water system. As of December 31, 2000, 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 sheet 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 December 31, 2000, Perini has
received $8.6 million of the $20.5 million fee which has been included in
construction in process in the accompanying balance sheet. 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 December
31, 2000 and 1999, the Authority incurred expenses of $2.7 million and $2.3
million, respectively, for such services. Distributions to the Tribe for the
quarters ended December 31, 2000 and 1999 were $10.0 million and $10.2 million,
respectively.
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.
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 quarter ended December 31, 1999. There were no management fees
for the quarter ended December 31, 2000 due to the termination of the Management
Agreement. (See discussion of Relinquishment Agreement below.)
10
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
Relinquishment Agreement
In February 1998, the Authority and TCA entered into an agreement (the
"Relinquishment Agreement") which supersedes the Management Agreement (see
below) 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 the
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 and continue at the end of each three-month
period occurring thereafter until December 31, 2014. 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 continues 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, 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
promotional transactions that, in TCA's opinion, has resulted in a reduction in
revenues subject to the Relinquishment Agreement. The amount in dispute does
not have a material effect on the Authority's financial statements as of
December 31, 2000.
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 December 31, 2000, the relinquishment liability was reassessed to be $676.4
million from $672.9 million as of September 30, 2000. This reassessment
resulted from the impact of the time value of money due to the passage of time.
At December 31, 2000, approximately $15.6 million was included in the
relinquishment liability representing the amount earned from July 1, 2000 to
December 31, 2000. This includes $5.5 million of Senior Relinquishment Payments
relating to the period from October 1, 2000 to December 31, 2000 and $10.1
million of Junior Relinquishment Payments relating to the period from July 1,
2000 to December 31, 2000. For the three months ended December 31, 2000, the
quarterly reassessment for the time value of money due to the passage of time
was $9.0 million. During the quarter ended December 31, 2000, the Authority
made a Senior Relinquishment Payment of $5.5 million.
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, TCA oversees the planning,
design and construction of Project Sunburst and will receive compensation of $14
million for such services based on the incremental completed percentage of
Project Sunburst. As of December 31, 2000, TCA had earned $5.5 million of the
$14 million in development fees. This fee is included in construction in
process.
11
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
8. Employee Benefits Plans:
Effective February 10, 1997, the Authority adopted a retirement savings plan for
its employees under Section 401(k) of the Internal Revenue Code. 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. 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
$619,000 and $631,000, respectively, to this plan for the quarters ended
December 31, 2000 and 1999.
Effective September 1, 1998, the Authority, together with the Tribe, adopted a
Non-Qualified 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 December 31, 2000, net contributions by Authority
employees totaled $298,000. Cumulative contributions by Authority employees to
the plan have totaled $1.1 million.
9. Due from the Tribe:
At December 31, 2000, amounts due from Tribe relate to payments made by the
Authority on behalf of the Tribe for the construction of the Tax-Exempt
Utilities and the Public Safety Facility that will service the Mohegan
Reservation. The Tribe anticipates obtaining tax-exempt financing which will,
among other things, be used to repay this advance.
12
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 December 31, 2000 and
1999:
Net revenues for the three months ended December 31, 2000 were $183.1 million
compared to $173.3 million reported for the same period of the prior year. This
5.6% increase is primarily attributable to an increase in gaming revenues.
Gaming revenues totaled $175.0 million for the three months ended December 31,
2000 compared to $164.9 million for the three months ended December 31, 1999.
The increase of 6.1% in gaming revenues is due to a 5.8% growth in slot machine
revenues and a 7.5% increase in table game revenues.
For the three months ended December 31, 2000, food and beverage revenues were
$10.7 million compared to $11.3 million for the three months ended December 31,
1999. The 5.2% decrease in food and beverage revenues is attributable to a 4.0%
decrease in food covers for the three months ended December 31, 2000 as compared
to the same period in the prior year.
Retail and other revenues were $16.6 million and $15.5 million for the three
months ended December 31, 2000 and 1999, respectively. This represents growth
of $1.1 million, or 7.4%, over the same period in the prior year. Of the $1.1
million increase in retail and other revenues, $878,000 is attributable to the
increased sales at the Mohegan Sun gasoline and convenience center.
Promotional allowances totaled $19.2 million for the three months ended December
31, 2000, representing a $804,000, or 4.4%, 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 11.0% and 11.1% for the three months ended
December 31, 2000 and 1999, respectively.
Total costs and expenses were $139.8 million for the three months ended December
31, 2000, a decrease of $1.6 million over the same period in the prior year.
The decrease is a result of the termination of the Management Agreement
effective January 1, 2000, partially offset by increases in gaming and general
and administrative costs.
Gaming costs and expenses were $78.4 million for the three months ended December
31, 2000, an increase of $5.2 million, or 7.1%, over the same period in the
prior year. The slot win contribution totaled $33.0 million and $30.9 million
for the three months ended December 31, 2000 and 1999, respectively. The slot
win contribution increase of $2.1 million, or 6.9%, over the same period in the
prior year is directly attributable to the $7.1 million, or 5.8%, increase in
slot revenues. The balance of the growth in gaming costs and expenses is
attributable to an increase in the quality of complimentaries offered in the
lounges and increased labor and benefit costs.
Food and beverage costs were $6.1 million for the three months ended December
31, 2000, an increase of $70,000, or 1.2%, over the same period in the prior
year. The increase is primarily attributable to increased labor and benefit
costs.
Retail and other costs were $5.8 million for the three months ended December 31,
2000, an increase of $196,000, or 3.5%, over the same period in the prior year.
The increase is directly attributable to the 7.4% 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.
General and administrative costs were $41.5 million for the three months ended
December 31, 2000. The increase of $7.1 million, or 20.6%, over the same period
in the prior year is attributable to continued marketing and advertising
campaigns and the addition of the Uncas Pavilion, a temporary entertainment
structure used for special events. Management believes marketing programs have
driven incremental patronage, expanding our brand awareness and market share.
13
Pre-opening costs totaled $1.4 million for the three months ended December 31,
2000 and are primarily composed of pre-opening labor and advertising costs
associated with the Project Sunburst expansion. Mohegan Sun incurred pre-
opening expansion costs of $907,000 for the three months ended December 31,
1999.
TCA did not receive management fees for the three months ended December 31,
2000, as a result of the termination of the Management Agreement on January 1,
2000. Management fees earned by TCA totaled $13.6 million for the three months
ended December 31, 1999.
For the three months ended December 31, 2000, depreciation and amortization
decreased by $947,000, or 12.6%, over the same period in the prior year. The
decrease is primarily attributable to the acceleration of the trademark
amortization in the prior year of $859,000. Depreciation and amortization for
the three months ended December 31, 2000 and 1999 were $6.6 million and $7.5
million, respectively.
Income from operations for the three months ended December 31, 2000 totaled
$43.3 million, compared to $32.0 million for the same period in the prior year.
This represents a $11.3 million, or 35.5%, increase over the same period in the
prior year.
For the three months ended December 31, 2000, 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 $1.2 million for the three months ended December
31, 2000, a decrease of $2.1 million, or 64.1%, 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
$42.1 million and $218.8 million for the three months ended December 31, 2000
and 1999, 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 $5.9 million for the three months ended December 31, 2000
represented a decrease of $8.1 million, or 57.8%, over the same period in the
prior year. This decrease was mainly attributable to lower average debt
outstanding and increased capitalization of interest related to Project
Sunburst, partially offset by a higher average interest rate. Capitalized
interest was $4.8 million for the three months ended December 31, 2000 compared
to $1.1 million for the same period in the prior year. The weighted average
interest rate for the three months ended December 31, 2000 was 8.42%, compared
to 8.38% for the three months ended December 31, 1999. The weighted average
outstanding debt was $504.8 million for the three months ended December 31,
2000, compared to $517.3 million for the three months ended December 31, 1999.
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 December 31, 2000. The Authority held no derivative instruments during the
quarter ended December 31, 1999.
Liquidity, Capital Resources and Capital Spending
As of December 31, 2000 and 1999, the Authority held cash and cash equivalents
of $68.5 million and $221.1 million, respectively. Cash provided by operating
activities was $52.9 million for the three months ended December 31, 2000
compared to cash provided by operating activities of $16.3 million for the same
period in the prior year. 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.
14
On March 3, 1999, the Authority entered into a syndicated $425.0 million Bank
Credit Facility maturing in March 2004. The Bank Credit Facility agreement
provided the Authority the right to arrange for increases in the Bank Credit
Facility to an aggregate amount of $500.0 million. In November 2000, the
Authority exercised its right to increase the Bank Credit Facility to $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
December 31, 2000, there were no borrowings outstanding on the Bank Credit
Facility. The Authority plans to draw on the Bank Credit Facility primarily in
connection with Project Sunburst. Subsequent to December 31, 2000 the Authority
borrowed $55.0 million under the Bank Credit Facility to fund Project Sunburst
costs.
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 has entered into certain hedging transactions effective
October 1, 2000 and January 2, 2001, to mitigate against the exposure to
interest rate fluctuations on the Bank Credit Facility. As of January 31,
2001, the Authority borrowed $55.0 million on the Bank Credit Facility.
In November 2000, the Tribe approved a formal resolution increasing the
expansion budget from $800.0 million to $960.0 million (excluding capitalized
interest, which will be paid from internally generated funds). The Authority,
in conjunction with the Tribe, has increased the Project Sunburst budget to
$960.0 million for three reasons: (1) expected increases in Project Sunburst
labor costs because of the extremely competitive nature of the Northeast
construction labor market; (2) enhancements to project scope such as an increase
in the number of slot machines scheduled to be placed on the gaming floor; and
(3) quality improvements to the hotel and public areas. As a result of the
increase to the Project Sunburst budget, the Authority anticipates seeking to
issue an additional $150.0 million of subordinated notes or a term loan. The
remainder of the increase will be funded through internally generated funds
The Authority's capital spending has increased significantly with the
commencement of the Project Sunburst expansion. Capital expenditures totaled
$81.2 million for the three months ended December 31, 2000 versus $53.7 million
for the same period in the prior year. Project Sunburst construction costs,
excluding capitalized interest of $15.2 million, totaled $334.7 million through
December 31, 2000, of which $69.9 million, excluding $4.8 million of capitalized
interest, was expended during the quarter. The Casino of the Sky, Mohegan Sun
Arena and the Shops at Mohegan Sun are expected to open in October 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 $4.7 million and $3.4 million for the three months ended December 31,
2000 and 1999, respectively. Expenditures for the employee parking center
totaled $24.8 million to date and $1.2 million for the quarter. Expenditures on
the property's utility enhancements have totaled $17.6 million, of which
$624,000 was spent during the three months ended December 31, 2000.
Cumulative Project Sunburst construction costs totaled $334.7 million, excluding
capitalized interest, through December 31, 2000. For the remainder of fiscal
2001, based on TCA estimates, the Authority anticipates Project Sunburst
spending to be $424.1 million.
For fiscal 2001, the Authority expects capital expenditures to total
approximately $25.0 million on facility improvements and maintenance capital
expenditures, $494.0 million, excluding capitalized interest, on Project
Sunburst construction, $20.0 million on the conversion of the bingo hall into a
smoke-free slot parlor, $17.4 million on utility enhancements, $2.0 million on
an employee day care center and $42 million on an additional patron garage.
During the three months ended December 31, 2000 and 1999, the Authority
distributed $10.0 million and $10.2 million, respectively, to the Tribe.
15
The Authority commenced construction of a $35.0 million electrical and water
systems infrastructure ("Infrastructure Improvements") 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 December 31, 2000, approximately $17.6 million has been
incurred.
The Authority, in conjunction with the Project Sunburst expansion, commenced
construction on the Eagleview employee parking center in March 1999. The
Eagleview 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 Eagleview employee
parking center opened in June 2000. The total cost of the Eagleview employee
parking center to date is $24.8 million. The total cost of the Eagleview
employee parking garage is expected to be $25.0 million. It is anticipated that
the parking garage will be completed by March 2001.
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.
Approximately $5.9 million has been incurred and reflected as amounts due from
Tribe in the Authority's balance sheet as of December 31, 2000.
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 December 31, 2000, the TCA has earned $5.5 million of the
development fee of which $4.9 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 $676.4 million as of December 31, 2000. In
October 2000, the Authority paid $5.5 million in Senior Relinquishment Payments.
On January 25, 2001, the Authority paid $5.5 million in Senior Relinquishment
payments and $10.1 million in Junior Relinquishment Payments.
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.
Disclosure Regarding 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 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,
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).
16
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 December 31, 2000, the Bank Credit Facility was undrawn. On January 3 and
25, 2001, the Authority drew $15.0 million and $40.0 million, respectively, on
the Bank Credit Facility in connection with Project Sunburst.
The Authority uses derivative instruments, including interest rate caps, collars
and swaps as 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 generate 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
December 31, 2000.
Derivative instruments held by the Authority at December 31, 2000 are as
follows:
- -----------------------------------------------------------------------------------------------------
Effective Maturity Notional Cost Market
Date Date
- -----------------------------------------------------------------------------------------------------
Interest Rate Cap
Strike Rate - 8% October 1, October 1, $ 2,647,400 $ 410,000 $ 10,000
2000 2003
- -----------------------------------------------------------------------------------------------------
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% January 2, March 1, 451,267 295,000 ( 777,632)
2001 2004
- -----------------------------------------------------------------------------------------------------
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable January 2, March 1, 225,633 221,000 ( 448,124)
2001 2004
- -----------------------------------------------------------------------------------------------------
Total $ 3,324,300 $ 926,000 ($1,215,756)
- -----------------------------------------------------------------------------------------------------
All derivative instruments are based upon one-month LIBOR, which was 6.56% on
December 31, 2000.
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
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
None
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: February 12, 2001 By: /s/ Mark F. Brown
----------------- --------------------------------------
Mark F. Brown
Chairman, Management Board
Date: February 12, 2001 By: /s/ William J. Velardo
----------------- --------------------------------------
William J. Velardo
President and General Manager
Date: February 12, 2001 By: /s/ Jeffrey E. Hartmann
----------------- --------------------------------------
Jeffrey E. Hartmann, Executive Vice
President Finance/Chief Financial Officer
(Principal Financial and Accounting
Officer)