SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
Commission file number 033-80655
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 ___
-----------
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 March 31, 2001 2
(unaudited) and September 30, 2000
Statements of Income of Mohegan Tribal Gaming Authority for the Three and Six 3
Months Ended March 31, 2001 and 2000 (unaudited)
Statements of Capital of Mohegan Tribal Gaming Authority for the Six Months 4
Ended March 31, 2001 and 2000 (unaudited)
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the Six Months 5
Ended March 31, 2001 and 2000 (unaudited)
Notes to Financial Statements of Mohegan Tribal Gaming Authority 6-13
Item 2 -- Management's Discussion and Analysis of Financial Condition and 14-19
Results of Operations
Item 3 -- Quantitative and Qualitative Disclosure of Market Risk 20
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 21
Item 2 -- Changes in Securities 21
Item 3 -- Defaults upon Senior Securities 21
Item 4 -- Submission of Matters to a Vote of Security Holders 21
Item 5 -- Other Information 21
Item 6 -- Exhibits and Reports on Form 8-K 21
Signatures - Mohegan Tribal Gaming Authority 22
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, 2001 and the related statements of
income for the three and six month periods ended March 31, 2001 and 2000 and the
statements of capital and cash flows for the six months ended March 31, 2001 and
2000. These financial statements are the responsibility of the Authority's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States, the
objective of which is the expression of an opinion regarding the financial
statements as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet of the Mohegan Tribal Gaming
Authority as of September 30, 2000, and the related statements of income (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
April 26, 2001
Mohegan Tribal Gaming Authority
-------------------------------
Balance Sheets
--------------
(in thousands)
--------------
March 31 September 30,
2001 2000
-------------- --------------
(unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 62,488 $ 115,731
Receivables, net 7,204 7,161
Due from Tribe 16,803 824
Inventories 7,179 7,577
Other current assets 5,759 4,478
-------------- --------------
Total current assets 99,433 135,771
Non-current assets:
Property and equipment, net 337,309 338,243
Construction in process 492,093 264,999
Trademark, net 121,410 123,128
Other assets, net 19,144 23,238
-------------- --------------
Total assets $1,069,389 $ 885,379
============== ==============
LIABILITIES AND CAPITAL
-----------------------
Current liabilities:
Current portion of capital lease obligations $ 2,721 $ 4,055
Current portion of relinquishment liability 46,508 56,646
Accounts payable and accrued expenses 72,524 57,601
Accrued interest payable 11,041 10,625
-------------- --------------
Total current liabilities 132,794 128,927
Non-current liabilities:
Long-term debt 628,000 500,000
Relinquishment liability 623,257 616,234
Capital lease obligations, net of current portion 950 2,336
-------------- --------------
Total liabilities 1,385,001 1,247,497
-------------- --------------
Commitments and contingencies (Notes 5 and 7)
Capital:
Retained Earnings (313,321) (362,118)
Accumulated other comprehensive loss (2,291) -
-------------- --------------
(315,612) (362,118)
-------------- --------------
Total liabilities and capital $1,069,389 $ 885,379
============== ==============
The accompanying accountants' review report and notes to the financial
statements should be read in conjunction with the financial statements
2
Mohegan Tribal Gaming Authority
-------------------------------
Statements of Income
--------------------
(in thousands)
--------------
For the For the For the For the
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
March 31, 2001 March 31, 2000 March 31, 2001 March 31, 2000
--------------- -------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Gaming $180,605 $175,572 $355,563 $340,519
Food and beverage 11,037 11,680 21,761 22,997
Retail and other 11,981 10,603 28,576 26,034
-------- -------- -------- --------
Gross revenues 203,623 197,855 405,900 389,550
Less - Promotional allowances (15,843) (15,646) (35,030) (34,029)
-------- -------- -------- --------
Net revenues 187,780 182,209 370,870 355,521
-------- -------- -------- --------
Cost and expenses:
Gaming 77,770 74,210 156,159 147,419
Food and beverage 5,942 5,856 12,020 11,864
Retail and other 7,571 6,486 15,474 12,125
General and administration 32,352 31,609 71,789 66,026
Pre-opening costs 1,927 1,110 3,316 2,017
Management fee - - - 13,634
Depreciation and amortization 6,943 7,760 13,522 15,286
-------- -------- -------- --------
Total costs and expenses 132,505 127,031 272,280 268,371
-------- -------- -------- --------
Income from operations 55,275 55,178 98,590 87,150
-------- -------- -------- --------
Other income (expense):
Relinquishment liability reassessment (Note 7) (8,958) (5,764) (17,916) (11,527)
Interest and other income 578 4,300 1,742 7,545
Interest expense (5,890) (9,131) (11,815) (23,159)
Change in fair value of derivative instruments
(Note 3) 865 - (1,277) -
-------- -------- -------- --------
(13,405) (10,595) (29,266) (27,141)
-------- -------- -------- --------
Income from continuing operations 41,870 44,583 69,324 60,009
Loss from discontinued operations (335) (40) (527) (306)
-------- -------- -------- --------
Net income $ 41,535 $ 44,543 $ 68,797 $ 59,703
======== ======== ======== ========
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 For the Six Months
Ended March 31, 2001 Ended March 31, 2000
-------------------- --------------------
(unaudited) (unaudited)
Beginning balance $(362,118) ($458,052)
Net income 68,797 59,703
Accumulated other comprehensive loss (2,291) -
Distributions to Tribe (20,000) (22,246)
--------- ------------
Ending balance $(315,612) $ (420,595)
========= ============
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, 2001 March 31, 2000
-------------- --------------
(unaudited) (unaudited)
Cash flows provided by operating activities:
Net income $ 68,797 $ 59,703
Adjustments to reconcile net income to
net cash flow provided by operating activities:
Depreciation and amortization 13,522 15,286
Loss on asset disposal - 182
Provision for losses on receivables 275 414
Relinquishment liability reassessment 17,916 11,527
Change in fair value of derivative instruments 1,277 -
Changes in operating assets and liabilities:
Increase in receivables and other assets (16,547) (4,623)
Increase in accounts payable and accrued expenses 15,339 2,956
------------------------ ------------------------
Net cash flows provided by operating activities 100,579 85,445
------------------------ ------------------------
Cash flows used in investing activities:
Purchase of property and equipment (8,744) (7,029)
Increase in construction in process (227,094) (97,915)
------------------------ ------------------------
Net cash flows used in investing activities (235,838) (104,944)
------------------------ ------------------------
Cash flows provided by (used in) financing activities:
Distributions to Tribe (20,000) (22,246)
Relinquishment payments (21,031) -
Payment on equipment financing (2,719) (5,991)
Proceeds from issuance of long-term debt 128,000 -
Capitalized financing fees (2,234) -
Defeasance trust asset - 135,507
Defeasance liability - (140,344)
------------------------ ------------------------
Net cash flows provided by (used in) financing activities 82,016 (33,074)
------------------------ ------------------------
Net decrease in cash and cash equivalents (53,243) (52,573)
Cash and cash equivalents at beginning of period 115,731 276,598
------------------------ ------------------------
Cash and cash equivalents at end of period $ 62,488 $ 224,025
======================== ========================
Supplemental disclosures:
Cash paid during the period for interest $ 22,111 $ 21,908
======================== ========================
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).
The accompanying financial statements have been prepared in accordance with the
accounting policies described in the Authority's 2000 Annual Report on Form 10-K
and should be read in conjunction with the Notes to Financial Statements which
appear in that report. The Balance Sheet at September 30, 2000, contained
herein, was taken from audited financial statements, but does not include all
disclosures contained in the Form 10-K and required by accounting principles
generally accepted in the United States.
Certain amounts in the 2000 financial statements have been reclassified. The
reclassification has no effect on the Authority's net income.
In the opinion of the Authority, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods have been included. The results reflected in the financial
statements for the three and six months ended March 31, 2001 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 November 29, 2000 the Authority discontinued bingo operations in order to
build a smoke-free slot area. Pursuant to Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30"), the financial statements of the
Authority have been restated to reflect the disposition of bingo operations as
discontinued operations. Accordingly, the revenues, costs and expenses have been
excluded from the captions in the Statements of Income and have been reported as
"Loss from discontinued operations." For the quarter ended March 31, 2001,
$335,000 was recorded as loss from discontinued operations relating to severance
pay and the disposal of bingo inventory.
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").
6
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
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 March 31, 2001, accrued
interest on the Senior Notes was $4.1 million.
Senior Subordinated Notes
On March 3, 1999, the Authority issued the Senior Subordinated Notes with fixed
interest payable at a rate of 8.75% per annum. Interest on the Senior
Subordinated Notes is payable semi-annually on January 1 and July 1. The notes
mature on January 1, 2009. The Senior Subordinated Notes are unsecured general
obligations of the Authority and are subordinated to the Bank Credit Facility
(see below), to the Senior Notes and to 50% of the Relinquishment Agreement
payment to TCA (see Note 7). The Senior Subordinated Notes rank equally to the
remaining 50% of the Authority's Relinquishment Agreement payment obligations.
As of March 31, 2001, accrued interest on the Senior Subordinated Notes was $6.6
million.
Bank Credit Facility
On March 3, 1999, the Authority entered into the $425.0 million Bank Credit
Facility, which will mature in March of 2004. The Bank Credit Facility agreement
provided the Authority the right to increase the Bank Credit Facility to an
aggregate amount of $500.0 million within two years subsequent to the closing.
In November 1999, the Bank Credit Facility was increased to $459.5 million. On
November 30, 2000, the Authority exercised its right to increase the Bank Credit
Facility to $500.0 million. The Bank Credit Facility is secured by a lien on
substantially all of the Authority's assets, by a leasehold mortgage on the land
on which Mohegan Sun is located, and by each of the Authority's cash operating
accounts. At the Authority's option, interest will accrue on the basis of a 1-
month, 3-month or 6-month London Inter-Bank Offer Rate ("LIBOR") based formula
plus applicable spreads. Interest on each LIBOR loan, which is for a term of
three months or less, shall be due and payable on the last day of the related
interest period. Interest on each LIBOR loan, which is for a term of more than
three months, is due and payable on the date which is three months after the
date such LIBOR loan was made and every three months thereafter on the last day
of the related interest period. The Bank Credit Facility will automatically
reduce by 10% of the commitment as of the earlier of March 31, 2002 or the last
full day of the first full fiscal quarter following the completion date of
Project Sunburst. The Authority draws on the Bank Credit Facility primarily in
connection with Project Sunburst. As of March 31, 2001, the Authority has
borrowed $128.0 million under the Bank Credit Facility. Accrued interest on the
Bank Credit Facility was $416,000 as of March 31, 2001. One-month LIBOR as of
March 31, 2001 was 5.08%.
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 March 31, 2001 and
2000, the Authority was in compliance with all financial covenant requirements.
7
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
Derivative Instruments
The Authority uses derivative instruments, including interest rate caps, collars
and swaps in its strategy to manage interest rate risk associated with the
variable interest rate on the Bank Credit Facility. The Authority's objective in
managing interest rate risk is to ensure the Authority has appropriate income
and sufficient liquidity to meet the Tribe and debt-holder obligations. The
Authority does not believe that there is any material risk exposure with respect
to derivative or other financial instruments. The Authority continually monitors
these exposures and makes the appropriate adjustments to manage these risks
within the established limits.
The Authority analyzes interest rate risk using various models that forecast
cash flows of the liabilities and their supporting assets, including derivative
instruments.
The Authority is considered an "end user" of derivative instruments and engages
in derivative transactions for risk management purposes only. On October 1, 2000
the Authority adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities", designated all derivative instruments as cash flow hedging
instruments and marked them to market. The impact of the adoption of SFAS No.
133 was not material to the financial position of the Authority taken as a
whole. The Authority excludes the change in time value when assessing the
effectiveness of the hedging relationships. All derivatives are evaluated
quarterly and were deemed to be effective at March 31, 2001.
- --------------------------------------------------------------------------------
Notional Cost Market
- --------------------------------------------------------------------------------
Interest Rate Cap
Strike Rate - 8% $22,314,600 $410,000 $ 2,000
- --------------------------------------------------------------------------------
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% 1,353,800 295,000 (1,665,267)
- --------------------------------------------------------------------------------
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable 676,900 221,000 ( 980,111)
- --------------------------------------------------------------------------------
Total $24,345,300 $926,000 ($2,643,378)
- --------------------------------------------------------------------------------
All derivative instruments are based on one-month LIBOR. One-month LIBOR was
5.08% and 6.61% on March 31, 2001 and September 30, 2000, respectively.
There was no gain or loss recognized on the sale of the derivative instruments.
For the quarter ended March 31, 2001, the Authority recognized a net gain of
$865,000 relating to the change in fair value of its derivative instruments,
which is reflected as other income in the statements of income. The net gain is
due to a decrease in the market value of the derivative instrument of
approximately $1.4 million offset by a reclassification of approximately $2.3
million to accumulated other comprehensive loss relating to the derivative
instruments becoming effective during the quarter ended March 31, 2001. For the
six months ended March 31, 2001, the Authority recognized a net loss of $1.3
million relating 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 that will
expire on August 31, 2001 and a $550,000 letter of credit agreement that expires
on April 16, 2002. The $550,000 letter of credit was reduced from $1.0 million
on April 13, 2001. The Authority had a $250,000 letter of credit that expired on
January 11, 2001. As of March 31, 2001, no amounts were drawn on the letters of
credit.
4. Leases:
At March 31, 2001, the Authority was obligated under capital leases to make
future minimum lease payments as follows:
For the fiscal year ending September 30,
- ------------------------------------------
(In Thousands)
2001 $ 1,452
2002 2,357
2003 64
-------
Total minimum lease payments 3,873
Amount representing interest (202)
-------
Total obligation under capital leases 3,671
Less: Amount due within one year (2,721)
-------
Amount due after one year $ 950
=======
On April 18, 2001, the Authority paid $1.4 million to buy out two of its capital
lease obligations.
Operating lease expenses, excluding costs to obtain assets, were $902,000 and
$1.8 million, respectively for the three and six months ended March 31, 2000. No
operating leases existed during the six months ended March 31, 2001.
5. Commitments and Contingencies:
Project Sunburst
The Authority has received authorization from the Tribe to expend up to $960.0
million, excluding capitalized interest, on Project Sunburst. As of March 31,
2001, the Authority has spent $468.0 million, excluding capitalized interest.
Project Sunburst expenditures for the remainder of fiscal 2001 are expected to
total $296.2 million. The remaining $195.8 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.
9
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
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). For the three months ended
March 31, 2001 and 2000 the Authority incurred expenses associated with the Slot
Win Contribution of $33.8 million and $32.7 million, respectively. The Authority
reflected expenses associated with Slot Win Contribution totaling $66.8 million
and $63.6 million, respectively for the six months ended March 31, 2001 and
2000.
Town of Montville Agreement
On June 16, 1994, the Tribe and the Town of Montville (the "Town") entered into
an agreement whereby the Tribe agreed to pay to the Town a recurring annual
payment of $500,000 to minimize the impact to the Town resulting from decreased
tax revenues on reservation land held in trust. Additionally, the Tribe agreed
to make a one-time payment of $3.0 million towards infrastructure improvements
to the Town's water system. As of March 31, 2001, the Authority has fulfilled
this obligation and paid $3.0 million to the Town of Montville for improvements
to the municipal water system, which has been included in other assets in the
accompanying balance sheets and is being amortized over 40 years. The Tribe has
assigned its rights and obligations in this agreement to the Authority.
Expansion Construction Management Agreement with Perini Building Company, Inc.
The Authority has engaged Perini Building Company, Inc. ("Perini") as
Construction Manager to provide construction management services for Project
Sunburst. As Construction Manager, Perini will receive a fee of $20.5 million
for services including, but not limited to, pre-construction review and
construction phase contract administration. As of March 31, 2001, Perini has
received $11.1 million of the $20.5 million fee which has been included in
construction in process in the accompanying balance sheets. The Authority
retains a portion of the construction expenditures until the completion of
Project Sunburst. As of March 31, 2001, construction retainage totaled $20.8
million, which has been included in accounts payable and accrued expenses in the
accompanying balance sheets. The Construction Management Agreement contains a
limited waiver of sovereign immunity to permit the commencement, maintenance and
enforcement of any dispute, claim and/or cause of action arising under the
Construction Management Agreement. In conjunction with the limited waiver of
sovereign immunity, Perini may seek satisfaction of judgment against the
undistributed and/or future revenues of Project Sunburst and/or the existing
Mohegan Sun facility.
Litigation
The Authority is a defendant in certain litigation incurred in the normal course
of business. In the opinion of management, based on the advice of counsel, the
aggregate liability, if any, arising from such litigation will not have a
material adverse effect on the Authority's financial position or results of
operations.
6. Related Party Transactions:
The Tribe provides governmental and administrative services to the Authority in
conjunction with the operation of Mohegan Sun. For the quarters ended March 31,
2001 and 2000, the Authority incurred expenses of $2.7 million and $2.5 million,
respectively, and $5.5 million and $4.6 million for the six months ended March
31, 2001 and 2000, respectively, for such services. Distributions to the Tribe
for the three months ended March 31, 2001 and 2000 were $10.0 million and $12.0
million, respectively. Distributions to the Tribe for the six months ended March
31, 2001 and 2000 were $20.0 million and $22.2 million, respectively.
10
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
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 six months ended March 31, 2000. There were no management fees
for the quarters ended March 31, 2001 and 2000 and for the six months ended
March 31, 2001 due to the termination of the Management Agreement. (See
discussion of Relinquishment Agreement below.)
Relinquishment Agreement
In February 1998, the Authority and TCA entered into an agreement (the
"Relinquishment Agreement") which superseded the Management Agreement effective
January 1, 2000 (the "Relinquishment Date"). The Relinquishment Agreement
provides that the Authority will make certain payments to TCA out of, and
determined as a percentage of, the revenues generated by 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 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, 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 March 31, 2001.
The Authority, in accordance with Financial Accounting Standards Board Statement
No. 5 ("SFAS No. 5"), "Accounting for Contingencies," has recorded a
relinquishment liability of the estimated present value of its obligations under
the Relinquishment Agreement. A relinquishment liability of $549.1 million was
established at September 30, 1998 based on the present value of the estimated
future Mohegan Sun revenues utilizing the Authority's risk free investment rate.
At March 31, 2001, approximately $10.2 million was included in the
relinquishment liability resulting from relinquishment fees earned from January
1, 2001 through March 31, 2001. At March 31, 2001, the relinquishment liability
was reassessed to be $669.8 million from $672.9 million as of September 30,
2000. For the three and six months ended March 31, 2001, the reassessment for
the time value of money due to the passage of time was $9.0 million and $17.9
million, respectively. For the three months ended March 31, 2001, the Authority
made Senior Relinquishment Payments of $5.1 million and Junior Relinquishment
Payments of $10.5 million. For the six months ended March 31, 2001, the
Authority made Senior Relinquishment Payments of $10.5 million and Junior
Relinquishment Payments of $10.5 million.
11
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO FINANCIAL STATEMENTS--(Continued)
------------------------------------------
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
$14.0 million for such services based on the incremental completed percentage of
Project Sunburst. As of March 31, 2001, TCA had earned $7.1 million of the $14.0
million in development fees. This fee is included in construction in process.
8. Employee Benefits Plans:
The Authority maintains a retirement savings plan for its employees under
Section 401(k) of the Internal Revenue Code. 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 $775,000 and $681,000
respectively, to this plan for the quarters ended March 31, 2001 and 2000.
Cumulative contributions have totaled $1.5 million and $1.3 million for the six
months ended March 31, 2001 and 2000, respectively
The Authority, together with the Tribe, maintains 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
March 31, 2001, contributions, net of withdrawals, by Authority employees
totaled ($68,000). For the six months ended March 31, 2001 and 2000,
contributions, net of withdrawals, by Authority employees totaled $231,000 and
$192,000. Cumulative contributions by Authority employees to the plan have
totaled $1.1 million.
9. Due from the Tribe:
At March 31, 2001, amounts due from the Tribe relate to payments made by the
Authority on behalf of the Tribe for various operating expenses and 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 the Authority.
10. Comprehensive Income:
SFAS No. 130 "Reporting Comprehensive Income", requires that the Authority
disclose comprehensive income and its components. The objective of SFAS No. 130
is to report a measure of all changes in equity of a company that result from
transactions and other economic events of the period other than transactions
with stockholders. Comprehensive income is the total of net income and all other
non-stockholder changes in equity ("Other Comprehensive Income").
The Authority has reclassified the intrinsic value associated with its
derivative instruments in accordance with SFAS No. 133 upon becoming effective
during the quarter ended March 31, 2001.
For the For the For the Six For the Six
Quarter Quarter Months Ended Months Ended
Ended March 31, 2001 Ended March 31, 2000 March 31, 2001 March 31, 2000
-------------------- -------------------- ---------------- ----------------
Net Income $ 41,535 $ 44,543 $ 68,797 $ 59,703
Derivative Instruments
adjustment (2,291) - (2,291) -
------------------- -------------------- ---------------- ----------------
Comprehensive Income $ 39,244 $ 44,543 $ 66,506 $ 59,703
=================== ==================== ================ ================
12
11. Subsequent Events:
On April 18, 2001, the Authority opened its smoke-free slot area, The Hall of
the Lost Tribes. The highly thematic smoke-free gaming venue features 637 slot
machines, quick service dining, and a new cocktail bar with video poker. The
Hall of the Lost Tribes is anticipated to be completed for $18.0 million, $2.0
million below the original $20.0 million budget.
On April 18, 2001, the Authority announced that all employees will be enrolled
in a Defined Contribution Retirement Plan ("The Plan") sponsored by the
Authority. The Plan will be effective July 2001 and contributions by the
Authority will be based on hours worked. Employees become eligible after 90 days
of employment and will be fully vested at the completion of seven years.
13
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Operating Results for the Three Months Ended March 31, 2001 and
2000:
Net revenues for the three months ended March 31, 2001 were $187.8 million
compared to $182.2 million reported for the same period of the prior year. This
3.1% increase is primarily attributable to an increase in gaming revenues.
Gaming revenues totaled $180.6 million for the three months ended March 31, 2001
compared to $175.6 million for the three months ended March 31, 2000. The 2.9%
increase in gaming revenues is due to a 2.1% growth in slot machine revenues and
a 5.8% increase in table game revenues.
For the three months ended March 31, 2001, food and beverage revenues were $11.0
million compared to $11.7 million for the three months ended March 31, 2000. The
5.5% decrease in food and beverage revenues is attributable to a 11.8% decrease
in food covers for the three months ended March 31, 2001 as compared to the same
period in the prior year.
Retail and other revenues were $12.0 million and $10.6 million for the three
months ended March 31, 2001 and 2000, respectively. This represents growth of
$1.4 million, or 13.0%, over the same period in the prior year. Of the $1.4
million increase in retail and other revenues, $313,000 is attributable to
increased retail revenues, $586,000 is attributable to the increased sales at
the Mohegan Sun gasoline and convenience center and $389,000 is attributable to
increased entertainment revenue.
Promotional allowances totaled $15.8 million for the three months ended March
31, 2001, representing a $197,000, or 1.3%, increase over the same period in the
prior year. The growth is attributable to increased redemption of Mohegan Sun
Player's Club points by patrons. Promotional allowances as a percentage of
gaming revenues were 8.8% and 8.9% for the three months ended March 31, 2001 and
2000, respectively.
Total costs and expenses were $132.5 million for the three months ended March
31, 2001, an increase of $5.5 million or 4.3% over the same period in the prior
year. The increase is primarily the result of increases in gaming, retail,
general and administrative costs and higher utility costs.
Gaming costs and expenses were $77.8 million for the three months ended March
31, 2001, an increase of $3.6 million, or 4.8%, over the same period in the
prior year. The slot win contribution totaled $33.8 million and $32.7 million
for the three months ended March 31, 2001 and 2000, respectively. The Slot Win
Contribution increase of $1.1 million, or 3.4%, over the same period in the
prior year is attributable to the $2.7 million, or 2.1%, increase in slot
revenues. Also contributing to the increase was an effective slot tax rate of
25.7% for the three months ended March 31, 2001 compared to 25.4% for the same
period in the prior year.
Food and beverage costs were $5.9 million for the three months ended March 31,
2001, an increase of $86,000, or 1.5%, over the same period in the prior year.
The increase is primarily attributable to higher labor and benefit costs.
Retail and other costs were $7.6 million for the three months ended March 31,
2001, an increase of $1.1 million, or 16.7%, over the same period in the prior
year. The increase is directly attributable to the 13.0% 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 $32.4 million for the three months ended
March 31, 2001. The increase of $743,000, or 2.4%, over the same period in the
prior year is attributable to continued marketing and advertising campaigns,
higher utility costs 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.
14
Pre-opening costs totaled $1.9 million for the three months ended March 31, 2001
and are primarily comprised of pre-opening labor and advertising costs
associated with the Project Sunburst expansion. Mohegan Sun incurred pre-opening
expansion costs of $1.1 million for the three months ended March 31, 2000.
For the three months ended March 31, 2001, depreciation and amortization
decreased by $817,000, or 10.5%, over the same period in the prior year. The
decrease is attributable to decreased depreciation on furniture and equipment,
versus the same period in the prior year, and the acceleration of the
amortization of capitalized interest in the prior year. Depreciation and
amortization for the three months ended March 31, 2001 and 2000 were $6.9
million and $7.8 million, respectively.
Income from operations for the three months ended March 31, 2001 totaled $55.3
million, compared to $55.2 million for the same period in the prior year. This
represents a $97,000 increase over the same period in the prior year.
For the three months ended March 31, 2001, the relinquishment liability
reassessment was $9.0 million compared to $5.8 million for the same period in
the prior year. This increase of $3.2 million, or 55.4%, is due to the
Authority's quarterly reassessment of the liability to reflect the impact of the
time value of money due to the passage of time.
Interest and other income were $578,000 for the three months ended March 31,
2001, a decrease of $3.7 million, or 86.6%, over the same period in the prior
year. The decrease in interest income resulted from the liquidation of
investments to fund Project Sunburst. The weighted average invested cash was
$20.6 million and $193.7 million for the three months ended March 31, 2001 and
2000, respectively. The Authority invests its excess cash in investment-grade
commercial paper having maturities of not more than six months from the date of
acquisition.
Interest expense of $5.9 million for the three months ended March 31, 2001
represented a decrease of $3.2 million, or 35.5%, over the same period in the
prior year. This decrease was mainly attributable to a lower average interest
rate and increased capitalization of interest related to Project Sunburst,
partially offset by an increase in average debt outstanding. Capitalized
interest was $5.9 million for the three months ended March 31, 2001 compared to
$1.8 million for the same period in the prior year. The weighted average
interest rate for the three months ended March 31, 2001 was 8.2%, compared to
8.4% for the three months ended March 31, 2000. The weighted average outstanding
debt was $595.9 million for the three months ended March 31, 2001, compared to
$514.3 million for the three months ended March 31, 2000.
The change in fair value of derivative instruments of $865,000 was attributable
to a decrease in the market value of the derivative instrument held at March 31,
2001 of $1.4 million. This was offset by a reclassification of $2.3 million to
accumulated other comprehensive loss relating to the derivative instruments
becoming effective during the quarter ended March 31, 2001. The Authority held
no derivative instruments during the quarter ended March 31, 2000.
Comparison of Operating Results for the Six Months Ended March 31, 2001 and
2000:
Net revenues for the six months ended March 31, 2001 were $370.9 million
compared to $355.5 million reported for the same period of the prior year. This
4.3% increase is primarily attributable to growth in gaming revenues.
Gaming revenues totaled $355.6 million for the six months ended March 31, 2001
compared to $340.5 million for the six months ended March 31, 2000. The increase
of 4.4% in gaming revenues is due to a 3.9% growth in slot machine revenues and
a 6.6% increase in table game revenues.
For the six months ended March 31, 2001, food and beverage revenues were $21.8
million compared to $23.0 million for the six months ended March 31, 2000. The
5.4% decrease in food and beverage revenues is attributable to an 8.0% decrease
in food covers for the six months ended March 31, 2001 as compared to the same
period in the prior year.
15
Retail and other revenues were $28.6 million and $26.0 million for the six
months ended March 31, 2001 and 2000, respectively. This represents growth of
$2.6 million or 9.8%, over the same period in the prior year. Of the $2.6
million increase in retail and other revenues, $1.6 million is attributable to
increased retail revenues and $1.5 million is attributable to the increased
sales at the Mohegan Sun gasoline and convenience center. The increase is offset
by a decrease in entertainment and other revenue of $550,000.
Promotional allowances totaled $35.0 million for the six months ended March 31,
2001, representing a $1.0 million, or 2.9%, increase over the same period in the
prior year. The growth is primarily attributable to increased redemption of
Mohegan Sun Player's Club points by patrons. Promotional allowances as a
percentage of gaming revenues were 9.9% and 10.0% for the six months ended March
31, 2001 and 2000, respectively.
Total costs and expenses were $272.3 million for the six months ended March 31,
2001, an increase of $3.9 million or 1.5% over the same period in the prior
year. The increase is a result of increases in gaming, retail, general and
administrative costs and higher utility costs, partially offset by a reduction
in management fees due to the termination of the Management Agreement.
Gaming costs and expenses were $156.2 million for the six months ended March 31,
2001, an increase of $8.7 million, or 5.9%, over the same period in the prior
year. The Slot Win Contribution totaled $66.8 million and $63.6 million for the
six months ended March 31, 2001 and 2000, respectively. The Slot Win
Contribution increase of $3.2 million, or 5.1%, over the same period in the
prior year is attributable to the $9.8 million, or 3.9%, increase in slot
revenues. Also contributing to the increase was an effective slot tax rate of
25.7% for the six months ended March 31, 2001 compared to 25.4% for the same
period in the prior year.
Food and beverage costs were $12.0 million for the six months ended March 31,
2001, an increase of $156,000, or 1.3%, over the same period in the prior year.
The increase is primarily attributable to higher labor and benefit costs.
Retail and other costs were $15.5 million for the six months ended March 31,
2001, an increase of $3.3 million, or 27.6%, over the same period in the prior
year. The increase is attributable to the 9.8% 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 $71.8 million for the six months ended
March 31, 2001. The increase of $5.8 million, or 8.7%, over the same period in
the prior year is attributable to continued marketing and advertising campaigns,
combined with higher utility costs. Management believes marketing programs have
driven incremental patronage, expanding our brand awareness and market share.
Pre-opening costs totaled $3.3 million for the six months ended March 31, 2001
and are primarily comprised of pre-opening labor and advertising costs
associated with the Project Sunburst expansion. Mohegan Sun incurred pre-opening
expansion costs of $2.0 million for the six months ended March 31, 2000.
For the six months ended March 31, 2001, depreciation and amortization decreased
by $1.8 million, or 11.5%, over the same period in the prior year. The decrease
is attributable to decreased depreciation on furniture and equipment versus the
same period in the prior year, and the acceleration of the trademark and
capitalized interest amortization in the prior year. Depreciation and
amortization for the six months ended March 31, 2001 and 2000 were $13.5 million
and $15.3 million, respectively.
Income from operations for the six months ended March 31, 2001 totaled $98.6
million, compared to $87.2 million for the same period in the prior year. This
represents a $11.4 million or 13.1% increase over the same period in the prior
year.
For the six months ended March 31, 2001, the relinquishment liability
reassessment was $17.9 million compared to $11.5 million for the same period in
the prior year. This increase of $6.4 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.
16
Interest and other income were $1.7 million for the six months ended March 31,
2001, a decrease of $5.8 million, or 76.9%, 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
$21.3 million and $110.0 million for the six months ended March 31, 2001 and
2000, respectively. The Authority invests in investment-grade commercial paper
having maturities of not more than six months from the date of acquisition.
Interest expense of $11.8 million for the six months ended March 31, 2001
represented a decrease of $11.3 million, or 49.0%, over the same period in the
prior year. This decrease was mainly attributable to a lower average interest
rate and increased capitalization of interest related to Project Sunburst,
partially offset by an increase in average debt outstanding. Capitalized
interest was $10.7 million for the six months ended March 31, 2001 compared to
$2.9 million for the same period in the prior year. The weighted average
interest rate for the six months ended March 31, 2001 was 8.3%, compared to 8.4%
for the six months ended March 31, 2000. The weighted average outstanding debt
was $550.1 million for the six months ended March 31, 2001, compared to $515.8
million for the six months ended March 31, 2000.
The change in fair value of derivative instruments of $1.3 million was
attributable to the decrease in the market value of derivative instruments held
at March 31, 2001. The Authority held no derivative instruments during the six
months ended March 31, 2000.
Liquidity, Capital Resources and Capital Spending
As of March 31, 2001 and September 30, 2000, the Authority held cash and cash
equivalents of $62.5 million and $115.7 million, respectively. Cash provided by
operating activities was $100.6 million for the six months ended March 31, 2001
compared to cash provided by operating activities of $85.4 million for the same
period in the prior year. During fiscal 2001, the Authority has drawn $128.0
million from the Bank Credit Facility. During fiscal 2000, the Authority
tendered $90.0 million of Subordinated Notes using the defeasance trust asset
established in fiscal 1999, for the sum of $140.3 million including all accrued
and deferred interest on December 30, 1999.
On March 3, 1999, the Authority entered into a syndicated $425.0 million Bank
Credit Facility maturing in March 2004. In November 2000, the Authority
exercised its right to arrange for increases in the Bank Credit Facility to an
aggregate amount of $500.0 million. At the Authority's option, interest will
accrue on the basis of a 1-month, 3-month or 6-month London Inter-bank Offer
Rate ("LIBOR") based formula plus applicable spreads. Interest on each LIBOR
loan, which is for a term of three months or less, shall be due and payable on
the last day of the related interest period. Interest on each LIBOR loan which
is for a term of more than three months is due and payable on the date which is
three months after the date such LIBOR loan was made and every three months
thereafter on the last day of the interest period. The Bank Credit Facility will
automatically reduce by 10% of the commitment as of the earlier of March 31,
2002 or the last full day of the first full quarter following the completion
date of Project Sunburst. As of March 31, 2001, there was $128.0 million
outstanding on the Bank Credit Facility. The Authority draws on the Bank Credit
Facility primarily in connection with Project Sunburst. Subsequent to March 31,
2001 the Authority borrowed an additional $52.0 million under the Bank Credit
Facility to fund Project Sunburst costs. The Authority anticipates Bank Credit
Facility draws to total $240.0 million for fiscal 2001. 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.
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.
17
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
$235.8 million for the six months ended March 31, 2001 versus $104.9 million for
the same period in the prior year. Project Sunburst construction costs of $203.2
million, excluding $10.7 million of capitalized interest, were expended during
the six months ended March 31, 2001. 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
$11.7 million and $7.7 million for the six months ended March 31, 2001 and 2000,
respectively. Expenditures for the Eagleview employee parking center ("Employee
Parking Center") totaled $24.9 million of which $1.2 million was spent during
the six months ended March 31, 2001. Expenditures on the property's utility
enhancements have totaled $20.9 million, of which $3.9 million was spent during
the six months ended March 31, 2001. Expenditures for the new 637-unit smoke-
free slot area, The Hall of the Lost Tribes, have totaled $5.1 million through
March 31, 2001.
Cumulative Project Sunburst construction costs totaled $468.0 million, excluding
capitalized interest, through March 31, 2001. For the remainder of fiscal 2001,
based on TCA estimates, the Authority anticipates Project Sunburst spending to
be $296.2 million, excluding capitalized interest.
For fiscal 2001, the Authority expects capital expenditures to total
approximately $25.0 million on facility improvements and maintenance capital
expenditures, $499.4 million, excluding capitalized interest, on Project
Sunburst construction, $1.0 million on an employee day care center and $8.0
million on an additional patron garage. The Authority anticipates spending $18.0
million on The Hall of the Lost Tribes, $2.0 million below the $20.0 million
budget.
The Authority commenced construction of an electrical and water system
infrastructure ("Infrastructure Improvements"), estimated to cost $35.0 million,
that will service Mohegan Sun and other facilities. The upgrades provide the
most efficient manner of handling the increased utility demands of the expanded
facility that are attributable to the Project Sunburst expansion. The
construction was funded by the Authority, and is expected to be complete
concurrent with the opening of Project Sunburst. As of March 31, 2001,
approximately $20.9 million has been incurred. Anticipated Infrastructure
Improvements spending for the final six months of fiscal 2001 is $14.1 million.
The Authority, in conjunction with the Project Sunburst expansion, commenced
construction on the Employee Parking Center in March 1999. The Employee Parking
Center includes 2,700 parking spaces and amenities such as a dry cleaning
service, on-site banking, an employee computer/training center and a 15,000
square foot exercise facility. The Employee Parking Center opened in June 2000.
The total cost of the Employee Parking Center was $24.9 million. The Employee
Parking Center was completed in January 2001.
The Tribe commenced construction of a Public Safety Facility, within the
Eagleview complex, that will service the Mohegan Reservation. Construction was
initially funded by the Authority and subsequently reimbursed by the Tribe. The
total cost of the Public Safety Facility is $6.8 million. The Authority has also
initially funded other Tribal projects, including the construction of a
temporary Tribal office, construction of roads and improvements made to the Town
of Montville's wastewater collection and treatment facilities. The total amount
incurred by the Authority for these projects, including the Public Safety spaces
referred to above, is $32.1 million. To date $16.3 million has been reimbursed
by the Tribe, and $15.8 million is reflected in amounts due from Tribe in the
Authority's balance sheet as of March 31, 2001.
18
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 March 31, 2001, TCA has earned $7.1 million of the development
fee of which $5.5 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 $669.8 million as of March 31, 2001. In
October 2000, the Authority paid $5.5 million in Senior Relinquishment Payments.
On January 25, 2001, the Authority paid $5.1 million in Senior Relinquishment
payments and $10.5 million in Junior Relinquishment Payments. On April 25, 2001,
the Authority paid $5.1 million in Senior Relinquishment Payments.
During the six months ended March 31, 2001 and 2000, the Authority distributed
$20.0 million and $22.2 million, respectively, to the Tribe.
Management believes that existing cash balances, financing arrangements and
operating cash flow will provide the Authority with sufficient resources to meet
its existing debt obligations, relinquishment payments, tribal distributions,
and foreseeable capital expenditure requirements with respect to current
operations and Project Sunburst for at least the next 12 months.
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).
19
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 March 31, 2001, the Authority has drawn $128.0 million on the Bank Credit
Facility. On April 26, 2001, the Authority drew an additional $52.0 million on
the Bank Credit Facility in connection with Project Sunburst.
The Authority uses derivative instruments, including interest rate caps, collars
and swaps in its strategy to manage interest rate risk associated with the
variable interest rate on the Bank Credit Facility. The Authority's objective in
managing interest rate risk is to ensure the Authority has appropriate income
and sufficient liquidity to meet the Tribe and debt-holder obligations. The
Authority does not believe that there is any material risk exposure with respect
to derivative or other financial instruments. The Authority continually
monitors these exposures and makes the appropriate adjustments to manage these
risks within management's established limits.
The Authority analyzes interest rate risk using various models that forecast
cash flows of the liabilities and their supporting assets, including derivative
instruments.
The Authority is considered an "end user" of derivative instruments and engages
in derivative transactions for risk management purposes only. On October 1,
2000 the Authority adopted SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities," designated all derivative instruments as cash flow
hedging instruments and marked them to market. The Authority excludes the change
in time value when assessing the effectiveness of the hedging relationships.
All derivatives are evaluated quarterly and were deemed to be effective at March
31, 2001.
Derivative instruments held by the Authority at March 31, 2001 are as follows:
- -----------------------------------------------------------------------------------------------------
Effective Maturity Notional Cost Market
Date Date
- -----------------------------------------------------------------------------------------------------
Interest Rate Cap
Strike Rate - 8% October 1, October $22,314,600 $410,000 $ 2,000
2000 1, 2003
- -----------------------------------------------------------------------------------------------------
Interest Rate Collar
Ceiling Strike Rate - 8%
Floor Strike Rate - 6% January 2, March 1, 1,353,800 295,000 (1,665,267)
2001 2004
- -----------------------------------------------------------------------------------------------------
Interest Rate Swap
Pay fixed - 6.35%
Receive Variable January 2, March 1, 676,900 221,000 (980,111)
2001 2004
- -----------------------------------------------------------------------------------------------------
Total $24,345,300 $926,000 ($2,643,378)
- -----------------------------------------------------------------------------------------------------
All derivative instruments are based upon one-month LIBOR, which was 5.08% on
March 31, 2001.
20
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
21
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 11, 2001 By: /s/ Mark F. Brown
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Mark F. Brown
Chairman, Management Board
Date: May 11, 2001 By: /s/ William J. Velardo
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William J. Velardo
President and General Manager
Date: May 11, 2001 By: /s/ Jeffrey E. Hartmann
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Jeffrey E. Hartmann, Executive Vice
President Finance/
Chief Financial Officer
(Principal Financial and
Accounting Officer)