<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
[X] ANNUAL REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from inception to September 30, 1996
Commission file number 033-80655
MOHEGAN TRIBAL GAMING AUTHORITY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARACTER)
Non applicable 06-143633
----------------------------------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) Identification No.)
Mohegan Sun Boulevard, P. O. Box 348, Uncasville, CT 06382
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(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860) 204-7190
Securities Registered Pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- ---
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes X No .
--- ---
The registrant hereby amends Items 1 and 8 of its Annual Report on Form 10-K
for the year ended September 30, 1996, as filed on December 30, 1996 and as
amended on February 18, 1997. Items 1 and 8, as amended, are set forth
herein in their entirety.
<PAGE>
PART I
ITEM 1-BUSINESS
A. GENERAL DEVELOPMENT OF BUSINESS
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 Authority is developing a gaming and entertainment facility (the
"Mohegan Sun"). The Authority's year-end is September 30.
The Authority has two major functions. The first, delegated to the Authority's
Management Board, was to engage Trading Cove Associates ("TCA"), a Connecticut
general partnership, to manage the development, operation, management, promotion
and construction of the Mohegan Sun and all related development. The Management
Board consist of the nine members of the Council (the governing body of the
Tribe). The Management Board also selects tribal representatives to a Business
Board which oversees the business aspects of the gaming operation (the "Business
Board"). The Business Board is established under the management agreement
between the Tribe and TCA (the "Management Agreement") and consists of two
members appointed by the Tribe and two members appointed by TCA.
The second major function of the Authority is to regulate gaming. The
Management Board appoints an independent Director of Regulation to ensure the
integrity of the gaming operation through the promulgation and enforcement of
appropriate regulation. The Director of Regulation serves at the pleasure of
the Management Board. The Director of Regulation is responsible for issuance
and revocation of gaming licenses and employs a staff that is responsible for
performing background investigation into gaming license applicants.
The Tribe and the Authority have entered into a land lease ("Lease") pursuant to
which the Tribe is leasing to the Authority certain land located in southeastern
Connecticut on which the Mohegan Sun is being constructed (the "Site"). The
site is a portion of a parcel of land that has been acquired and held in trust
for the Tribe by the United States of America, with the Tribe retaining
perpetual rights to the use of the Site.
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, as amended ("IGRA"), 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 "Compact") that has been approved by the U.S. Secretary of the
Interior.
1
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A. GENERAL DEVELOPMENT OF BUSINESS CONTINUED
The Authority has engaged TCA to manage the development, construction and
operation of the Mohegan Sun. TCA is 50% owned by Sun Cove Ltd., an affiliate
of Sun International Hotels Limited ("Sun International") and 50% owned by
Waterford Gaming, LLC.
The Authority and TCA are parties to a seven-year Gaming Facility Management
Agreement ("the Management Agreement") to provide for the management of the
Mohegan Sun. Under the terms of the Management Agreement, the Authority has
granted TCA the exclusive right and obligation to develop, manage, operate and
maintain the Mohegan Sun and all other related facilities that are owned by
the Authority, the Tribe or any of its instrumentalities. Under the
Management Agreement, TCA is authorized to enter into contracts, through the
General Manager, relating to the operation of the Mohegan Sun; provided that
any contracts that require expenditures of more than $25,000 in any one year
or contracts with affiliates of TCA must be approved by the Business Board.
TCA is required each year to submit to the Tribal Council, for its approval,
a detailed proposed annual operating budget for the Mohegan Sun.
The Management Agreement authorizes TCA to pay itself a monthly management fee
out of "Net Revenues" (as defined below) of the Mohegan Sun. The management fee
is expressed as a percentage of Net Revenues generated by the Mohegan Sun each
year of the agreement, beginning with 40.0% of Net Revenues up to a threshold
amount and successively declining to 35.0% and 30.0% of Net Revenues in excess
of the threshold amount. For example, for fiscal year 1997, the annual
management fee equals the sum of 40.0% of Net Revenues up to $50.5 million,
35.0% of Net Revenues between $50.5 million and $63.2 million, and 30.0% of Net
Revenues over $63.2 million. The management fee is paid on a monthly basis,
with each payment calculated based on 1/12th of the annual projected Net
Revenues, and then adjusted annually within 60 days of the close of the fiscal
year. "Net Revenues" are defined as all revenues of any nature generated
directly or indirectly from operations of the Mohegan Sun (except from Class III
gaming, such as bingo), less operating expenses and certain specified categories
of revenue, such as proceeds of third party financing, proceeds from the sale of
capital assets, insurance proceeds and interest on certain bank accounts.
TCA is required to deposit all revenues it receives from the operations of the
Mohegan Sun into a deposit account, from which TCA cannot make disbursements.
Funds are then transferred to a disbursement bank account, from which TCA makes
disbursements each month to cover operating expenses of the Mohegan Sun. TCA
also is required to reserve additional funds each month (out of funds in excess
of any required minimum balances established by the Business Board to cover
working capital costs) to pay operating and other costs of the Mohegan Sun that
are not paid on a monthly basis, such as insurance premiums. In addition, each
of TCA and the Authority is required to make monthly deposits into a "Reserve
Fund," which may be used to pay approved capital expenditures for the Mohegan
Sun. Up to $3.0 million per year is required to be deposited into the Reserve
Fund, payable 60.0% by the Authority and 40% by TCA.
2
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A. GENERAL DEVELOPMENT OF BUSINESS CONTINUED
Under the Management Agreement, Net Revenues (less a reasonable cash
contingency reserve for the payment of cash prizes) are required to be
disbursed, to the extent due and payable and earned, in the following order of
priority:
(1) a $50,000 "Minimum Priority Payment" must be distributed to the Tribe
each month in which any gaming is conducted (even if only for part of the
month), which is chargeable against the Authority's share of Net Revenues;
provided that if Net Revenues for any month are less than the Minimum Priority
Payment, TCA is required to fund the amount of the deficiency and is entitled to
be reimbursed for such amount out of subsequent months' Net Revenues;
(2) current principal and other payments, including sinking funds or any
required deposits to certain reserve accounts required to be maintained under
the Indenture, due on the Senior Notes or the Subordinated Notes;
(3) payments to TCA for funds advanced in prior periods and reimbursement
of amounts advanced by TCA (including any Minimum Priority Payment deficiencies
funded by TCA pursuant to Item (1), above; all of which funds are charged
without interest against the Authority's share of Net Revenues);
(4) deposits to the Reserve Fund by the Authority and TCA; and
(5) payment of the management fee to TCA.
To the extent the Authority has residual Net Revenues after making the
distributions described above, the Authority is required to make distributions
to the Tribe (subject to restrictions contained in the Indenture) sufficient to
provide the Tribe a fair return on its investment, consistent with the
development and operation of a legal and profitable gaming enterprise.
The Authority is financing the development of the Mohegan Sun with the proceeds
of the sale of $175.0 million of 13.5% Senior Secured Notes due 2002 (the
"Senior Notes"), $40.0 million of Subordinated Notes due 2003 (the "Subordinated
Notes"), approximately $40.0 million available under equipment lease financing
(the "Equipment Financing") and approximately $13.0 million of senior
indebtedness available for working capital purposes (the "Working Capital
Financing"). In addition, Sun International has provided a $50.0 million
secured completion guarantee to fund any cost overruns (the "Secured Completion
Guarantee").
3
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A. GENERAL DEVELOPMENT OF BUSINESS CONTINUED
The site on which Mohegan Sun is being constructed (the "Site") was formerly
occupied by United Nuclear Corporation ("UNC"), a naval products manufacturer
of, among other things, nuclear reactor fuel components.
From 1990 through 1993, UNC commissioned an environmental consultant to perform
a series of environmental audits and reports on the Site. The environmental
audits and soil sampling programs detected, among other things, volatile organic
chemicals, heavy metals and fuel hydrocarbons in the soil and groundwater.
Extensive remediation of contaminated soils and additional investigations were
completed. UNC's facility was officially decommissioned on June 8, 1994, when
the Nuclear Regulatory Commission ("NRC") confirmed that all licensable
quantities of special nuclear material ("SNM") had been removed from the site
and that any residual SNM contamination was remediated in accordance with the
NRC approved decommissioning plan. By letter dated March 20, 1995, the State of
Connecticut Department of Environmental Protection approved the remediation
report for the site.
Although the site currently meets all applicable federal, state and local
remediation requirements, no assurance can be given that the various
environmental reports or any other existing environmental studies with respect
to the site revealed all environmental liabilities, that any prior owners or
tenants of the Site did not create any material environmental condition not
known to the Authority, that future laws, ordinances or regulations will not
impose any material environmental liability, or that a material environmental
condition does not otherwise exist on the Site. Future remediation may be
necessary if excavation and construction exposes contaminated soil which has
otherwise been deemed isolated and not subject to cleanup requirements.
B. NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Mohegan Sun is located on a heavily wooded 240-acre site on the banks of the
Thames River, in southeastern Connecticut. The Mohegan Sun's historical
northeastern Indian theme is conveyed through architectural features and the use
of natural design elements such as timber, stone, and water. The Mohegan Sun is
separated into four themed quadrants, each of which has its own unique entrance
and is designed to reflect a separate seasonal theme - winter, spring, summer
and fall - emphasizing the importance of the seasonal changes to tribal life.
The approximately 625,000 square foot facility includes approximately 150,000
square feet of gaming space, and is designed to accommodate approximately 3,000
slot machines and 180 table games. At the commencement of operation on October
12, 1996, the Authority had 2,500 slot machines and 179 table games.
4
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GENERAL CONTINUED
The Mohegan Sun food service includes a 680-seat buffet, three specialty theme
restaurants, a coffee shop, deli and a large food court. Multiple full-service
and floor service bars are located throughout the facility, plus a lounge with
live entertainment. For non-gaming entertainment, the Mohegan Sun offers a
children's recreation area and child care facilities.
CURRENT STATUS
Although Mohegan Sun commenced operations subsequent to year-end, the final
costs of developing, constructing, equipping and opening the Mohegan Sun have
not been finalized. The $318.0 million total budgeted project costs are
based on budgets prepared by the Authority with the assistance of Sun
International, TCA and the contractors. The Authority has entered into a
guaranteed maximum price contract with the general contractor, Morse Diesel
International, for the construction of Mohegan Sun. The final amount paid
under such contract, however, is subject to modification based upon the
occurrence of certain events, such as design change orders and costs
associated with certain types of delays. The Authority (with the assistance
of Sun International and TCA) and Morse Diesel International currently are
negotiating whether certain costs incurred in construction of the Mohegan Sun
are covered under the guaranteed maximum price or whether such cost increases
are the result of change orders or other events that could result in an
increase in the contract price above the guaranteed maximum price. Based on
its discussions with Morse Diesel International and a review of the claims
made by the Authority and Morse Diesel International, the Authority believes
that ultimate resolution of the total costs in dispute could result in Morse
Diesel International refunding $2.0 million to the Authority, or in the
Authority paying an additional amount of not more than $8.0 million to Morse
Diesel International. TCA and Morse Diesel International must review disputed
amounts on a line-by-line basis, to determine whether all or some of such
costs, in whole or in part, are covered by the guaranteed maximum price, and
resolution regarding some disputed amounts are likely to affect resolution of
other disputed amounts. The resolution of all or some of these issues in
favor of Morse Diesel International may result in the final cost of Mohegan
Sun exceeding its current budget. Based upon its review of the budget and the
open cost items, and its assessment that resolution of the Morse Diesel
International dispute will result in the Authority obtaining a refund or
paying less than an additional $8.0 million, the Authority believes that the
final, total cost of developing, constructing, equipping and opening the
Mohegan Sun will not exceed the sum of the proceeds from the sale of the
Senior Notes and the Subordinated Notes, amounts available under the Secured
Completion Guarantee, the Equipment Financing and the Working Capital
Financing and cash flow from operations. However, there is no assurance that
such costs will not exceed budgeted amounts. As of December 4, 1996, the
Authority has drawn $42.0 million under the Secured Completion Guarantee and
issued additional subordinated notes to Sun International in principal amount
equal to the amount of the draw. The Authority may not obligate itself to
pay development costs in excess of $325.0 million without the further consent
of the National Indian Gaming Commission (the "NIGC"). In the event the
resolution of the issues with Morse Diesel International result in total
development costs being in excess of $325.0 million, the Authority would
require the consent of the NIGC, and there can be no assurances such consent
would be given.
5
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SEASONALITY
Mohegan Sun currently operates in an industry which reflects the conditions that
the seasons bring to Connecticut. The volume tends to peak in spring and summer
as tourists come to the east coast, while fall and winter seasons tend to
decline slightly as the climate changes.
COMPETITIVE CONDITIONS
Because Mohegan Sun is marketed primarily to the day-trip customer, it competes
primarily with other casinos within 150 miles and, to a lesser extent, with
casinos in Atlantic City, New Jersey. Currently, Foxwoods is the only casino in
operation within 150 miles of Mohegan Sun site. Foxwoods is located
approximately 10 miles from the Mohegan Sun site and is currently the largest
gaming facility in the United States in terms of the number of slot machines.
Currently, outside Atlantic City, New Jersey, casino gaming in the northeastern
United States may be conducted only by federally recognized Indian tribes
operating under IGRA. In addition to the Pequot Tribe, which operates Foxwoods,
a federally recognized tribe in Massachusetts is seeking to establish gaming
operations in its state. The Oneida Tribe and the Mohawk Tribe, which operate
gaming facilities in upstate New York, are seeking to expand their operations.
In addition, a number of Indian tribes in New England are seeking federal
recognition in order to establish gaming operations. The Authority cannot
predict whether any of these tribes will be successful in establishing gaming
operations and, if established, whether such gaming operations will have a
material adverse effect on the proposed operations of Mohegan Sun.
In addition, a number of states, including Connecticut, have investigated
legalizing casino gaming by non-Indians in one or more locations. In November
1995, the Connecticut state legislature rejected a proposal submitted by the
Pequot Tribe to develop a casino in Bridgeport, Connecticut. The Pequot
proposal has been submitted in response to a request for proposals made by the
State of Connecticut. Under the Compact, the Authority believes that if
Connecticut were to legalize any gaming operations other than pursuant to IGRA
(i.e., by an Indian tribe on Indian land) with slot machines or other commercial
casino games, the Mohegan Tribe would no longer be required to make payments to
the State of Connecticut related to slot machine revenues (see Note 6 to
Financial Statements). The Authority is unable to predict whether the
Connecticut state legislature will accept any other casino proposal and, if such
proposal results in a casino being constructed and opened, whether such casino
will have a material adverse effect on Mohegan Sun.
6
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-1
Balance Sheets of Mohegan Tribal Gaming Authority as of
September 30, 1996 and 1995 F-2-F-3
Statement of Cash Flows of Mohegan Tribal Gaming Authority
as of September 30, 1996 and 1995 F-4
Notes to Financial Statements of Mohegan Tribal Gaming Authority F-5-F-13
7
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Mohegan Tribal Gaming Authority:
We have audited the accompanying balance sheets of the Mohegan Tribal Gaming
Authority (a development state entity) as of September 30, 1996 and 1995, and
cash flows for the period of inception (July 15, 1995) to September 30, 1996.
These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Mohegan Tribal Gaming
Authority as of September 30, 1996 and 1995, and its cash flows for the
period from inception (July 15, 1995) to September 30, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
November 27, 1996
F-1
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MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
BALANCE SHEETS
--------------
AS OF SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
-----------------------------------------------
(in thousands)
--------------
ASSETS SEPTEMBER 30, SEPTEMBER 30,
------ 1996 1995
---- ----
CURRENT ASSETS:
Cash $ 7,437 $ --
Restricted cash 5,100 213,300
Deposits 5,900 --
Inventory 819 --
Other current assets 2,135 --
-------- --------
Total Current Assets 21,391 213,300
-------- --------
CAPITALIZED PROPERTY COSTS:
Deferred lease cost 30,081 --
Leasehold interest under construction 220,578 --
Furniture, fixture & equipment 14,259 --
-------- --------
Total Capitalized Property
Costs 264,918 --
-------- --------
OTHER ASSETS:
Pre-opening costs 11,186 --
Deferred financing costs 9,286 11,352
Organizational costs 700 700
-------- --------
Total Other Assets 21,172 12,052
-------- --------
Total Assets $307,481 $225,352
-------- --------
-------- --------
The accompanying notes to financial statements are an integral part of these
statements.
F-2
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MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
BALANCE SHEETS
--------------
AS OF SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
-----------------------------------------------
(in thousands)
--------------
LIABILITIES SEPTEMBER 30, SEPTEMBER 30,
----------- 1996 1995
---- ----
CURRENT LIABILITIES:
Construction retainage $ 9,738 $ --
Current maturities of long-term debt 250 --
Accounts payable 33,077 10,352
Accrued interest 15,232 --
Accrued liabilities 1,208 --
Credit line 4,749 --
Other current liabilities 227 --
-------- --------
Total Current Liabilities 64,481 10,352
-------- --------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 5)
NON-CURRENT LIABILITIES:
Senior notes 175,000 175,000
Subordinated notes 67,000 40,000
Other long-term debt, net of
current maturities 1,000 --
-------- --------
Total Non-Current Liabilities 243,000 215,000
-------- --------
Total Liabilities $307,481 $225,352
-------- --------
-------- --------
The accompanying notes to financial statements are an integral part of these
statements.
F-3
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MOHEGAN TRIBAL GAMING AUTHORITY
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STATEMENT OF CASH FLOW
----------------------
FOR THE PERIOD FROM INCEPTION (JULY 15, 1995)
---------------------------------------------
THROUGH SEPTEMBER 30, 1996
--------------------------
(in thousands)
--------------
PRE-OPENING ACTIVITIES:
Increase in inventory $ (819)
Increase in deposits (5,900)
Increase in other current assets (2,135)
Increase in construction retainage 9,738
Increase in accounts payable 33,077
Increase in accrued liabilities and interest 16,440
Increase in other current liabilities 727
---------
Net cash provided by pre-opening activities 51,128
---------
INVESTING ACTIVITIES
Deferred lease cost (30,081)
Leasehold interest under construction (220,578)
Net equipment additions (14,259)
Pre-opening costs (11,186)
Deferred financing costs (9,286)
Organizational costs (700)
---------
Net cash used in investing activities (286,090)
---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 247,499
---------
Net cash provided by financing activities 247,499
---------
Net increase in cash and cash equivalents 12,537
---------
CASH AND CASH EQUIVALENTS, at beginning of period --
---------
CASH AND CASH EQUIVALENTS, at end of period 12,537
---------
---------
SUPPLEMENTAL INFORMATION:
INTEREST PAID $ 14,925
---------
---------
The accompanying notes to financial statements are an integral part of these
statements.
F-4
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NOTES TO FINANCIAL STATEMENT OF MOHEGAN TRIBAL GAMING AUTHORITY:
- ----------------------------------------------------------------
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES:
- -------------------------------------------------------------------
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 Authority is developing a gaming and entertainment facility
(the "Mohegan Sun"). The Authority's year-end is September 30.
The Tribe and the Authority have entered into a land lease ("Lease") (see
Note 3) pursuant to which the Tribe is leasing to the Authority certain land
located in southeastern Connecticut on which the Mohegan Sun is being
constructed (the "Site"). The Site is a portion of a parcel of land that has
been acquired and held in trust for the Tribe by the United States of
America, with the Tribe retaining perpetual rights to the use of the Site.
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, as amended ("IGRA"), 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 "Compact") that has been approved by the Secretary
of the Interior.
The Authority has engaged Trading Cove Associates ("TCA") to manage the
development, construction and operation of the Mohegan Sun. TCA is 50% owned
by Sun Cove, an affiliate of Sun International Hotels Limited ("Sun
International"), and 50% by Waterford Gaming, LLC.
The Authority is financing the development of the Mohegan Sun with the
proceeds of the sale of senior notes, subordinated notes and equipment and
working capital financing as described in Note 2. The total cost of
development and construction of Mohegan Sun and working capital is estimated
to be $318 million, all of which has been obtained as of the balance sheet
date as follows (000's):
Senior Notes $175,000
Subordinated Notes 40,000
Subordinated Notes: Secured
Completion Guarantee 50,000
Working Capital Financing 13,000
Equipment Financing 40,000
--------
$318,000
--------
--------
F-5
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The Secured Completion Guarantee provides that, subject to certain
qualifications, Sun International will provide up to $50.0 million to fund
any cost overruns incurred in connection with the construction, development,
equipping and opening of the Mohegan Sun. The Guarantee terminates on
September 30, 1997, or, if certain other criteria are met as agreed upon by
the Authority and Sun International. Any draws on the Guarantee are evidenced
by additional subordinated notes issued by the Authority to Sun
International. These additional subordinated notes will bear interest at the
prime rate plus 1% and are payable under the same terms as the subordinated
notes (see Note 2).
USE OF ESTIMATES IN THE PRESENTATION OF FINANCIAL STATEMENTS -
- --------------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCING INSTRUMENTS -
- -------------------------------------
The Authority's carrying amount of financial instruments including cash,
payables and debt, approximate fair market value.
DEVELOPMENT STAGE ENTERPRISE -
- ------------------------------
The Authority is classified as a Development Stage enterprise as defined by
Statement of Financial Accounting Standards No. 7.
CASH EQUIVALENTS -
- ------------------
For purposes of the Financial Statements, the Authority has considered all
investments with maturities of three months or less to be cash equivalents.
RESTRICTED CASH
- ---------------
Included in restricted cash are approximately $850,000 held as collateral for
road construction permits and land required for the completion of the
Authority's roadway access and approximately $4.3 million in working capital
for the impressment of the slot machines.
F-6
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DEPOSITS AND OTHER CURRENT ASSETS
- ---------------------------------
The Authority has expended approximately $5.9 million in deposits for items
relating to the development of the Mohegan Sun that will be refunded in full
during the first quarter of fiscal 1997.
INVENTORIES
- -----------
Inventories of provisions and supplies are carried at the lower of cost
(weighted average) or market.
CAPITALIZED PROPERTY COSTS -
- ----------------------------
Capitalized property costs consist of (i) deferred lease costs related to the
payment made by the Authority on behalf of the Tribe for the acquisition of
the Site, (ii) leasehold interest costs which represent costs incurred
through the balance sheet date for the construction of the Mohegan Sun and
(iii) equipment (primarily furniture and computers) that are being used in
connection with the pre-opening activities of the Authority. Upon the
commencement of operations, these costs will be depreciated or amortized, as
applicable, on a straight-line basis over the following estimated useful
lives:
Deferred lease cost 50 years
Leasehold interest cost 40-50 years
Equipment 5-7 years
DEFERRED LEASE COST -
- ---------------------
Deferred lease cost consists of the following (000's):
Acquisition cost of the site $28,581
Acquisition cost of additional
parcel 1,500
-------
$30,081
-------
-------
The Site and the additional parcel were acquired from third parties unrelated
to the Tribe or the Authority. The Authority will not be reimbursed by the
Tribe for these payments.
OTHER ASSETS -
- --------------
Other assets consist of pre-opening, deferred financing and organization
costs. Pre-opening costs are mainly payroll and related benefits and general
office overhead incurred through the balance sheet date. Deferred financing
costs have been incurred in connection with the issuance of the senior notes
and the subordinated notes. Organization costs represent primarily legal
costs incurred in the organization of the Authority.
F-7
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Beginning on the opening date of the Mohegan Sun, these costs will be
amortized on a straight-line basis over the following estimated useful lives:
Pre-opening costs 12 months
Deferred financing costs 7 years
Organization costs 5 years
RETAINAGE
- ---------
Retainage consists of amounts withheld from construction draws for the
General and Infrastructure contractor to ensure adequate performance and
completion of the development of Mohegan Sun and is expected to be remitted
in the 1997 fiscal year.
2. DEBT
- -------
A. The Authority has issued $175 million in Senior Notes due 2002 (the
"Senior Notes") with fixed interest payable at a rate of 13-1/2% per annum
and Cash Flow Participation Interest in an aggregate amount of 5.0% of the
Authority's Cash Flow up to a limit, during any two consecutive semi-annual
periods, ending September 30, of $250 million of the Authority's Cash Flow.
Fixed interest is payable semi-annually and commenced May 15, 1996. No Cash
Flow Participation Interest shall be payable with respect to any period prior
to the earlier of the first day the Mohegan Sun commences operations or
October 31, 1996. The aggregate amount of Cash Flow Participation Interest
payable will be reduced pro rata for reductions in outstanding principal
amount of Senior Notes. The payment of Cash Flow Participation Interest may
be deferred if the Authority's Fixed Charge Coverage Ratio (as defined) is
less than 2 to 1. The Senior Notes are redeemable at set prices as set forth
in the Senior Notes after November 15, 1999, at the option of the Authority.
Upon the occurrence of certain events (as specified in the Indenture for the
Senior Notes) each holder of Senior Notes can require the Authority to
repurchase the notes at prices specified in the Senior Notes. Beginning with
fiscal year ending September 30, 1997, the Authority will be required, under
certain circumstances, to offer to purchase, at set prices, certain amounts
of Senior Notes then outstanding.
B. The Authority has obtained $67.0 million of subordinated financing from
Sun International and Waterford Gaming LLC in the form of two notes. The
first note for $40.0 million (Subordinated Notes) bears interest at 15% per
year, paid semi-annually. The second note for $27.0 million (Secured
Completion Guarantee) bears interest at 1% over prime. Both are due 2003;
however, principal cannot be paid until the Senior Notes have been paid in
full, unless certain conditions are met.
C. The Authority has obtained a mortgage note payable of approximately $1.3
million from a local bank to fund property purchased for the development of
Mohegan Sun payable in yearly payments of $250,000 for 5 years.
F-8
<PAGE>
D. The Authority has obtained two lines of credit totaling $13.0 million.
The line of credit for $12.5 million, obtained from Fleet Bank, offers LIBOR
and Base rate options (9.25% as of September 30, 1996). The maximum
borrowings under the Fleet line of credit shall be reduced by $2,000,000 on
April 1, 1997 and by an additional $2,000,000 on each one month anniversary
date thereafter. The second line of credit for $500 thousand was obtained
from Norwich Savings bears interest at a rate of 7 3/4%. As of September 30,
1996, $4.8 million was outstanding under both lines of credit. These amounts
were used for the impressment of slot machines and Bingo operations.
Long-term debt consists of the following(000's):
Senior Secured Notes (A) $175,000
Subordinated Notes (B) 67,000
Mortgage Note Payable (C) 1,250
Line of Credit (D) 4,749
--------
Total Debt 247,999
Less Current Maturities 4,999
--------
$243,000
--------
--------
The above described debt is secured by substantially all the assets of the
Authority.
REPAYMENTS OF DEBT FOR NEXT FIVE YEARS
Year ending
September 30, Amounts
- ------------- -------
(000's)
1997 $ 4,999
1998 250
1999 250
2000 250
2001 250
THEREAFTER 242,000
--------
$247,999
--------
--------
The ability of the Authority to meet its debt service requirements will be
entirely dependent upon the completion and future successful performance of
the Mohegan Sun, which is subject to financial, economic, political,
competitive, and other factors, many of which are beyond the Authority's
control.
F-9
<PAGE>
The amount of interest capitalized in leasehold interest under construction
on the balance sheet for the period from inception to September 30, 1996, was
approximately $30.2 million.
3. LEASE AGREEMENTS-
- ---------------------
As discussed in Note 1, the Authority has entered into a Lease with the Tribe
with respect to the Site. The initial term of the Lease is 25 years, with an
option to extend the term for an additional 25 years provided that the
Authority is not in default under the Lease. The Lease also provides that all
improvements constructed on the Site will become the property of the Tribe
and subject to the Lease. The Lease is a net Lease requiring that the
Authority be responsible for all costs of operating, constructing,
maintaining, repairing, replacing and insuring the leased property, plus
paying the Tribe an annual rent of $1.00. In addition to the rent, the
Authority has used the proceeds from the issuance of the Subordinated Notes,
described in Note 2, to acquire the Site on behalf of the Tribe. Due to
these payments and other terms of the Lease described above, expenditures
made by the Authority in connection with the acquisition of the Site and the
Additional Parcel have been recorded as deferred lease costs. These deferred
lease costs will be amortized on a straight-line basis over the term of the
Lease, plus the option period (a total of 50 years). The leasehold interest
will be amortized on a straight-line basis over the estimated life of the
buildings (40 years).
The Authority leases various equipment and vehicles under operating
leases. Future minimum lease payments under the noncancelable operating
leases are as follows:
Amounts
-------
(000's)
1997 $3,664
1998 3,650
1999 3,421
2000 3,041
Thereafter -0-
--------
$13,776
========
4. INCOME TAXES-
- -----------------
The Tribe is an "Indian Tribal Government" within the meaning of sections
7701(a)(40) and 7871 of the Internal Revenue Code of 1986, as amended. As
such, the Authority has tax-exempt status with respect to federal and state
income and certain excise taxes.
F-10
<PAGE>
5. COMMITMENTS AND CONTINGENCIES:
- ----------------------------------
The Tribe, by itself and acting through the Authority, and TCA have entered
into an Amended and Restated Gaming Facility Development and Construction
Agreement ("the Construction Agreement") providing for the design,
construction, furnishing and site development of the Mohegan Sun by TCA. The
total cost of the Mohegan Sun as outlined in the Construction Agreement, is
not to exceed $325 million. The Tribe has assigned its rights and obligations
in the Agreement to the Authority.
The Tribe has entered into a seven-year Amended and Restated Gaming Facility
Management Agreement ("the Management Agreement") with TCA to provide for the
management of the Mohegan Sun. Under the terms of the Management Agreement,
the Tribe has granted TCA the exclusive right and obligation to develop,
manage, operate and maintain the Mohegan Sun and all other related facilities
that are owned by the Tribe or any of its instrumentalities. The Management
Agreement authorizes TCA to pay itself a monthly management fee from the
Mohegan Sun's net revenues (as defined). The management fee under the
Management Agreement is expressed as a percentage of net revenues, which
ranges from 30% to 40%, depending on the level of the net revenues generated
by the Mohegan Sun. The Tribe has assigned its rights in and delegated its
obligations under the Management Agreement to the Authority.
The Authority has entered into a guaranteed maximum price contract with
the general contractor, Morse Diesel International, for the construction of
the Mohegan Sun. The final amount paid under such contract, however, is
subject to modification based upon the occurrence of certain events, such as
design change orders and costs associated with certain types of delays. The
Authority and Morse Diesel International currently are negotiating whether
certain costs incurred in construction or the Mohegan Sun are covered under
the guaranteed maximum price or whether such cost increases are the result of
change orders or other events that could result in an increase in the
contract price above the guaranteed maximum price. Based on its discussions
with Morse Diesel International and a review of the claims made by the
Authority and Morse Diesel International, the Authority believes that
ultimate resolution of the total costs in dispute could result in Morse
Diesel International refunding $2.0 million to the Authority, or in the
Authority paying an additional amount of not more than $8.0 million to Morse
Diesel International. The resolution of all or some of these issues in favor
of Morse Diesel International may result in the final cost of Mohegan Sun
exceeding its current budget. Based upon its review of the budget and the
open cost items, and its assessment that resolution of the Morse Diesel
International dispute will result in the Authority obtaining a refund or
paying less than an additional $8.0 million, the Authority believes that the
final, total cost of developing, constructing, equipping and opening the
Mohegan Sun will not exceed the sum of the proceeds from the sale of the
Senior Notes and the Subordinated Notes and amounts available under the
Secured Completion Guarantee, the Equipment Financing and the Working Capital
Financing. However, there is no assurance that such costs will not exceed
budgeted amounts. As of December 4, 1996, the Authority has drawn $42 million
under the Secured Completion Guarantee and issued additional subordinated
notes to Sun International in principal amount equal to the amount of the
draw. The Authority may not obligate itself to pay development costs in
excess of $325 million without the further consent of the National Indian
Gaming Commission (the "NIGC"). In the event the resolution of the issues
with Morse Diesel International result in total development costs
F-11
<PAGE>
being in excess of $325 million, the Authority would require the consent of
the NIGC, and there can be no assurances such consent would be given.
The Authority has established a Cash Maintenance Account as a way of
accumulating funds to protect the Bond Holders in the event of a default. For
the calendar years ended 1997-2001, the annual deposit required is $6.0
million per year and thereafter, such amount necessary to keep at least $36.0
million in the Cash Maintenance Account.
The Authority also has established an Interest and Excess Cash Flow Account
into which it must place the fixed interest accrued during each month on the
Senior Debt and the Subordinated Debt, 50% of the Excess Cash Flow (as
defined) generated by the Mohegan Sun in the previous month and the Cash Flow
Participating interest accrued for the prior month. These amounts are to be
used to pay current interest and to provide funds for redemption of Senior
Debt as provided in the Indenture. If the Senior Debt holders decline
redemption, these funds may be used to redeem the subordinated debt, with any
remaining balance available for distribution to the Tribe.
The Authority shall also make a minimum monthly payment to the Tribe of
$50,000. In addition, the Authority may make a monthly payment to the Tribe
with respect to net revenues (as defined), generated by the Mohegan Sun in
the preceding month. Such amount shall only be made after certain other
minimum Priority Payments and required deposits in to certain reserve
accounts (as defined) have been made. No payments have been made or are due
as of September 30, 1996.
6. COMPACT WITH THE STATE OF CONNECTICUT
- ----------------------------------------
The Tribe's Compact with the State of Connecticut stipulates that a portion
of the revenues earned on slot machines will be paid to the State of
Connecticut. For each twelve-month period commencing July 1, 1995, the
minimum contribution of the Tribe to the State of Connecticut 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) $80,000,000. These
payments will not be required if the State of Connecticut legalizes any other
gaming operations with slot machines to be operated in the State of
Connecticut (other than on certain Indian lands). No payments have been made
or are due as of September 30, 1996.
7. TOWN OF MONTVILLE
- --------------------
The Tribe has entered into an agreement with the Town of Montville,
Connecticut (the "Town") pursuant to which the Tribe has agreed to pay to the
Town (i) an annual payment of $500,000 to compensate the Town for the
financial impact of removing the Site from the Town's tax rolls and
jurisdiction and (ii) a one-time fee of $3.0 million to make improvements to
the Town's water system, which improvements are necessitated by the
development and operation of the Mohegan Sun. The one-time payment is due
F-12
<PAGE>
and the annual payments commence one year after the commencement of slot
machine gaming activities.
It is anticipated that these payments will be made by the Authority on behalf
of the Tribe. When that occurs, the one-time fee of $3.0 million for
improvement of the Town's water system will be capitalized as part of
leasehold interest (see Note 3), while the annual payments of $500,000 will be
treated as operating expenses of the Authority since they are effectively in
lieu of property taxes that would be the responsibility of the Authority
under the Lease. It is not anticipated that the Tribe will reimburse the
Authority for these payments.
8. SUBSEQUENT EVENTS
- --------------------
As of September 30, 1996, the Authority has entered into or is negotiating
various commitments to obtain (through purchase or under capital or operating
leases) approximately $56.9 million worth of assets. Also, the Authority has
drawn down an additional $6 million on the working capital line of credit
subsequent to September 30, 1996.
Mohegan Sun plans on implementing a 401(k) plan during the second quarter of
fiscal 1997.
Mohegan Sun opened to the general public on October 12, 1996.
F-13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, as amended, the Mohegan Tribal Gaming Authority has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on March 6, 1997.
MOHEGAN TRIBAL GAMING AUTHORITY
By: /s/ Roland Harris
-------------------------------------------
Roland Harris,
Chairman, Management Board, Duly Authorized
Pursuant to the Requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on March 6, 1997.
Signature Title
- --------- -----
/s/ Mark Brown Member, Management Board
- -----------------------------
Mark Brown
/s/ Jayne Fawcett Vice Chair and
- ----------------------------- Member, Management Board
Jayne Fawcett
/s/ Carlisle Fowler Treasurer and
- ----------------------------- Member Management Board
Carlisle Fowler
/s/ Courtland Fowler Member, Management Board
- -----------------------------
Courtland Fowler
11
<PAGE>
Signature Title
- --------- -----
/s/ Roland Harris Chairman and Member,
- ----------------------------- Management Board
Roland Harris (Principal Executive Officer)
/s/ Loretta Roberge Corresponding Secretary
- ----------------------------- and Member, Management Board
Loretta Roberge
/s/ Maynard Strickland Member, Management Board
- -----------------------------
Maynard Strickland
/s/ Shirley Walsh Recording Secretary and
- ----------------------------- Member, Management Board
Shirley Walsh
/s/ Jeffrey E. Hartmann Senior Vice President of Finance,
- ----------------------------- Chief Financial Officer (Principal
Jeffrey E. Hartmann Financial and Accounting Officer)
/s/ Glenn LaVigne Member, Management Board
- -----------------------------
Glenn LaVigne
12
