<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period___________________ to _________________________.
Commission file number: 033-80655
----------
MOHEGAN TRIBAL GAMING AUTHORITY
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
N/A 06-1436334
--- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Mohegan Sun Boulevard, Uncasville, CT 06382
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(860) 204-8000
--------------
(Registrant's telephone number, including area code)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days. Yes X No _____
--------
Total number of pages in this report: 17
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION Page
Number
------
<S> <C>
ITEM 1 -- Financial Statements
Review Report of Independent Public Accountants 1
Condensed Balance Sheets of Mohegan Tribal Gaming Authority as of 2
March 31, 1998 (unaudited) and September 30, 1997.
Condensed Statements of Income of Mohegan Tribal Gaming Authority for the 3
Three and Six Months Ended March 31, 1998, (unaudited) and for the Three
Months Ended March 31, 1997 (unaudited), and for the Period October 12,
1996 (date of commencement of operations) through March 31, 1997
(unaudited).
Condensed Statements of Capital of Mohegan Tribal Gaming Authority for 4
the Quarter Ended March 31, 1998 (unaudited) and for the Period October
12, 1996 (date of commencement of operations) through March 31, 1997
(unaudited).
Condensed Statements of Cash Flows of Mohegan Tribal Gaming Authority for 5
the Six Months Ended March 31, 1998 (unaudited) and for the Period
October 12, 1996 (date of commencement of operations), through March 31,
1997 (unaudited).
Notes to Condensed Financial Statements of Mohegan Tribal Gaming 6-11
Authority.
ITEM 2 -- Management's Discussion and Analysis of Financial Condition 12-15
and Results of Operations.
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings 16
ITEM 2 -- Changes in Securities 16
ITEM 3 -- Defaults upon Senior Securities 16
ITEM 4 -- Submission of Matters to a Vote of Security Holders 16
ITEM 5 -- Other Information 16
ITEM 6 -- Exhibits and Reports on Form 8-K 16
Signatures - Mohegan Tribal Gaming Authority 17
</TABLE>
<PAGE>
REVIEW REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------------
To the Mohegan Tribal Gaming Authority:
We have reviewed the accompanying condensed balance sheet of Mohegan Tribal
Gaming Authority (Authority) as of March 31, 1998, and the related condensed
statements of income for the three and six months ended March 31, 1998, and for
the three months ended March 31, 1997, and for the period October 12, 1996 (date
of commencement of operations) through March 31, 1997 and the condensed
statements of cash flows and capital for the six months ended March 31, 1998 and
for the period October 12, 1996 (date of commencement of operations) through
March 31, 1997. These financial statements are the responsibility of the
Authority's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Mohegan Tribal Gaming Authority as of September
30, 1997, and the related statement of income for the period October 12, 1996
(date of commencement of operations) through September 30, 1997 (not presented
herein) and statements of cash flows and capital for the year ended September
30, 1997 (not presented herein), and, in our report dated December 11, 1997, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying condensed balance sheet of Mohegan
Tribal Gaming Authority as of September 30, 1997, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
/s/ Arthur Anderson, LLP
Hartford, Connecticut
May 1, 1998
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
--------
CURRENT ASSETS:
Cash and cash equivalents $28,537 $40,387
Restricted cash 67,631 48,457
Receivables, net 2,360 1,140
Inventories 4,556 4,516
Other current assets 1,847 1,263
-------------- ---------------
Total current assets 104,931 95,763
NON-CURRENT ASSETS:
Property and equipment, net 298,030 287,192
Other assets 1,545 4,019
-------------- ---------------
Total assets $404,506 $386,974
============== ===============
LIABILITIES AND CAPITAL
-------------------------
CURRENT LIABILITIES:
Current portion of capital lease obligations 8,448 9,200
Accounts payable and accrued expenses 43,058 35,985
Accrued interest payable 37,569 30,821
-------------- ---------------
Total current liabilities 89,075 76,006
NON-CURRENT LIABILITIES:
Long term debt 265,000 265,000
Capital leases, net of current portion 16,520 24,037
-------------- ---------------
Total liabilities 370,595 365,043
COMMITMENTS AND CONTINGENCIES (NOTE 4)
CAPITAL:
Total capital 33,911 21,931
-------------- ---------------
Total liabilities and capital $404,506 $386,974
============== ===============
</TABLE>
The accompanying accountants' review report and
notes to financial statements should be read in
conjunction with the financial statements
2
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
CONDENSED STATEMENTS OF INCOME
------------------------------
(IN THOUSANDS)
------------
<TABLE>
<CAPTION>
FOR THE PERIOD OCTOBER 12, 1996
FOR THE THREE FOR THE THREE FOR THE SIX (DATE OF COMMENCEMENT
MONTHS ENDED MONTHS ENDED MONTHS ENDED OF OPERATIONS)
MARCH 31, 1998 MARCH 31, 1997 MARCH 31, 1998 THROUGH MARCH 31, 1997
-------------- -------------- -------------- ----------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Gaming $133,275 $107,016 $253,073 $197,912
Food and beverage 13,474 11,657 26,070 21,277
Retail and Other 7,229 5,083 17,254 8,547
Bingo operations 3,720 3,381 6,603 5,870
-------------- -------------- -------------- ---------------------
Gross revenues 157,698 127,137 303,000 233,606
Less - Promotional allowances (17,334) (13,539) (35,494) (23,125)
-------------- -------------- -------------- ---------------------
NET REVENUES 140,364 113,598 267,506 210,481
-------------- -------------- -------------- ---------------------
COST AND EXPENSES:
Gaming 59,431 50,671 115,739 94,315
Food and beverage 5,790 6,185 10,730 12,746
Retail and Other 4,429 5,401 10,818 9,545
Bingo operations 813 1,072 1,517 2,265
General and administration 21,297 18,271 45,036 38,122
Management fee 12,593 4,846 19,997 7,204
Depreciation and amortization 4,122 7,648 8,922 15,312
-------------- -------------- -------------- ---------------------
TOTAL COSTS AND EXPENSES 108,475 94,094 212,759 179,509
-------------- -------------- -------------- ---------------------
INCOME FROM OPERATIONS 31,889 19,504 54,747 30,972
-------------- -------------- -------------- ---------------------
Interest and other income 592 505 1,240 740
Interest expense (12,414) (11,650) (24,192) (21,386)
-------------- -------------- -------------- ---------------------
(11,822) (11,145) (22,952) (20,646)
-------------- -------------- -------------- ---------------------
INCOME BEFORE EXTRAORDINARY EXPENSE 20,067 8,359 31,795 10,326
Loss on Extinguishment of Debt (332) 0 (332) 0
-------------- -------------- -------------- ---------------------
NET INCOME $19,735 $8,359 $31,463 $10,326
============== ============== ============== =====================
</TABLE>
The accompanying accountants' review report and
notes to financial statements should be read in
conjunction with the financial statements
3
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
CONDENSED STATEMENTS OF CAPITAL
-------------------------------
(IN THOUSANDS)
--------------
<TABLE>
<CAPTION>
FOR THE PERIOD OCTOBER 12, 1996
FOR THE SIX MONTHS ENDED (DATE OF COMMENCEMENT OF OPERATIONS)
CAPITAL MARCH 31, 1998 THROUGH MARCH 31, 1997
- ------- -------------- ----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Beginning Balance $ 21,931 $ -
Net income 31,463 10,326
Distributions to Tribe (19,483) (4,360)
------------------------ ------------------------------------
Ending Balance $ 33,911 $ 5,966
======================== ====================================
</TABLE>
4
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(IN THOUSANDS)
------------
<TABLE>
<CAPTION>
FOR THE PERIOD OCTOBER 12, 1996
(DATE OF COMMENCEMENT
FOR THE SIX MONTHS ENDED OF OPERATIONS)
MARCH 31, 1998 THROUGH MARCH 31, 1997
-------------- ----------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $31,463 $10,326
Adjustments to reconcile net income to
net cash flow provided by operating activities:
Depreciation and amortization 8,922 15,312
Loss on extinguishment of debt 332 0
Loss on asset disposal 22 0
Provision for losses on receivables 380 99
Changes in operating assets and liabilities:
(Increase) decrease in receivables and other assets 350 (12,030)
Increase (decrease) in accounts payable and accrued expenses 17,425 44,176
--------------------------- ------------------------------
Net cash flows provided by operating activities 58,894 57,883
--------------------------- ------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (19,882) (7,154)
Decrease in construction payable (3,604) (35,888)
--------------------------- ------------------------------
Net cash flows used in investing activities (23,486) (43,042)
--------------------------- ------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Tribe (19,483) (4,360)
Increase in short-term borrowings 650 7,056
Proceeds from equipment financing 0 14,936
Payment on equipment financing (9,251) (8,813)
Additional borrowing under Secured Completion Guarantee 0 23,000
--------------------------- ------------------------------
Net cash flows (used in) provided by financing activities (28,084) 31,819
--------------------------- ------------------------------
Net increase in cash and cash equivalents 7,324 46,660
Cash and Cash Equivalents at beginning of period 88,844 12,537
--------------------------- ------------------------------
Cash and Cash Equivalents at end of period $96,168 $59,197
=========================== ==============================
Supplemental Disclosures:
Cash paid during the period for interest $17,446 $13,753
Debt assumed from acquisition of property $0 $22,739
</TABLE>
The accompanying accountants' review report and
notes to financial statements should be read in
conjunction with the financial statements
5
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
MARCH 31, 1998
--------------
(UNAUDITED)
-----------
1. Basis of Presentation:
- -------------------------
The Mohegan Tribal Gaming Authority (the "Authority"), established on July 15,
1995, is an instrumentality of the Mohegan Tribe of Indians of Connecticut (the
"Tribe"). The Tribe established the Authority with the exclusive power to
conduct and regulate gaming activities for the Tribe. Under the Indian Gaming
Regulatory Act of 1988, as amended ("IGRA"), federally recognized Indian tribes
are permitted to conduct 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"), which was approved by the Secretary of the Interior on
December 14, 1994. On October 12, 1996, the Authority opened a casino known as
Mohegan Sun Casino ("Mohegan Sun").
The Authority has engaged Trading Cove Associates ("TCA") to manage the
operations of Mohegan Sun pursuant to a seven year contract (the "Management
Agreement"). 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 condensed financial statements have been prepared in accordance with the
accounting policies described in the Authority's 1997 Annual Report on Form 10-K
and should be read in conjunction with the Notes to Financial Statements which
appear in that report. The condensed Balance Sheet at September 30, 1997,
contained herein, was derived from audited financial statements, but does not
include all disclosures contained in the Form 10-K and required by generally
accepted accounting principles.
Certain amounts in the condensed financial statements have been reclassified.
The reclassification has no effect on 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 condensed
financial statements for the second quarter and the six months ended fiscal 1998
are not necessarily indicative of expected results for the full year, as the
casino industry in Connecticut is seasonal in nature.
The Authority's operation of a casino in Connecticut is subject to significant
regulatory controls which affect virtually all of its operations.
2. Long-Term Debt:
- -------------------
Long-term debt consists of the following ( in thousands):
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
-------------- ------------------
<S> <C> <C>
Senior Secured Notes $175,000 $175,000
Subordinated Notes 90,000 90,000
-------- --------
$265,000 $265,000
======== ========
</TABLE>
6
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
MARCH 31, 1998
--------------
(UNAUDITED)
-----------
2. Long-Term Debt continued:
- -----------------------------
SENIOR SECURED NOTES
On September 29, 1995, the Authority issued $175 million in Senior Secured Notes
due 2002 (the "Senior Notes" or the "Senior Secured Notes") with fixed interest
payable at a rate of 13.5% per annum and Cash Flow Participation Interest, as
defined therein, in an aggregate amount of 5% 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. The aggregate amount of Cash Flow
Participation Interest payable will be reduced pro rata for reductions in the
outstanding principal amount of Senior Secured Notes. The payment of Cash Flow
Participation Interest may be deferred if the Authority's Fixed Charge Coverage
Ratio is less than 2 to 1. The Senior Notes are redeemable after November 15,
1999 at set prices as set forth in the Senior Secured Notes, at the option of
the Authority. Upon the occurrence of certain events as specified in the
Indenture executed in connection with the issuance of the Senior Notes (the
"Indenture"), each holder of Senior Notes can require the Authority to
repurchase the Senior Notes at prices specified in the Indenture. Beginning
with the fiscal year ending September 30, 1997, the Authority was required
within 120 days, under certain circumstances, to offer to purchase, at set
prices, certain amounts of Senior Secured Notes then outstanding, under the
Excess Cash Purchase Offer, as defined in the Indenture. See Note 4 for the
Excess Cash Purchase Offer made by the Authority for the fiscal year ended
September 30, 1997.
SUBORDINATED NOTES
The Authority has obtained $90 million of subordinated financing from Sun
International and Waterford Gaming LLC in the form of notes ("Subordinated
Notes"). The Authority issued $20 million of Subordinated Notes to each of Sun
International and Waterford Gaming LLC, which notes bear interest at 15% per
year. The Authority also has issued $50 million in Subordinated Notes to Sun
International evidencing draws made by the Authority under the secured
completion guarantee provided by Sun International ("Secured Completion
Guarantee"). Each Subordinated Note issued under the Secured Completion
Guarantee bears interest at the rate per annum then most recently announced by
Chemical Bank of New York as its prime rate plus 1%, which shall be set and
revised at intervals of six months. Interest on the Subordinated Notes is
payable semi-annually, provided, however that all such interest is deferred and
will not be paid until at least half of the Senior Secured Notes have been
retired, pursuant to the terms of the Indenture, and certain other conditions
have been fulfilled. Accrued and deferred interest on the Subordinated Notes is
$19 million as of March 31, 1998. All Subordinated Notes are due 2003; however,
principal cannot be paid until the Senior Notes have been paid in full, unless
certain conditions are met. During October 1997, $2.5 million of Subordinated
Notes issued to Sun International pursuant to the Secured Completion Guarantee
were purchased by Waterford Gaming LLC. In the event that the holders of the
Senior Notes reject all or any portion of the Excess Cash Purchase Offer, as
defined in the Indenture, the Authority is required to offer to purchase, at
par, certain amounts of the Subordinated Notes then outstanding. See Note 4 for
such offer made by the Authority.
LINES OF CREDIT
The Authority has obtained an unsecured line of credit totaling $2.5 million.
The line of credit obtained from Fleet National Bank, expires on March 31, 2000
and provides for interest based on various floating indexes. As of March 31,
1998, outstanding amounts on this line of credit have been paid. This line of
credit was used for working capital purposes.
7
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
MARCH 31, 1998
--------------
(UNAUDITED)
-----------
3. Leases
- ---------
CAPITAL LEASES
The Authority received gaming equipment financing of $23 million from CIT
Group/Equipment Financing, Inc. ("CIT Group"). The terms of this agreement
provide that borrowings bear interest of 2% over prime, commencing from the date
of delivery of the equipment. Principal payments will be over 48 months and
commenced December 1996.
The Authority received equipment financing of $9 million from the CIT Group and
Phoenixcor, Inc. ("Phoenixcor"). The CIT Group agreement provided $5 million of
funding with an interest rate of 9.17%. Principal payments will be over 48
months and commenced December 1996. The Phoenixcor agreement provided $4
million of funding with an interest rate of 8.95%. Principal payments will be
over 48 months and commenced November 1996.
The Authority received financing of $5.1 million from PDS Financial Corporation
("PDS"). The PDS agreement provided that borrowings bear interest of 12%.
Principal payments were to be over 48 months and commenced January 1997. On
February 27, 1998 the Authority paid $4 million to PDS which represented full
and final payment of this capital lease. The Authority incurred a $332,000 loss
from this debt extinguishment which has been classified as an extraordinary
item.
The Authority received equipment financing of $3 million from Fleet Capital
Corporation ("Fleet"). The Fleet agreement provides that borrowings bear
interest of 8.75%. Principal payments will be made over 48 months and commenced
July 1997. The Fleet agreement has been assigned to Keycorp Leasing.
Additionally, the Authority has obtained a $10 million equipment lease
commitment from CIT Group/Equipment Financing, Inc. ("CIT Group"). As of March
31, 1998, there is no amount outstanding on this equipment lease commitment.
OPERATING LEASES
The Authority leases various equipment under operating leases. Rent expense
under these leases for the three and six months ending March 31, 1998 were $1.7
and $4.6 million respectively.
4. Commitments and Contingencies:
- ----------------------------------
THE MOHEGAN COMPACT
The Mohegan Compact stipulates that a portion of the revenues earned on slot
machines must be paid to the State of Connecticut ("Slot Win Contribution").
For each twelve-month period commencing July 1, 1995, the minimum 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) $80,000,000.
These payments will not be required if the State of Connecticut legalizes any
other gaming operations with slot machines or other commercial casino games to
be operated in the State of Connecticut (other than on certain Indian lands).
The Authority has reflected $24.3 and $42.4 million of gaming expense in its
financial statements for the Slot Win Contribution for the three and six months
ending March 31, 1998 respectively. At March 31, 1998, $8.4 million was owed to
the State of Connecticut for the Slot Win Contribution.
8
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
MARCH 31, 1998
--------------
(UNAUDITED)
-----------
4. Commitments and Contingencies continued:
- --------------------------------------------
LITIGATION
The Authority is a defendant in certain litigation incurred in the normal course
of business. In the opinion of management, based on the advice of counsel, the
aggregate liability, if any, arising from such litigation will not have a
material adverse effect on the Authority's financial position or results of
operations.
EXCESS CASH PURCHASE OFFER
Pursuant to the Indenture, the Authority is required to make an Excess Cash
Purchase Offer to all holders of the Senior Notes within 120 days after each
fiscal year end of the Authority, commencing September 30, 1997. The Excess
Cash Purchase Offer equals 50% of the Excess Cash Flow plus 100% of the Deferred
Subordinated Interest; the Excess Cash Flow Purchase Offer was $29.1 million for
the period ended September 30, 1997.
The Excess Cash Purchase Offer was made on January 28, 1998. In accordance with
the Indenture, the Authority offered to purchase the Senior Notes at 113.5% of
the principal amount of the Senior Notes plus accrued and unpaid interest to the
purchase date. The Excess Cash Purchase Offer expired by its terms on February
25, 1998, and none of the holders of the Senior Notes accepted such offer.
On March 12, 1998, pursuant to the Note Purchase Agreement, an offer to
repurchase in the amount of the Excess Cash Purchase Offer was made to the
holders of the Subordinated Notes. The offer period concluded on April 2, 1998,
and the holders of the Subordinated Notes also rejected such offer. On April 3,
1998, in accordance with Section 4.07(g) of the Indenture, the Authority
distributed the amount of the Excess Cash Purchase Offer ($29.1 million) to the
Tribe.
5. Related Party Transactions:
- -------------------------------
The Tribe provides governmental and administrative services to the Authority in
conjunction with the operation of Mohegan Sun. For the three and six months
ended March 31, 1998, the Authority incurred expenses of $1.8 million and $3.6
million, respectively for such services.
The Tribe, through one of its limited liability companies, has provided goods to
the Authority for resale at its retail location.
The Tribe, through two other limited liability companies, has entered into
various land lease agreements with the Authority for adjacent properties. The
properties are used by the Authority for access, parking and related amenities
for Mohegan Sun.
Under the terms of the Management Agreement, the Authority may award service
contracts or purchase services from qualified members of the Tribe if the costs
of services are competitive in the local market.
As of March 31, 1998, 191 employees of the Authority consist of Mohegan tribal
members and spouses.
9
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
MARCH 31, 1998
--------------
(UNAUDITED)
-----------
6. Relinquishment and Development Agreements
- ---------------------------------------------
On February 7, 1998, the Tribe finalized contract negotiations with TCA and is
prepared to move forward with an estimated $550 million (excluding capitalized
interest) expansion project at Mohegan Sun.
Under the terms of a new agreement with TCA (the "Relinquishment Agreement"),
TCA will continue to manage the existing property under the Management Agreement
until December 31, 1999. On January 1, 2000, the Management Agreement will
terminate, and the Authority will assume day-to-day management of Mohegan Sun.
To compensate TCA for terminating its rights, the Authority has agreed to pay to
TCA 5% of gross revenues (as defined in the agreement), generated from Mohegan
Sun and from the planned expansion, beginning January 2000 and ending October
2014. The effective date of the Relinquishment Agreement is the later of (a)
the date the Authority receives all required approvals or (b) the date the
Senior Notes are refinanced or repaid.
The Authority has also negotiated a second agreement with TCA (the "Development
Agreement"), which will make TCA the exclusive developer of the planned
expansion at Mohegan Sun. Under the Development Agreement, TCA will oversee the
planning, design and construction of the expansion at Mohegan Sun. The
effective date of the Development Agreement is the first day of the first
calendar month following the later of (a) the date the Authority receives all
required approvals or (b) the closing of the anticipated refinancing of certain
of the Authority's existing indebtedness, together with construction financing.
The Relinquishment Agreement and Development Agreement are subject to regulatory
approval. The proposed development plans include 100,000 square feet of
additional gaming space, a luxury hotel (or hotels) with approximately 1,500
rooms, a convention/events center with seating for 10,000 patrons and 100,000
square feet of convention space. The Authority also plans to include additional
retail and restaurant facilities into its design. Current plans would also
require significant upgrades and additions to the facility's parking and
infrastructure systems.
7. Subsequent Events:
- ----------------------
The Excess Cash Purchase Offer as more fully described in Note 4, had been
offered to the Holders of the Senior Notes and then subsequently was offered to
the Holders of the Subordinated Notes. As of April 2, 1998, both the Holders of
the Senior Notes and the Subordinated Notes had rejected the Excess Cash
Purchase Offer. On April 3, 1998, in accordance with Section 4.07 (g) of the
Indenture, the Authority distributed the Excess Cash Purchase Offer of $29.1
million to the Tribe.
On April 8, 1998, the Chairman of the Authority announced that the Authority
plans to construct a Fueling Facility and a simulcasting Race Book Facility.
The Fueling Facility of approximately 4,000 square feet will consist of sixteen
gasoline pumps, one diesel fuel pump, and a convenience store that will offer
fresh baked goods and retail items. The Fueling Facility is expected to cost
approximately $4 million.
10
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
-------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
---------------------------------------
MARCH 31, 1998
--------------
(UNAUDITED)
-----------
7. Subsequent Events continued:
- --------------------------------
The simulcasting Race Book Facility of approximately 9,000 square feet, will
feature the New York Racing Association circuit as well as greyhound racing and
jai alai from throughout the United States. The simulcasting Race Book will
feature 230 seats with individual television monitors and computerized self-
service capabilities. The simulcasting Race Book Facility is expected to cost
approximately $5 - $6 million.
11
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE QUARTER ENDED MARCH 31, 1998 AND THE
QUARTER ENDED MARCH 31, 1997:
Consolidated net revenues for the second quarter ended March 31, 1998 were
$140.4 million compared with $113.6 million reported in the same period of the
prior year. The increase in net revenues is primarily due to growth in gaming
and food and beverage revenues in the 1998 period.
Gaming Revenues of $133.3 million for the second quarter of 1998 showed an
increase of $26.3 million or 25% over $107 million for the same period in the
prior year. The increase in gaming revenue is primarily attributable to the 25%
growth of the Connecticut slot market and the continued growth of the Mohegan
Sun customer base.
Slot revenues were $94.1 million for the quarter ended March 31, 1998 and
reflected a slot win per unit per day of $351. The slot win increase of $20.9
million or 29% over the same period in the prior year reflected Mohegan Sun's
increase of the Connecticut slot win market share from 99% of the fair share in
second quarter 1997 to a fair share of 106% achieved in second quarter 1998.
The mild winter weather experienced in the Northeastern United States partially
contributed to the 11% growth in Connecticut slot revenue for the quarter. Slot
win percentage was 8.1% and 7.6% for the quarter ending March 31, 1998 and 1997,
respectively.
Food and Beverage revenues were $13.5 million for the quarter, an increase of
$1.8 million over the same period in the prior year. Of the total increase, food
revenues accounted for 83% or $1.5 million of the increase for the quarter.
Other revenues, consisting primarily of retail and entertainment, were $7.2
million for the quarter ending March 31, 1998, an increase of $2.1 million or
42% over the same period in the prior year.
Total costs and expenses were $108.5 million in the second quarter, representing
an increase of $14.4 million or 15% over the same period in the prior year.
Gaming costs and expenses were $59.4 million for the period, an increase of $8.8
million or 17% over the same period in the prior year.
Under the Mohegan Compact, the Authority is required to remit to the State of
Connecticut 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
for each twelve-month period commencing July 1, 1995. As a result of an
increase in slot revenue, the expense for the contribution to the State of
Connecticut was $5.8 million more for the quarter ended March 31, 1998 than for
the same period in the prior year.
General and Administrative costs increased by $3.0 million or 17% over the same
period in the prior year which is partially attributable to an increase in
administrative costs associated with insurance premiums and workers'
compensation assessments. Food and beverage costs decreased by $395,000 or 6%
due to improved labor operating efficiencies. Retail and other operating
expenses decreased by $972,000 or 18% compared to the same period in the prior
year as a result of an increase in cost percentages applied to gaming expenses
associated with promotional allowances.
Income from the Bingo operation was $109,000 during the second quarter, a
turnaround from a loss of $491,000 over the same period in the prior year. This
improvement over last year's results is attributable to increased promotion and
awareness of the Bingo operation.
For the second quarter 1998, depreciation and amortization decreased by $3.5
million or 46% over the prior year. The decrease in fiscal year 1998 is due to
the full amortization of pre-opening costs during fiscal year 1997. Management
fees earned by Trading Cove Associates increased by $7.7 million over the same
period in the prior year due to the increased profit for the 1998 period.
Income from operations was $31.9 million for the quarter ended March 31, 1998,
compared to $19.5 million for the quarter ended March 31, 1997.
Interest and Other Income was $592,000 for the quarter, an increase of $87,000
or 17% from the same period in the prior year. Loss on Extinguishment of Debt
of $332,000 was due to a loss incurred on a retirement of a capital lease in
February 1998.
12
<PAGE>
Interest Expense of $12.4 million in the second quarter of fiscal 1998 was
$764,000 or 7% higher than the same period in the prior year. The increase in
the second quarter of fiscal 1998 was primarily due to an increase in Cash Flow
Participation Interest paid to the holders of the Senior Notes pursuant to the
Bond Indenture. The Cash Flow Participation Interest represents a payment of 5%
of the Authority's cash flow up to a limit, during any two consecutive periods,
ending September 30, of $250 million of the Authority's cash flow.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND THE
SIX MONTHS ENDED MARCH 31, 1997:
Consolidated net revenues for the six months ended March 31, 1998 were $267.5
million compared with $210.5 million reported in the same period of the prior
year. This 27% increase in net revenue is primarily attributable to an increase
in gaming revenues.
Gaming Revenues of $253.1 million for the six months ended March 31, 1998 showed
an increase of $55.2 million or 28% over the same period in the prior year. The
increase in gaming revenue is due to the growth in slot revenues and in table
revenues over the prior year.
Slot revenues of $179.4 million for the six months ended March 31, 1998
reflected a slot win per unit per day of $329. The slot win growth of $41.5
million or 30% over the same period in the prior year was evidence of Mohegan
Sun's growth in slot win market share in the state to 106% by the end of the
second fiscal quarter 1998. Slot win percentage was 7.9% and 7.2% for the six
months ended March 31, 1998 and 1997, respectively.
For the six months ended March 31, 1998, Food and Beverage revenues were $26.1
million, a growth of $4.8 million or 23% over the same period in the prior year.
Food revenues accounted for 78% or $3.7 million of the revenue growth.
Total costs and expenses were $212.8 million for the six months ended March 31,
1998, an increase of $33.3 million or 19% over the same period in the prior
year. Gaming costs and expenses were $115.7 million for the period, an increase
of $21.4 million or 23% over the same period in the prior year.
Under the Mohegan Compact, the Authority is required to remit to the State of
Connecticut 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
for each twelve-month period commencing July 1, 1995. The expense for the state
slot contribution was $46.3 million for the six months ended March 31, 1998, an
increase of $11.1 million over the same period in the prior year which is
directly attributable to higher gross slot revenues over the same period in the
prior year.
General and Administrative costs were $45.0 million for the six months ended
March 31, 1998, an increase of $6.9 million or 18% over the same period in the
prior year which is partially attributable to an increase in administrative
costs associated with insurance premiums and workers' compensation assessments.
Food and beverage costs decreased by $2.0 million or 16% over the same period in
the prior year due to improved labor operating efficiencies. Retail and other
operating expenses increased by $1.3 million or 13% compared to the same period
in the prior year as a result of an increase in cost percentages applied to
gaming expenses associated with promotional allowances.
Results from the Bingo operations were much improved in the first half of fiscal
1998 compared to the same period last year. For the six months ended March 31,
1998, Bingo is at a $4,000 loss for the year, compared to a $1.8 million loss
for the same period in the prior year. This improvement over last year's
results is attributable to increased promotion and awareness of the Bingo
operation.
For the first six months of fiscal year 1998, depreciation and amortization
decreased by $6.4 million or 42% over the prior year, due to the full
amortization of pre-opening costs during fiscal 1997. Management fees earned by
Trading Cove Associates increased by $12.8 million over the same period in the
prior year due to the increased profit for the 1998 period.
Operating income for the first six months of fiscal 1998 was $54.7 million,
compared to $31.0 million for the same period last year.
13
<PAGE>
Interest and Other Income was $1.2 million for the six months ended March 31,
1998, an increase of $500,000 or 67.6% from the same period in the prior year.
Loss on Extinguishment of Debt of $332,000 was due to a loss incurred on
retirement of a capital lease in February 1998.
Interest Expense of $24.2 million for the first half of fiscal 1998 was $2.8
million or 13% higher than the same period in the prior year. The increase in
fiscal 1998 was mainly attributable to an increase in Cash Flow Participation
Interest paid to the holders of the Senior Notes pursuant to the Bond Indenture.
The Cash Flow Participation Interest represents a payment of 5% of gross
operating profit to the holders of the Senior Notes.
CAPITAL RESOURCES, CAPITAL SPENDING AND LIQUIDITY
As of March 31, 1998 and September 30, 1997, the Authority held cash and cash
equivalents of $28.5 million and $40.4 million, respectively. Net Cash Flows
provided by operating activities for the first six months of 1998 was $58.9
million versus $57.9 million for 1997.
The Authority expects its capital expenditures for new assets will range from
$21 - $25 million for the fiscal year 1998. For the six months ended March 31,
1998, capital expenditures amounted to $19.9 million which included $15.3
million for the purchase of assets previously held under operating leases.
Some of these capital expenditures related to the recently completed retail
expansion, which included an additional retail outlet and an enhancement to the
Native American theme. As described in "Future Development", work has begun on
a simulcasting Race Book which is being added to the gaming facility, as well as
on the construction of an on-reservation Fueling Facility. The Race Book
Facility is expected to cost approximately $5 - $6 million, and the Fueling
Facility is expected to cost $4 million. Sources of funding for both projects
will include equipment financing of approximately $10 million from CIT
Group/Equipment Financing, Inc. ("CIT Group"). The first draw of $3.4 million
was received on April 24, 1998 and bears interest at 7.90%.
The Authority, subsequent to meeting its operating expenses and required
deposits to reserve funds pursuant to the Indenture, has distributed $9.9
million to the Tribe for the second quarter of fiscal 1998. Also during the
second quarter, interest paid in connection with equipment financing and working
capital amounted to $746,000.
Management believes that existing cash balances and operating cash flow will
provide the Authority with sufficient resources to meet its existing debt
obligations and foreseeable capital expenditure requirements with respect to
current operations for at least the next twelve (12) months. On February 7,
1998, the Authority finalized contract negotiations with TCA and is prepared to
move forward with an estimated $450 - $550 million (excluding capitalized
interest) expansion project at Mohegan Sun. (See "Future Development").
The Excess Cash Purchase Offer, as more fully described in Note 4, had been
offered to the Holders of the Senior Notes and then subsequently was offered to
the Holders of the Subordinated Notes. As of April 2, 1998, both the Holders of
the Senior Notes and the Subordinated Notes had rejected the Excess Cash
Purchase Offer. On April 3, 1998, pursuant to Section 4.07 (g) of the
Indenture, the Authority distributed the Excess Cash Purchase Offer of $29.1
million to the Tribe, which had been previously deposited in restricted cash.
FUTURE DEVELOPMENT
On February 7, 1998, the Authority finalized contract negotiations with TCA and
is prepared to move forward with an estimated $450-$550 million (excluding
capitalized interest) expansion project at Mohegan Sun.
Under the terms of a new agreement with TCA (the "Relinquishment Agreement"),
TCA will continue to manage the existing property under the Management Agreement
until December 31, 1999. On January 1, 2000, the Management Agreement will
terminate, and the Authority will assume day-to-day management of Mohegan Sun.
To compensate TCA for terminating its rights, the Authority has agreed to pay to
TCA 5% of gross revenues (as defined in the agreement), generated from Mohegan
Sun and from the planned expansion, beginning January 2000 and ending October
2014. The effective date of the Relinquishment Agreement is the later of (a)
the date the Authority receives all required approvals or (b) the date the
Senior Notes are refinanced or repaid.
14
<PAGE>
The Authority has also negotiated a second agreement with TCA (the "Development
Agreement"), which will make TCA the exclusive developer of the planned
expansion at Mohegan Sun. Under the Development Agreement, TCA will oversee the
planning, design and construction of the expansion at Mohegan Sun. The
effective date under the Development Agreement is the first day of the first
calendar month following the later of (a) the date the Authority receives all
required approvals or (b) the closing of the anticipated refinancing of certain
of the Authority's existing indebtedness, together with construction financing.
The Relinquishment Agreement and Development Agreement are subject to
regulatory approval. The proposed development plans include 100,000 square feet
of additional gaming space, a luxury hotel (or hotels) with approximately 1,500
rooms, a convention/events center with seating for 10,000 patrons and 100,000
square feet of convention space. The Tribe also plans to include additional
retail and restaurant facilities into its design. Current plans would also
require significant upgrades and additions to the facility's parking and
infrastructure systems.
Any such expanded operations will require additional sources of funding, which
may include public and private debt and bank financing. There can be no
assurance that the Authority will be able to obtain such financing, although the
Authority believes that the current results of operations of Mohegan Sun make
such financing a viable likelihood.
On April 8, 1998, the Chairman of the Authority announced that the Authority
plans to construct a Fueling Facility and a simulcasting Race Book Facility
contiguous to the gaming facility.
The Fueling Facility of approximately 4,000 square feet will consist of sixteen
gasoline pumps, one diesel fuel pump, and a convenience store that will offer
fresh baked goods and retail items. The Fueling Facility is expected to cost
approximately $4 million.
The simulcasting Race Book Facility of approximately 9,000 square feet, will
feature the New York Racing Association circuit as well as greyhound racing and
jai alai from throughout the United States. The simulcasting Race Book will
feature 230 seats with individual television monitors and computerized self-
service capabilities. The simulcasting Race Book Facility is expected to cost
approximately $5 - $6 million.
CERTAIN FORWARD LOOKING STATEMENTS
Certain information included in this Form 10-Q and other materials filed or to
be filed by the Authority with the Securities and Exchange Commission (as well
as information included in oral statements or other written statements made or
to be made by the Authority) contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. 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).
15
<PAGE>
PART II - OTHER INFORMATION:
ITEM I -- 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
Pursuant to the Indenture, the Authority is required to make an Excess Cash
Purchase Offer to all holders of the Senior Notes within 120 days after each
fiscal year end of the Authority, commencing September 30, 1997. The Excess
Cash Purchase Offer equals 50% of the Excess Cash Flow plus 100% of the Deferred
Subordinated Interest; the Excess Cash Flow Purchase Offer was $29.1 million for
the period ended September 30, 1997.
The Excess Cash Purchase Offer was made on January 28, 1998. In accordance with
the Indenture, the Authority offered to purchase the Senior Notes at 113.5%
of the principal amount of the Senior Notes plus accrued and unpaid interest to
the purchase date. The Excess Cash Purchase Offer expired by its terms on
February 25, 1998, and none of the holders of the Senior Notes accepted such
offer.
On March 12, 1998, pursuant to the Note Purchase Agreement, an offer to
repurchase in the amount of the Excess Cash Purchase Offer was made to the
holders of the Subordinated Notes. The offer period concluded on April 2, 1998,
and the holders of the Subordinated Notes also rejected such offer. On April 3,
1998, in accordance with Section 4.07(g) of the Indenture, the Authority
distributed the amount of the Excess Cash Purchase Offer ($29.1 million) to the
Tribe.
ITEM 5 -- OTHER INFORMATION
None
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits: 27 Financial Data Schedule for Mohegan Tribal Gaming
Authority
b. Current reports on Form 8-K: None
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
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 12, 1998 By: /s/ Roland Harris
------------------ ----------------------------------------
Roland J. Harris
Chairman, Management Board,
Duly Authorized
Date: May 12, 1998 By: /s/ William J. Velardo
------------------ ----------------------------------------
William J. Velardo
Executive Vice President and
General Manager
Date: May 12, 1998 By: /s/ Jeffrey E. Hartmann
------------------ ----------------------------------------
Jeffrey E. Hartmann, Senior Vice President
of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
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