<PAGE>
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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: December 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 (Zip Code)
offices)
(860) 204-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Total number of pages in this report: 17
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<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Review Report of Independent Public Accountants........................ 1
Balance Sheets as of December 31, 1998 (unaudited) and September 30,
1998.................................................................. 2
Statements of Income for the Quarter Ended December 31, 1998 and 1997
(unaudited)........................................................... 3
Statements of Capital for the Quarter Ended December 31, 1998 and 1997
(unaudited)........................................................... 4
Statements of Cash Flows for the Quarter Ended December 31, 1998 and
1997 (unaudited)...................................................... 5
Notes to Financial Statements ......................................... 6-10
ITEM 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 11-14
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings............................................ 15
ITEM 2 -- Changes in Securities........................................ 15
ITEM 3 -- Defaults upon Senior Securities.............................. 15
ITEM 4 -- Submission of Matters to a Vote of Security Holders.......... 15
ITEM 5 -- Other Information............................................ 15
ITEM 6 -- Exhibits and Reports on Form 8-K............................. 15
Signatures -- Mohegan Tribal Gaming Authority.......................... 16
</TABLE>
<PAGE>
REVIEW REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Mohegan Tribal Gaming Authority:
We have reviewed the accompanying balance sheet of the Mohegan Tribal Gaming
Authority (the Authority) as of December 31, 1998, and the related statements
of income, capital and cash flows for the three-month periods ended December
31, 1998 and 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 sheets of the Mohegan Tribal Gaming Authority as of
September 30, 1998 and 1997, and the related statements of income (loss) and
capital for the year ended September 30, 1998 and for the period October 12,
1996 (date of commencement of operations) through September 30, 1997 (not
presented herein) and statements of cash flows for the years ended September
30, 1998 and 1997 (not presented herein) and in our report dated December 21,
1998, we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying balance sheet of the
Mohegan Tribal Gaming Authority as of September 30, 1998, is fairly stated, in
all material respects, in relation to the balance sheet from which it has been
derived.
Arthur Andersen LLP
Hartford, Connecticut
February 2, 1999
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 28,328 $36,264
Restricted cash .................................. 81,250 74,466
Receivables, net.................................. 1,735 3,067
Inventories....................................... 5,776 5,027
Other current assets.............................. 2,349 2,136
-------- --------
Total current assets............................ 119,438 120,960
Non-Current Assets:
Property and equipment, net....................... 298,181 296,440
Trademark......................................... 130,000 130,000
Other assets, net................................. 7,127 7,080
-------- --------
Total assets.................................... $554,746 $554,480
======== ========
LIABILITIES AND CAPITAL
Current Liabilities:
Current portion of capital lease obligations (Note
3)............................................... $ 11,463 $ 11,004
Accounts payable and accrued expenses............. 44,382 46,857
Accrued interest payable (Note 2)................. 5,541 14,692
-------- --------
Total current liabilities....................... 61,386 72,553
Non-Current Liabilities:
Long-term debt (Note 2)........................... 300,191 296,539
Relinquishment liability (Note 6)................. 549,125 549,125
Capital lease obligations, net of current portion
(Note 3)......................................... 16,344 18,563
-------- --------
Total liabilities............................... 927,046 936,780
-------- --------
Commitments and Contingencies (Note 4)
Capital:
Total capital................................... (372,300) (382,300)
-------- --------
Total liabilities and capital................... $554,746 $554,480
======== ========
</TABLE>
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with these financial statements
2
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
December 31, 1998 December 31, 1997
--------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Gaming............................ $152,672 $119,798
Food and beverage................. 15,013 12,596
Retail and other.................. 13,287 10,025
Bingo operations.................. 3,442 929
-------- --------
Gross revenues.................... 184,414 143,348
Less--Promotional allowances...... (20,556) (16,206)
-------- --------
Net revenues...................... 163,858 127,142
-------- --------
Costs and Expenses:
Gaming............................ 66,590 56,307
Food and beverage................. 5,386 4,940
Retail and other.................. 9,113 6,390
Bingo operations.................. 3,377 703
General and administration........ 27,622 23,740
Management fee.................... 13,645 7,404
Depreciation and amortization..... 4,669 4,800
-------- --------
Total costs and expenses.......... 130,402 104,284
-------- --------
Income from operations............ 33,456 22,858
-------- --------
Other income (expense):
Interest and other income......... 615 648
Interest expense.................. (12,810) (11,778)
-------- --------
(12,195) (11,130)
-------- --------
Net income........................ $ 21,261 $ 11,728
======== ========
</TABLE>
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with these financial statements
3
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CAPITAL
(in thousands)
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
December 31, 1998 December 31, 1997
--------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
Beginning balance.................. ($382,300) $21,931
Net income......................... 21,261 11,728
Distributions to Tribe............. (11,261) (6,395)
--------- -------
Ending balance..................... ($372,300) $27,264
========= =======
</TABLE>
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with these financial statements
4
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
December 31, 1998 December 31, 1997
--------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows provided by operating
activities:
Net income........................ $ 21,261 $11,728
Adjustments to reconcile net
income to net cash flow provided
by operating activities:
Depreciation and amortization... 4,669 4,800
Provision for losses on
receivables.................... 83 19
Changes in operating assets and
liabilities:
(Increase) decrease in
receivables and other assets... (56) 534
Decrease in accounts payable and
accrued expenses............... (7,974) (7,120)
-------- -------
Net cash flows provided by
operating activities........... 17,983 9,961
-------- -------
Cash flows used in investing
activities:
Purchase of property and
equipment........................ (6,113) (17,909)
Decrease in construction payable.. -- (3,604)
-------- -------
Net cash flows used in investing
activities..................... (6,113) (21,513)
-------- -------
Cash flows used in financing
activities:
Distributions to Tribe............ (11,261) (6,395)
Increase in short-term
borrowings....................... -- 650
Proceeds from equipment
financing........................ 878 --
Payment on equipment financing and
short-term borrowings............ (2,639) (2,212)
-------- -------
Net cash flows used in financing
activities..................... (13,022) (7,957)
-------- -------
Net decrease in cash and cash
equivalents.................... (1,152) (19,509)
Cash and cash equivalents at
beginning of period.............. 110,730 88,844
-------- -------
Cash and cash equivalents at end
of period........................ $109,578 $69,335
======== =======
Supplemental disclosures of cash
flow information:
Cash paid during the period for
interest....................... $ 18,309 $16,700
======== =======
</TABLE>
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with these financial statements
5
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS
December 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, federally recognized Indian tribes are permitted to
conduct full-scale casino gaming operations on tribal land, subject to, among
other things, the negotiation of a tribal state compact with the affected
state. The Tribe and the State of Connecticut have entered into such a compact
(the "Mohegan Compact"), that has been approved by the Secretary of the
Interior. On October 12, 1996, the Authority opened a casino known as Mohegan
Sun Casino ("Mohegan Sun").
The Authority is governed by a Management Board, which consists of the nine
members of the Tribal Council. The Management Board has engaged Trading Cove
Associates ("TCA"), a Connecticut general partnership, to manage the operation
of Mohegan Sun pursuant to a seven year contract (the "Management Agreement").
TCA is 50% owned by Sun Cove Limited, an affiliate of Sun International Hotels
Limited ("Sun International"), and 50% owned by Waterford Gaming L.L.C. (See
Note 6 for discussion of Relinquishment Agreement between the Tribe and TCA).
The accompanying financial statements have been prepared in accordance with
the accounting policies described in the Authority's 1998 Annual Report on Form
10-K and should be read in conjunction with the Notes to Financial Statements
which appear in that report. The Balance Sheet at September 30, 1998, contained
herein, was taken from the audited financial statements, but does not include
all disclosures contained in the Form 10-K and required by generally accepted
accounting principles.
Certain amounts in the financial statements have been reclassified. The
reclassification has no effect on the Authority's net income.
In the opinion of the Authority, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results for the
interim periods have been included. The results reflected in the financial
statements for the quarter ended December 31, 1998 are not necessarily
indicative of expected results for the full year, as the casino industry in
Connecticut is seasonal in nature.
2. Financing Facilities:
Line of Credit
The Authority has a $2.5 million line-of-credit and letter of credit
arrangement with Fleet National Bank. Interest is payable at the bank's base
rate or LIBOR option. Borrowings are collateralized by a security interest in
all of the Authority's cash deposit accounts with Fleet National Bank. This
arrangement expires on March 31, 2000. As of December 31, 1998, the Authority
has issued letters of credit of $1.9 million and has no borrowings outstanding
under the line-of-credit.
Long-Term Debt
Financing facilities, as described below, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
(unaudited)
<S> <C> <C>
Senior Secured Notes........................... $175,000 $175,000
Subordinated Notes............................. 125,191 121,539
-------- --------
$300,191 $296,539
======== ========
</TABLE>
6
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Senior Secured Notes
On September 29, 1995, the Authority issued $175 million in 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, during any two consecutive semi-annual periods,
ending September 30, $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, as defined, is less than 2.0. For the quarters
ended December 31, 1998 and 1997, the Authority's Fixed Charge Coverage Ratio
was 4.0 and 3.0, respectively. The Senior Secured Notes are redeemable at set
prices, as set forth in the Senior Secured Notes, after November 15, 1999, at
the option of the Authority (See Note 8 for discussion of the tender offer and
consent solicitation). Upon the occurrence of certain events (as specified in
the Senior Secured Notes) each holder of Senior Secured Notes can require the
Authority to repurchase the notes at the specified prices.
Beginning with the fiscal year ended 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 Senior Secured Notes. See Excess
Cash Purchase Offer below.
Subordinated Notes
The Authority has obtained $90 million of subordinated financing from Sun
International and Waterford Gaming L.L.C. in the form of notes ("Subordinated
Notes"). The Authority has issued $20 million of Subordinated Notes to each of
Sun International and Waterford Gaming L.L.C. 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
the Chase Manhattan Bank (f/k/a Chemical Bank of New York) as its prime rate
plus 1%, which shall be set and revised at intervals of six months. The
interest rates were 8.75% and 9.5% at December 31, 1998 and 1997, respectively.
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 offered to be repurchased or retired,
pursuant to the terms of the Senior Secured Notes, and certain other conditions
have been fulfilled. Accrued and deferred interest payable on the Subordinated
Notes was $35.2 million and $21.2 million as of December 31, 1998 and 1997,
respectively. All Subordinated Notes are due 2003; however, principal cannot be
paid until the Senior Secured Notes have been paid in full, unless certain
conditions are met. During October 1998 and October 1997, a total of $5.0
million of Subordinated Notes, issued to Sun International pursuant to the
Secured Completion Guarantee, were purchased by Waterford Gaming L.L.C.
In the event that the holders of the Senior Secured 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 Excess Cash Purchase Offer below.
Excess Cash Purchase Offer
Pursuant to the Senior Secured Notes, the Authority is required to make an
Excess Cash Purchase Offer to all holders of the Senior Secured 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, as
defined, plus 100% of the Deferred Subordinated Interest.
7
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
An Excess Cash Purchase Offer of $51.2 million was made on December 30, 1998
for the year ended September 30, 1998. In accordance with the Senior Secured
Notes, the Authority offered to purchase the Senior Secured Notes at 112% of
the principal amount of the Senior Secured Notes plus accrued and unpaid
interest to the purchase date. The Excess Cash Purchase Offer expired, by its
terms, on January 29, 1999, and none of the holders of the Senior Secured Notes
accepted the offer.
On February 1, 1999, pursuant to the Subordinated Note purchase agreement,
an offer to repurchase, in the amount of the Excess Cash Purchase Offer, was
made to the holders of the Subordinated Notes. On February 1, 1999, the holders
of the Subordinated Notes rejected the offer. On February 2, 1999, as permitted
by Section 4.07(g) of the Senior Secured Notes Indenture, the Authority
distributed the Excess Cash Purchase Offer of $51.2 million to the Tribe.
3. Leases:
At December 31, 1998, the Authority was obligated under non-cancelable
operating leases and capital leases to make future minimum lease payments as
follows (unaudited):
<TABLE>
<CAPTION>
Operating Capital
For the fiscal year ending September 30, Leases Leases
---------------------------------------- --------- -------
(In Thousands)
<S> <C> <C>
1999.................................................. $2,700 $ 9,756
2000.................................................. 2,680 13,008
2001.................................................. 84 5,557
2002.................................................. -- 2,358
2003.................................................. -- 64
------ -------
Total minimum lease payment........................... $5,464 30,743
======
Amount representing interest.......................... (2,936)
-------
Total obligation under capital leases................. 27,807
Less: Amount due within one year...................... (11,463)
-------
Amount due after one year............................. $16,344
=======
</TABLE>
Rent expense on the non-cancelable operating leases was $900,000 for each of
the quarters ended December 31, 1998 and 1997.
The Authority's debt agreements require, among other restrictions, the
maintenance of various financial covenants and terms including a fixed charge
coverage ratio, a debt to adjusted net worth ratio, and a debt service coverage
ratio.
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 12-month period commencing July 1, 1995, the Slot Win Contribution
shall be the lesser of (a) 30% of gross revenues from slot machines, or (b) the
greater of (i) 25% of gross revenues from slot machines or (ii) $80 million.
8
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Slot Win Contribution payments will not be required if the State of
Connecticut legalizes any other (except those consented to by the Mashantucket
Pequot Tribe and the Mohegan Tribe) gaming operations with slot machines or
other commercial casino games within Connecticut. The Authority has reflected
$28.4 million and $22.0 million of gaming expense in its financial statements
for the required Slot Win Contribution for the quarters ended December 31, 1998
and 1997, respectively.
Litigation
The Authority is a defendant in certain litigation incurred in the normal
course of business. In the opinion of management, based on the advice of
counsel, the aggregate liability, if any, arising from such litigation will not
have a material adverse effect on the Authority's financial position or results
of operations.
Town of Montville Agreement
On June 16, 1994, the Tribe and the Town of Montville (the "Town") entered
into an agreement whereby the Tribe agreed to pay to the Town an annual payment
of $500,000 to minimize the impact to the Town resulting from decreased tax
revenues on reservation land held in trust. Two annual $500,000 payments
payable beginning one year after the commencement of slot machine gaming
activities, were remitted to the Town of Montville in October 1998 and 1997,
respectively. Additionally, the Tribe agreed to make a payment of $3.0 million
towards infrastructure improvements to the Town's water system. The Tribe has
assigned its rights and obligations in this agreement to the Authority. The
Town is billing the Authority for the infrastructure improvements as the Town's
costs are incurred. As of December 31, 1998, the Authority has paid $1.6
million to the Town of Montville towards improvements to the municipal water
system, which has been included in other assets in the accompanying balance
sheets and will be amortized over 40 years.
5. Related Party Transactions:
The Tribe provides governmental and administrative services to the Authority
in conjunction with the operation of Mohegan Sun. For the quarters ended
December 31, 1998 and 1997, the Authority incurred expenses of $1.7 million and
$1.3 million, respectively, for such services.
6. TCA Agreements:
Management Agreement
The Tribe and TCA entered into the Amended and Restated Gaming Facility
Management Agreement (the "Management Agreement"), pursuant to which the Tribe
has retained and engaged TCA, on an independent contractor basis, to operate,
manage and market Mohegan Sun.
The Tribe has assigned its rights and obligations under the Management
Agreement to the Authority. The term of the Management Agreement is seven
years. TCA holds responsibility to manage Mohegan Sun in exchange for payments
ranging from 30% to 40% of net income, before management fees, as defined,
depending upon profitability levels. Management fees totaled $13.6 million and
$7.4 million, respectively, for the quarters ended December 31, 1998 and 1997.
At December 31, 1998, $3.7 million was owed to TCA in connection with the
Management Agreement.
Relinquishment Agreement
In February 1998, the Authority and TCA entered into an agreement, (the
"Relinquishment Agreement"). The Relinquishment Agreement supercedes the
Management Agreement, effective the later of January 1, 2000, or the date the
Senior Secured Notes of the Authority, in the original aggregate principal
amount of
9
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
$175 million, are refinanced or repaid (the "Relinquishment Date"), and
provides that the Authority shall make certain payments to TCA out of, and
determined as a percentage of, the gross revenues generated by Mohegan Sun over
a 15-year period commencing on the Relinquishment Date. The payments ("Senior
Relinquishment Payments" and "Junior Relinquishment Payments"), are calculated
as 2.5% of Revenues each, as defined, but each has its own payment schedule and
priority. Senior Relinquishment Payments commence at the end of the first
three-month period following the Relinquishment Date and continue at the end of
each three-month period occurring thereafter until the fifteenth anniversary of
the Relinquishment Date. Junior Relinquishment Payments commence at the end of
the first six-month period following the Relinquishment Date and continue at
the end of each six-month period occurring thereafter until the fifteenth
anniversary of the Relinquishment Date. Each Senior Relinquishment Payment and
Junior Relinquishment Payment is an amount equal to 2.5% of the Revenues
generated by Mohegan Sun over the immediately preceding three-month or six-
month payment period, as the case may be. "Revenues" are defined as gross
gaming revenues (other than Class II gaming revenue) and all other facility
revenues (including, without limitation, hotel revenues, fees or receipts from
convention/events center in the expansion and all rental or other receipts from
lessees and concessionaires operating in the facility but not the gross
receipts of such lessees, licenses and concessionaires). The Authority, in
accordance with Financial Accounting Standards Board Statement No. 5, ("SFAS
No. 5"), "Accounting for Contingencies", has recorded a relinquishment
liability of the estimated present value of its obligation under the
Relinquishment Agreement. The liability is estimated at $549.1 million as of
December 31, 1998 and will be reassessed periodically. This amount was derived
by discounting the present value of 5% of projected gross revenues by the
Authority's risk free investment rate. The Authority has also recognized the
value of the trademarks associated with the Mohegan Sun brand name. The Mohegan
Sun trademarks, which were appraised by an independent consultant, were valued
at $130 million at December 31, 1998. TCA's services will be retained, however,
in the development and construction of the Phase II expansion (See Development
Agreement).
Development Agreement
The Authority has also negotiated a second agreement with TCA (the
"Development Agreement"), which will make TCA the exclusive developer of the
planned expansion of Mohegan Sun. Under the Development Agreement, TCA will
oversee the planning, design and construction of the expansion of Mohegan Sun
and will receive compensation of $14 million for such services.
7. Employee Benefits Plans
Effective January 1, 1999 pursuant to Section 401 of the Internal Revenue
Code, the Authority increased the employer matching contribution of its
retirement savings plan. The plan allows employees of the Authority to defer up
to the lesser of the maximum amount prescribed by the Internal Revenue Code or
15% of their income on a pre-tax basis, through contributions to this plan. The
Authority now matches 100% of eligible employees' contributions up to a maximum
of 3% of their individual earnings.
8. Subsequent Events:
On January 15, 1999, the Authority initiated a tender offer and consent
solicitation for all of the Senior Secured Notes due 2002. The offer will
expire at 12:00 midnight, New York City time on February 12, 1999, unless
extended or terminated earlier. The tender offer price for the Senior Secured
Notes is expected to be approximately $214 million. Funding of the tender offer
and consent solicitation 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 operating results of Mohegan Sun make such
financing a viable likelihood. As of January 29, 1999, holders of 99.9% of the
Senior Secured Notes have accepted the Tender Offer and Consent Solicitation.
10
<PAGE>
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Comparison of Operating Results for the Quarters Ended December 31, 1998 and
1997 (unaudited):
For the quarter ended December 31, 1998, the Connecticut slot market grew at
a rate of 17.3%, reporting a gross slot win of $273.9 million, an increase of
$40.4 million over the period ended December 31, 1997. Mohegan Sun exceeded the
market's growth as it experienced a 30.3% increase in slot win over the same
period in the prior year. Slot revenues of $111.1 million for the quarter ended
December 31, 1998 reflected a slot win per unit per day of $401. Slot win per
unit per day for the quarter ended December 31, 1997 was $311. The slot win
growth of $25.8 million, or 30.3%, over the previous year reflected Mohegan
Sun's growth in slot win market share of 3.8% over the same period in the prior
year.
Gaming revenues totaled $152.7 million for the quarter ended December 31,
1998, marking an increase of $32.9 million, or 27.4%, over the quarter ended
December 31, 1997. The increase in gaming revenues is primarily due to a 17.3%
growth in the Connecticut slot market and the continued growth of the Mohegan
Sun customer base. Membership in the Mohegan Sun Player's Club totaled 975,933
and 663,932 guests as of December 31, 1998 and 1997, respectively.
For the quarter ended December 31, 1998, food and beverage revenues were
$15.0 million, indicating a growth of $2.4 million, or 19.2%, over the prior
year. Retail and other revenues were $13.3 million, a growth of $3.3 million,
or 32.5%, over the same period in the prior year. The increase in non-gaming
revenues is primarily attributed to increased utilization of complimentaries,
the addition of two new retail outlets to the facility in December 1997 and
April 1998, and the opening of the gas station facility in December 1998.
Bingo revenues totaled $3.4 million for the quarter ended December 31, 1998,
representing a $2.5 million increase over the same period in the prior year.
The increase is a result of an improvement in the overall awareness of the
bingo operation in the marketplace.
Promotional allowances totaled $20.6 million for the quarter ended December
31, 1998, representing a $4.4 million, or 26.8%, increase over the prior year.
The increase is attributable to a growth in the Mohegan Sun customer base as
well as an increased utilization of the Mohegan Sun Player's Club complimentary
program. Promotional allowances as a percentage of gaming revenue remained
constant at 13.5% for both the quarters ended December 31, 1998 and 1997.
Total costs and expenses were $130.4 million for the quarter ended December
31, 1998, an increase of $26.1 million, or 25.0%, over the prior year. The
increase in variable expenses is a direct result of an increase in volume as
gross revenues increased by $41.1 million, or 28.6%, partially offset by
improved operating efficiencies in costs such as rent expense and cost of goods
sold.
Gaming costs and expenses were $66.6 million for the quarter ended December
31, 1998, an increase of $10.3 million, or 18.2%, over the same period in the
prior year. The slot win contribution for the quarter ended December 31, 1998
totaled $28.4 million. This represents an increase of $6.4 million over the
same period in the prior year, which is directly attributable to the $25.8
million increase in slot revenues.
General and administrative costs were $27.6 million for the quarter ended
December 31, 1998. The increase of $3.9 million or 16.4% is partially
attributable to innovative marketing and advertising campaigns which increased
the length of stay and frequency of patron visits.
Management fees earned by Trading Cove Associates totaled $13.6 million for
the quarter ended December 31, 1998, an increase of $6.2 million, or 84.3%,
over the fees paid in last year's period. The increase in management fees is a
direct result of the increase in income from operations.
11
<PAGE>
For the quarter ended December 31, 1998, depreciation and amortization
decreased by $131,000, or 2.7%, as compared with the same period in the prior
year. The decrease is primarily attributable to the expensing of financing fees
in fiscal 1998, partially offset by an increase in depreciation for newly
acquired capital assets such as the race book and gas station facilities.
Income from operations for the quarter ended December 31, 1998 totaled $33.5
million, compared to $22.9 million in the same period in the prior year. The
year over year increase of $10.6 million, or 46.4%, is primarily due to the
27.4% increase in gaming revenues and improved operating efficiencies.
Interest and other income was $615,000 for the quarter ended December 31,
1998, a decrease of $33,000, or 5.1%, over the same period in the prior year.
Interest expense of $12.8 million for the quarter ended December 31, 1998
represented an increase of $1.0 million, or 8.8%, over the same period in the
prior year. This increase was mainly attributable to an increase in the cash
flow participation interest held by the Senior Secured Notes, which is derived
as a percent of increased earnings before extraordinary items, interest, taxes,
depreciation, amortization and management fees. Cash flow participation
interest is paid to the holders of the Senior Secured Notes pursuant to the
Senior Secured Notes Indenture.
Liquidity, Capital Resources and Capital Spending
As of December 31, 1998 and 1997, the Authority held cash and cash
equivalents of $28.3 million and $36.3 million, respectively. Cash provided by
operating activities for the quarters ended December 31, 1998 and 1997 was
$18.0 million and $10.0 million, respectively.
The Authority's capital expenditures for the quarters ended December 31,
1998 and 1997 approximated $6.1 million and $17.9 million, respectively.
Capital expenditures in fiscal 1999 included $2.9 million for facility
improvements and the acquisition of new capital assets, and $3.2 million for
construction costs associated with the construction of the on-site gas station
facility and the preliminary stages of the planned expansion of Mohegan Sun.
Capital spending in fiscal 1998 was comprised of $1.7 million for the purchase
of new capital assets, $3.6 million in the settlement of construction claims
with Morse Diesel, Inc. related to the initial construction of Mohegan Sun, and
$12.6 million for the purchase of assets previously held under operating
leases.
The Authority opened a 4,000 square foot gas station facility on December 7,
1998. The facility consists of 16 gasoline pumps, one diesel fuel pump, and a
convenience store that offers fresh baked goods and retail items. The final
cost of the facility will be approximately $5.9 million, with expenditures
totaling $4.7 million through December 31, 1998.
During 1998, the Authority finalized contract negotiations with TCA for the
expansion of Mohegan Sun ("Phase II"), which is currently estimated to cost
$750 million (excluding capitalized interest and excluding a $50 million
project contingency). The proposed development plans include 100,000 square
feet of additional gaming space, a luxury hotel with approximately 1,500 rooms,
and a convention/events center with seating for 10,000 patrons and 100,000
square feet of convention space. The Tribe also plans to include additional
retail and restaurant facilities into its design. Current plans would also
require significant upgrades and additions to the facility's parking and
infrastructure systems. The Tribe has chosen a site master planning firm, an
architect and a project developer for the expansion. These firms, in
conjunction with the Tribe, are in the process of developing a construction
schedule. As a result, the estimated project cost is still subject to
adjustment. Phase II is expected to break ground in the spring of 1999. Under
the Development Agreement, TCA will oversee the planning, design and
construction of the expansion at Mohegan Sun and will receive compensation of
$14 million for such services.
Under the terms of the Relinquishment Agreement, TCA will continue to manage
the existing property under the Management Agreement until December 31, 1999.
On January 1, 2000, the Management Agreement will terminate, and the Authority
will assume day-to-day management of Mohegan Sun. The Authority, as a
12
<PAGE>
result of the termination of the Management Agreement, has agreed to pay to TCA
5% of gross revenues (as defined in the Relinquishment Agreement), generated
from Mohegan Sun and from the planned expansion, beginning January 1, 2000 and
ending December 31, 2014. The liability is estimated at $549.1 million as of
December 31, 1998 and will be reassessed periodically. The Authority has
capitalized $130 million of the relinquishment liability associated with the
trademark value of the Mohegan Sun brand name.
For the remainder of fiscal 1999, the Authority expects capital expenditures
to be approximately $13.4 million on facility improvements and $52.6 million on
existing construction projects. These existing construction project
expenditures include $1.2 million relating to the completion of the gas station
facility, and $51.4 million on the Phase II expansion.
During the quarters ended December 31, 1998 and 1997, the Authority,
subsequent to meeting its operating expenses and required deposits to reserve
funds under the Indenture for the Senior Secured Notes, distributed a total of
$11.3 million and $6.4 million, respectively, to the Tribe. As required under
the Indenture for the Senior Secured Notes, the Authority made an Excess Cash
Purchase Offer of $51.2 million to all holders of the Senior Secured Notes on
December 30, 1998. The Excess Cash Purchase Offer expired, by its terms, on
January 29, 1999, and none of the holders of the Senior Secured Notes accepted
the offer. On February 1, 1999, pursuant to the Subordinated Note purchase
agreement, an offer to repurchase in the amount of the Excess Cash Purchase
Offer was made to the holders of the Subordinated Notes. On February 1, 1999,
the holders of the Subordinated Notes also rejected the offer. On February 2,
1999, as permitted by Section 4.07(g) of the Senior Secured Notes Indenture,
the Authority distributed the Excess Cash Purchase Offer of $51.2 million to
the Tribe.
On January 15, 1999, the Authority initiated a tender offer and consent
solicitation for the repurchase of all $175 million, aggregate principal amount
outstanding, of its 13.5% Senior Secured Notes due 2002. The offer will expire
at 12:00 midnight, New York City time on February 12, 1999, unless extended or
terminated earlier. It is expected that the tender offer price for the Senior
Secured Notes will be approximately $214 million. Payment of the tender offer
and consent solicitation 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 operating results of Mohegan Sun make such
financing a viable likelihood. As of January 29, 1999, holders of 99.9% of the
Senior Secured Notes have accepted the Tender Offer and Consent Solicitation.
On November 15, 1998 and 1997, the Authority made interest payments of $11.8
million each to the holders of the Senior Secured Notes and payments of $5.8
million and $4.1 million, respectively, in Cash Flow Participation Interest on
such dates to such debtholders. There are no cash interest payment requirements
on the Subordinated Notes as interest is accrued and deferred until 50% of the
Senior Secured Notes are offered to be repurchased or retired, as defined.
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 12 months.
Year 2000 Readiness Disclosure
Background
Many computer systems and applications currently use two-digit date fields
to designate a year. As the century date change occurs, date-sensitive systems
will recognize the year 2000 as 1900, or not at all. This inability to
recognize, or properly treat, the year 2000 may cause systems to process
financial and operational information incorrectly resulting in system failures
and other business problems.
13
<PAGE>
Risk Factors
The Authority, like many organizations, depends on fully operational
computer systems in all areas of its operations. Additionally, the Authority is
dependent upon many vendors to provide uninterrupted service for its operation
to run effectively. Exposure to both of these risk factors are issues for which
the Authority is formulating an approach to handle these issues.
Approach
With the assistance of an outside consultant, the Authority has implemented
a Year 2000 program to provide an independent analysis of the Authority's Year
2000 preparedness and the adequacy of the Authority's Year 2000 plans. The
program includes inventorying entities, identifying problems, planning
compliance, calculating time and cost estimates and generating implementation
strategies, attempting to correct the problems and testing the solutions. The
consultant will examine the methodology being used to approach risks in the
facilities' embedded systems and in products in the Authority's supply chain.
While the Authority's efforts are designed to be successful, because of the
complexity of the Year 2000 issues and the interdependence of organizations
using computer systems, there can be no assurance that the Authority's efforts,
or those of a third party with whom the Authority interacts, will be
satisfactorily completed in a timely fashion. This could result in a material
adverse effect on future operations.
Status
As of December 1998, the Authority is approximately 65% in conformance with
the Gartner Group Year 2000 best practices model. The Authority anticipates
completion of the program by March 31, 1999. If at that time it is determined
that the program will not be completed, however, the Authority will develop a
contingency plan.
Cost
The Authority has incurred approximately $100,000 in costs associated with
the Year 2000 Program as of December 31, 1998. The Authority does not
separately track the internal costs incurred for the Year 2000 program, and the
$100,000 of costs incurred through December 31, 1998 are principally related to
payroll costs for the Authority's information systems group and outside
consulting fees. Although there can be no assurances, it is anticipated that
costs associated with the remediation and verification to become Year 2000
compliant will not exceed $1.0 million and will not have a material adverse
impact on the Authority's financial position, results of operations, or cash
flow.
Certain Forward Looking Statements
Certain information included in this Form 10-Q and other materials filed or
to be filed by the Authority with the Securities and Exchange Commission
contains forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements include information relating to plans for future expansion and
other business development activities as well as other capital spending,
financing sources and the effects of regulation (including gaming and tax
regulation) and competition. Such forward-looking information involves
important risks and uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the
Authority. These risks and uncertainties include, but are not limited to, those
relating to development and construction activities, dependence on existing
management, leverage and debt service, domestic or global economic conditions,
issues related to the Year 2000, pending litigation, changes in federal tax
laws or the administration of such laws and changes in gaming laws or
regulations (including the legalization of gaming in certain jurisdictions).
14
<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 Senior Secured Notes, the Authority is required to make an
Excess Cash Purchase Offer to all holders of the Senior Secured 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, as
defined, plus 100% of the Deferred Subordinated Interest.
An Excess Cash Purchase Offer of $51.2 million was made on December 30, 1998
for the year ended September 30, 1998. In accordance with the Senior Secured
Notes, the Authority offered to purchase the Senior Secured Notes at 112% of
the principal amount of the Senior Secured Notes plus accrued and unpaid
interest to the purchase date. The Excess Cash Purchase Offer expired, by its
terms, on January 29, 1999, and none of the holders of the Senior Secured Notes
accepted the offer.
On February 1, 1999, pursuant to the Subordinated Note purchase agreement,
an offer to repurchase in the amount of the Excess Cash Purchase Offer was made
to the holders of the Subordinated Notes. On February 1, 1999, the holders of
the Subordinated Notes also rejected the offer. On February 2, 1999, as
permitted by Section 4.07(g) of the Senior Secured Notes Indenture, the
Authority distributed the Excess Cash Purchase Offer of $51.2 million to the
Tribe.
On January 15, 1999, the Authority initiated a tender offer and consent
solicitation for the repurchase of all of the 13.5% Senior Secured Notes. The
offer will expire on February 12, 1999, unless extended or terminated earlier.
As of January 29, 1999, holders of 99.9% of the Senior Secured Notes have
accepted the Tender Offer and Consent Solicitation.
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
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOHEGAN TRIBAL GAMING AUTHORITY
/s/ Roland Harris
Date: February 3, 1999 By: _________________________________
Roland J. Harris
Chairman, Management Board,
Duly Authorized
/s/ William J. Velardo
Date: February 3, 1999 By: _________________________________
William J. Velardo
Executive Vice President and
General Manager
/s/ Jeffrey E. Hartmann
Date: February 3, 1999 By: _________________________________
Jeffrey E. Hartmann, Senior Vice
President,
Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer)
16
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<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
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