<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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: June 30, 1999
[_] 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
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MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of Registrant as specified in its charter)
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N/A 06-1436334
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Mohegan Sun Boulevard, Uncasville, CT 06382
(Address of principal executive offices) (Zip Code)
(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:
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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 of Mohegan Tribal Gaming Authority as of June 30, 1999
(unaudited) and September 30, 1998..................................... 2
Statements of Income of Mohegan Tribal Gaming Authority for the Three--
and Nine-Months Ended June 30, 1999 and 1998 (unaudited)............... 3
Statements of Capital of Mohegan Tribal Gaming Authority for the Nine-
Months Ended June 30, 1999 and 1998 (unaudited)........................ 4
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the
Nine-Months Ended June 30, 1999 and 1998 (unaudited)................... 5
Notes to Financial Statements of Mohegan Tribal Gaming Authority........ 6-11
ITEM 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 12-17
ITEM 3 -- Quantitative and Qualitative Disclosure of Market Risk........ 17
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings............................................. 18
ITEM 2 -- Changes in Securities......................................... 18
ITEM 3 -- Defaults upon Senior Securities............................... 18
ITEM 4 -- Submission of Matters to a Vote of Security Holders........... 18
ITEM 5 -- Other Information............................................. 18
Signatures -- Mohegan Tribal Gaming Authority........................... 19
</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 June 30, 1999, and the related statements of
income for the three-month and nine-month periods ended June 30, 1999 and 1998,
and the statements of capital and cash flows for the nine-month periods ended
June 30, 1999 and 1998. 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 the Mohegan Tribal Gaming Authority as of
September 30, 1998, and the related statements of income (loss), capital and
cash flows for the year ended September 30, 1998 (not present 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
August 9, 1999
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.. $ 278,915 $ 36,264
Restricted cash............ -- 74,466
Defeasance trust asset
(Note 2).................. 137,389 --
Receivables, net........... 2,378 3,067
Inventories................ 6,673 5,027
Other current assets....... 2,565 2,136
---------- ---------
Total current assets..... 427,920 120,960
========== =========
Non-Current Assets:
Property and equipment,
net....................... 295,468 296,440
Construction in process
(Note 4).................. 17,368 --
Trademark, net............. 128,282 130,000
Other assets, net.......... 19,939 7,080
---------- ---------
Total assets............. $ 888,977 $ 554,480
========== =========
LIABILITIES AND CAPITAL
Current Liabilities:
Current portion of capital
lease obligations......... $ 11,984 $ 11,004
Defeasance trust liability
(Note 2).................. 132,854 --
Accounts payable and
accrued expenses.......... 49,187 46,857
Accrued interest payable... 13,931 14,692
---------- ---------
Total current
liabilities............. 207,956 72,553
---------- ---------
Non-Current Liabilities:
Long-term debt............. 500,000 296,539
Relinquishment liability... 565,635 549,125
Capital lease obligations,
net of current portion.... 10,222 18,563
---------- ---------
Total liabilities........ 1,283,813 936,780
---------- ---------
Commitments And Contingencies
(Note 4)
Capital:
Total capital............ (394,836) (382,300)
---------- ---------
Total liabilities and
capital................. $ 888,977 $ 554,480
========== =========
</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
STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
For the
Three
Months Ended For the Three For the Nine For the Nine
June 30, Months Ended Months Ended Months Ended
1999 June 30, 1998 June 30, 1999 June 30, 1998
------------ ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Gaming................ $161,444 $139,758 $463,284 $392,831
Food and beverage..... 14,873 14,098 44,303 40,168
Retail and other...... 12,787 8,334 37,290 25,588
Bingo operations...... 3,278 3,555 10,447 10,467
-------- -------- -------- --------
Gross revenues........ 192,382 163,800 555,324 462,455
Less--Promotional
allowances........... (20,461) (16,204) (60,974) (47,353)
-------- -------- -------- --------
Net revenues.......... 171,921 147,596 494,350 415,102
-------- -------- -------- --------
Cost and expenses:
Gaming................ 69,907 62,397 202,358 178,136
Food and beverage..... 5,410 4,854 15,727 15,583
Retail and other...... 7,025 3,451 23,116 14,269
Bingo operations...... 2,822 3,150 8,705 9,321
General and
administration....... 24,437 21,043 75,964 66,081
Management fee........ 16,047 14,007 44,090 34,004
Depreciation and
amortization......... 6,238 4,676 16,413 13,598
-------- -------- -------- --------
Total costs and
expenses............. 131,886 111,633 386,373 324,393
-------- -------- -------- --------
Income from
operations........... 40,035 35,963 107,977 90,709
-------- -------- -------- --------
Other income (expense):
Relinquishment
liability
reassessment......... (5,504) -- (16,511) --
Interest and other
income............... 4,393 512 6,211 1,758
Interest expense...... (15,503) (12,770) (41,118) (36,962)
-------- -------- -------- --------
(16,614) (12,258) (51,418) (35,204)
-------- -------- -------- --------
Income before
extraordinary items.. 23,421 23,705 56,559 55,505
Extraordinary items... -- -- (39,423) (332)
-------- -------- -------- --------
Net income ........... $ 23,421 $ 23,705 $ 17,136 $ 55,173
======== ======== ======== ========
</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
STATEMENTS OF CAPITAL
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
June 30, 1999 June 30, 1998
------------------------- -------------------------
(unaudited) (unaudited)
<S> <C> <C>
Beginning balance......... $(382,300) $ 21,931
Net income................ 17,136 55,173
Capital contribution by
Tribe.................... 97,097 --
Distributions to Tribe.... (126,769) (58,089)
--------- --------
Ending balance............ $(394,836) $ 19,015
========= ========
</TABLE>
The accompanying accountants' review report and notes to financial statements
should be read in conjunction with the financial statements
4
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
June 30, 1999 June 30, 1998
------------------------- -------------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows provided by
operating activities:
Net income................ $ 17,136 $ 55,173
Adjustments to reconcile
net income to net cash
flow provided by
operating activities:
Depreciation and
amortization........... 16,413 13,598
Loss on early
extinguishment of
debt................... 33,717 332
Write-off of financing
fees................... 5,706 --
Loss on asset disposal.. 335 122
Provision for losses on
receivables............ 467 567
Relinquishment liability
reassessment........... 16,511 --
Changes in operating
assets and liabilities:
(Increase) decrease in
receivables and other
assets................. (5,159) 527
Increase in accounts
payable and accrued
expenses............... 12,882 14,156
--------- --------
Net cash flows provided
by operating
activities............. 98,008 84,475
--------- --------
Cash flows used in
investing activities:
Purchase of property and
equipment................ (12,669) (23,760)
Increase in construction
in process............... (17,368) --
Decrease in construction
payable.................. -- (3,604)
--------- --------
Net cash flows used in
investing activities... (30,037) (27,364)
--------- --------
Cash flows provided by
(used in) financing
activities:
Distributions to Tribe.... (126,769) (58,089)
Contribution of capital by
Tribe.................... 97,097 --
Proceeds from issuance of
long-term debt........... 500,000 650
Capitalized financing
fees..................... (18,529) --
Defeasance trust asset.... (135,507) --
Proceeds from equipment
financing................ 879 3,488
Payment on equipment
financing................ (8,240) (11,410)
Extinguishment of Senior
Secured Notes............ (208,717) --
--------- --------
Net cash flows provided
by (used in) financing
activities............. 100,214 (65,361)
--------- --------
Net increase (decrease)
in cash and cash
equivalents............ 168,185 (8,250)
Cash and cash equivalents
at beginning of period... 110,730 88,844
--------- --------
Cash and cash equivalents
at end of period......... $ 278,915 $ 80,594
========= ========
Supplemental disclosures:
Cash paid during the
period for interest.... $ 30,634 $ 34,108
</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 FINANCIAL STATEMENTS
June 30, 1999
(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 was 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 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 three- and nine-months ended June 30, 1999 are not
necessarily indicative of expected results for the full year, as the casino
industry in Connecticut is seasonal in nature.
2. Long-Term Debt:
Bank Credit Facility
On March 3, 1999, the Authority entered into a syndicated $425 million
reducing, revolving, secured credit facility ("Bank Credit Facility") maturing
in March of 2004. The Authority has the right, within two years following the
closing of the Bank Credit Facility, to arrange for increases in the Bank
Credit Facility to an aggregate amount of $500 million. The Bank Credit
Facility is secured by a lien on substantially all of the Authority's assets,
by a leasehold mortgage on the land on which Mohegan Sun Casino is located, and
by each of the Authority's cash operating accounts. At the Authority's option,
interest will accrue on the basis of a base rate formula or a Reserve Adjusted
LIBOR based formula plus applicable spreads. As of June 30, 1999, there are no
borrowings outstanding on the Bank Credit Facility. The Authority plans to draw
on the Bank Credit Facility primarily in connection with the expansion of
Mohegan Sun.
6
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-Term Debt
Long-term debt, as described below, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------- -------------
<S> <C> <C>
Senior Notes......................................... $ 200,000 $ --
Senior Subordinated Notes............................ 300,000 --
Senior Secured Notes................................. -- 175,000
Subordinated Notes................................... -- 121,539
--------- --------
$ 500,000 $296,539
========= ========
</TABLE>
Senior Notes
On March 3, 1999, the Authority issued $200 million in Senior Notes with
fixed interest payable at a rate of 8 1/8%. Interest on the Senior Notes is
payable semi-annually on January 1 and July 1. The notes mature on January 1,
2006. The Senior Notes are unsecured general obligations of the Authority and
are subordinated to the Bank Credit Facility. A total of 50% of the
Relinquishment Agreement (Note 6) payment to Trading Cove Associates will rank
equal in right of payment to the Senior Notes and the remaining 50% of this
payment will rank junior in right of payment to the Senior Notes.
Senior Subordinated Notes
On March 3, 1999, the Authority issued $300 million in Senior Subordinated
Notes with fixed interest payable at a rate of 8 1/4%. Interest on the Senior
Subordinated Notes is payable semi-annually on January 1 and July 1. The notes
mature on January 1, 2009. The Senior Subordinated Notes are unsecured general
obligations of the Authority and are subordinated to the Bank Credit Facility,
to the Senior Notes and to 50% of the Relinquishment Agreement payment to
Trading Cove Associates. The Senior Subordinated Notes rank equally to the
remaining 50% of the Authority's Relinquishment Agreement payment obligations.
Senior Secured Notes
On March 3, 1999, the Authority extinguished the $175 million Senior Secured
Notes due 2002 ("Senior Secured Notes") for $208.7 million including a tender
premium of $33.7 million but excluding $11.3 million in accrued interest.
Sources of funding for the extinguishment of the Senior Secured Notes include
the issuance of $200 million in Senior Notes and $300 million in Senior
Subordinated Notes.
Subordinated Notes/Defeasance Trust
The Authority has agreed to redeem the outstanding Subordinated Notes on
January 1, 2000, the first permitted redemption date, at a price of 100% of the
principal amount plus accrued and unpaid interest, less $500,000. To do this,
the Authority has exercised its rights under the original purchase agreement
for the Subordinated Notes to effect a defeasance of these Notes. The Authority
has established a separate trust account with First Union National Bank, the
defeasance agent, in the form of U.S. Government securities, in an amount that
is estimated to be sufficient to redeem the Subordinated Notes plus accrued
interest on January 1, 2000. All Subordinated Notes are currently held by Sun
International Hotels Limited, the parent company of a partner in Trading Cove
Associates, and by Waterford Gaming L.L.C., also a partner in Trading Cove
Associates.
7
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Letters of Credit
Subsequent to the closing of the Bank Credit Facility, the Authority
replaced its $2.5 million secured line-of-credit and letter of credit
arrangement with Fleet National Bank with a $250,000 unsecured letter of credit
with Fleet National Bank that will expire on August 31, 2000, and with a $1.6
million letter of credit agreement with Bank of America, which expires in April
2000.
The Authority's debt agreements require, among other restrictions, the
maintenance of various financial covenants and terms including a fixed charge
coverage ratio and certain debt leverage ratios. As of June 30, 1999 the
Authority is compliant with all financial covenants and terms.
3. Leases:
At June 30, 1999, the Authority was obligated under non-cancelable operating
leases and capital leases to make future minimum lease payments as follows:
<TABLE>
<CAPTION>
Operating Capital
For the fiscal year ending September 30, Leases Leases
---------------------------------------- --------- -------
(In Thousands)
<S> <C> <C>
1999 $ 900 $ 3,324
2000 2,680 13,297
2001 84 5,062
2002 -- 2,357
2003 -- 64
------ -------
Total minimum lease payment............................... $3,664 24,104
======
Amount representing interest.............................. (1,898)
-------
Total obligation under capital leases..................... 22,206
Less: Amount due within one year.......................... (11,984)
-------
Amount due after one year................................. $10,222
=======
</TABLE>
Rent expense on the non-cancelable operating leases was $900,000 for each of
the quarters ended June 30, 1999 and 1998.
4. Commitments and Contingencies:
Mohegan Sun Casino Expansion
The Authority's development plan, which is currently estimated to cost $750
million (excluding capitalized interest and excluding a $50 million
contingency), includes 100,000 square feet of additional gaming space, a 1,200
room luxury hotel, and a convention/events center with seating for 10,000
patrons and 100,000 square feet of convention space. The Authority will fund
the expansion with the proceeds from the $200 million Senior Notes, the $300
million Senior Subordinated Notes, the Bank Credit Facility and future
operating cash flow. As of June 30, 1999 the Authority has spent $17.4 million
related to the expansion of Mohegan Sun.
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").
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
8
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(ii) $80 million. The Slot Win Contribution payments will not be required if
the State of Connecticut legalizes any other gaming operations with slot
machines or other commercial casino games within Connecticut (except those
consented to by the Mohegan Tribe and the Mashantucket Pequot Tribe). The
Authority has reflected $30.3 million and $26.6 million of gaming expense in
its financial statements for the required Slot Win Contribution for the
quarters ended June 30, 1999 and 1998, respectively. For the nine-months ended
June 30, 1999 and 1998 the Slot Win Contribution totaled $86.6 million and
$72.9 million, 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
for infrastructure improvements to the Town's water system. If the Town does
not expend the funds, the Authority has no obligation to the Town. 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 June 30, 1999, the Authority has paid $2.1 million to
the Town of Montville for improvements to the municipal water system. The
incurred cost has been included in other assets in the accompanying balance
sheet 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 June
30, 1999 and 1998, the Authority incurred expenses of $2.0 million and $1.9
million, respectively, for such services. Expenses for governmental and
administrative services totaled $5.9 million and $5.5 million for the nine-
months ended June 30, 1999 and 1998, respectively.
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
retained and engaged TCA, on an independent contractor basis, to operate,
manage and market Mohegan Sun.
The Tribe assigned its rights and obligations under the Management Agreement
to the Authority. TCA 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 $16.0
million and $14.0 million, respectively, for the quarters ended June 30, 1999
and 1998. For the nine-months ended June 30, 1999 and 1998, management fees
were $44.1 million and $34.0 million, respectively. At June 30, 1999, $4.4
million was owed to TCA in connection with the Management Agreement.
9
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Relinquishment Agreement
In February 1998, the Authority and TCA entered into the "Relinquishment
Agreement". The Relinquishment Agreement supercedes the Management Agreement,
effective January 1, 2000 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 January 1, 2000
("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. Payments of Senior
Relinquishment Payments commence at the end of the first three-month period,
March 31, 2000, following the Relinquishment Date and continue at the end of
each three-month period occurring thereafter until December 31, 2014. Junior
Relinquishment Payments commence at the end of the first six-month period, June
30, 2000, following the Relinquishment Date and continue at the end of each
six-month period occurring thereafter until December 31, 2014. Each Senior
Relinquishment Payment and Junior Relinquishment Payment is an amount equal to
2.5% of the Revenues generated by Mohegan Sun over the immediately preceding
three-month or six-month payment period, as the case may be. "Revenues" are
defined as gross gaming revenues (other than Class II gaming revenue) and all
other facility revenues (including, without limitation, hotel revenues, 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). A total of 50%
of the Relinquishment Payments will rank equal in right of payment to the
Senior Notes and be subordinated to the Bank Credit Facility and the remaining
50% of this payment will rank junior in right of payment to the Senior Notes
and Bank Credit Facility and equal to the Senior Subordinated Notes.
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, which is reassessed quarterly,
increased $5.5 million for the quarter ended June 30, 1999 to $565.6 million as
of June 30, 1999. This amount was derived by discounting the present value of
the projected payments to TCA by the Authority at the Authority's risk free
investment rate at the inception of the Agreement. Approximately $130 million
of the Relinquishment Liability was allocated to the acquisition of the Mohegan
Sun trademark. The trademark value was determined by an independent appraisal
firm. The Authority is amortizing these trademarks over 38 years, the remaining
life of the facility and land improvements. As of June 30, 1999, the
accumulated amortization was $1.7 million, $860,000 of which relates to the
three months ended June 30, 1999.
Development Agreement
The Authority has negotiated an agreement with TCA (the "Development
Agreement"), which has made 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
Pursuant to Section 401 of the Internal Revenue Code, the Authority matches
100% of eligible employee contributions up to a maximum of 3% of their
individual earnings. For the quarters ended June 30, 1999 and 1998, the
Authority contributed $653,000 and $331,000, respectively. These contributions
vest over a five year period. 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. For the nine-months ended June 30, 1999 and 1998, the Authority
contributed $2.5 million and $972,000, respectively to the plan.
10
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Authority adopted a Nonqualified Deferred Retirement Plan for certain
key employees. The Nonqualified Deferred Retirement Plan allows participants to
defer, on a pre-tax basis, a portion of their salary and accumulate tax-
deferred earnings, plus interest, as a retirement fund. These deferrals are in
addition to those allowed under the Authority's 401(k) savings plan. All
deferred amounts vest immediately. There are no employer matching contributions
made under this plan. The full amount vested in a participant's account will be
distributed to a participant following termination of employment, normal
retirement or in the event of disability or death.
11
<PAGE>
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Comparison of Operating Results for the Three-Months Ended June 30, 1999 and
1998:
Net revenues for the three-months ended June 30, 1999 were $171.9 million
compared with $147.6 million reported for the same period of the prior year.
This 16.5% increase is primarily attributable to an increase in gaming
revenues.
Gaming revenues totaled $161.4 million for the three-months ended June 30,
1999, marking an increase of $21.7 million or 15.5% over the three-months ended
June 30, 1998. The increase in gaming revenues is primarily due to a 16% growth
in slot machine revenues. Mohegan Sun slot growth for the quarter exceeded the
9.5% growth in the Connecticut market for the quarter. Also contributing to the
gaming revenue increase is the continued growth of the Mohegan Sun patron base.
Membership in the Mohegan Sun Player's Club totaled 1.1 million patrons and
815,000 patrons as of June 30, 1999 and 1998, respectively.
For the three-months ended June 30, 1999, food and beverage revenues were
$14.9 million, indicating a growth of $775,000 or 5.7% over the three months
ended June 30, 1998. Retail and other revenues were $12.8 million, a growth of
$4.5 million or 54.2% over the same period in the prior year. The increase in
retail and other revenues is primarily attributed to the opening of the on-site
Mohegan Sun CITGO gas and convenience center ("fueling facility") in December
1998. Bingo revenues decreased $277,000 during the three-months ended June 30,
1999 compared to the same period in the prior year as a result of fewer bingo
sessions being conducted.
Promotional allowances totaled $20.5 million for the three-months ended June
30, 1999, representing a $4.3 million or 26.5% increase over the prior year.
The increase is attributable to growth in the Mohegan Sun patron base as well
as increased utilization of the Mohegan Sun Player's Club complimentary
program. Promotional allowances as a percentage of gaming revenue were 12.7%
and 11.6% for the three-months ending June 30, 1999 and 1998, respectively.
Total costs and expenses were $131.9 million for the three-months ended June
30, 1999, an increase of $20.3 million or 18.2% over the prior year.
Gaming costs and expenses were $69.9 million for the quarter, an increase of
$7.5 million or 12.0% over the same period in the prior year. The slot win
contribution, which is included in gaming costs and expenses, totaled $30.3
million for the three-months ended June 30, 1999. This represents an increase
of $3.7 million over the same period in the prior year, which is directly
attributable to the $16.5 million increase in slot revenues.
Food and beverage costs were $5.4 million for the three-months ended June
30, 1999, an increase of $556,000 or 11.5% from the same period in the prior
year. This is due to increased volume of food and beverage sales.
Retail and other costs were $7.0 million for the three-months ended June 30,
1999, an increase of $3.5 million over the same period in the prior year. The
increase is primarily a result of the on-site fueling facility that opened in
December 1998 as well as increased utilization of the Mohegan Sun complimentary
program in the retail outlets. Excluding expenses associated with the fueling
facility, retail expenses increased 7.8% over the same period in the prior
year.
Bingo operation costs of $2.8 million for the three-months ended June 30,
1999 decreased $328,000 over the same period in the prior year due to fewer
sessions being conducted combined with increased efficiencies in bingo hall
operations.
12
<PAGE>
General and administrative costs were $24.4 million for the three-months
ended June 30, 1999. The increase of $3.4 million or 16.1% for the same period
in the prior year is attributable to continued direct marketing promotions,
partially offset by the efficient utilization of technology throughout the
operation.
Management fees earned by Trading Cove Associates totaled $16.0 million for
the three-months ended June 30, 1999, an increase of $2.0 million or 14.3% over
the same period in the prior year. The increase in management fees is a direct
result of the increase in operating income before management fees.
For the three-months ended June 30, 1999, depreciation and amortization
increased by $1.5 or 33.4% to $6.2 million over the same period in the prior
year. The increase is primarily attributable to the $860,000 amortization of
the trademark asset.
Income from operations for the three-months ended June 30, 1999 totaled
$40.0 million, compared to $36.0 million for the same period in the prior year.
The period to period increase of $4.0 million or 11.1% is primarily due to
increased gaming revenues.
Interest and other income were $4.4 million for the three-months ended June
30, 1999, an increase of $3.9 million over the prior year. The increase in
interest income is related to the closing on the $200 million Senior Notes and
the $300 million Senior Subordinated Notes on March 3, 1999. Although a portion
of the financing was utilized to pay off existing debt, $253.5 million has been
invested to fund future construction of the expansion. The Authority invests in
investment-grade commercial paper having maturities of not more than six months
from the date of acquisition.
Interest expense of $15.5 million for the three-months ended June 30, 1999
represented an increase of $2.7 million or 21.1% over the same period in the
prior year. This increase was mainly attributable to the additional interest
associated with the $200 million Senior Notes and $300 million Senior
Subordinated Notes during the month of March, partially offset by the tender of
the existing Senior Secured Notes that had a coupon rate of 13.5%.
Comparison of Operating Results for the Nine-Months Ended June 30, 1999 and
1998:
Net revenues for the nine-months ended June 30, 1999 were $494.4 million
compared with $415.1 million reported for the same period of the prior year.
This 19.1% increase is mainly attributable to an increase in gaming revenues.
Gaming revenues of $463.3 million for the nine-months ended June 30, 1999,
marked an increase of $70.5 million or 17.9% over the nine-month period ended
June 30, 1998. The increase in gaming revenues is primarily due to a 10.8%
growth in the Connecticut slot market and the continued growth of the Mohegan
Sun patron base.
For the nine-months ended June 30, 1999, food and beverage revenues were
$44.3 million, indicating a growth of $4.1 million or 10.2% over the prior
year. Retail and other revenues were $37.3 million, a growth of $11.7 million
or 45.7% over the same period in the prior year. The increase in non-gaming
revenues is primarily attributed to increased utilization of complimentaries
and the opening of the fueling facility in December 1998.
Bingo revenues totaled $10.4 million for the nine-months ended June 30,
1999, representing a $20,000 decrease over the same period in the prior year.
The decrease is a result of fewer bingo sessions being conducted.
Promotional allowances totaled $61.0 million for the nine-months ended June
30, 1999, representing a $13.6 million or 28.7% increase over the prior year.
The increase is attributable to a growth in the Mohegan Sun patron base as well
as an increased utilization of the Mohegan Sun Player's Club complimentary
program. Promotional allowances as a percentage of gaming revenue was 13.2% and
12.1% for the nine-months ended June 30, 1999 and 1998, respectively.
13
<PAGE>
Total costs and expenses were $386.4 million for the nine-months ended June
30, 1999, an increase of $62.0 million or 19.1% over the prior year.
Gaming costs and expenses were $202.4 million for the nine-months ended June
30,1999, an increase of $24.3 million or 13.6% over the same period in the
prior year. The increase in gaming costs and expenses is primarily attributable
to the $13.7 million increase in the slot win contribution over the same period
in the prior year. Food and beverage costs were $15.7 million for the nine-
months ended June 30, 1999, an increase of $144,000 or 0.9% from the same
period in the prior year. This is due to increased volume of food and beverage
sales.
Retail and other costs were $23.1 million for the nine-months ended June 30,
1999, an increase of $8.8 million or 62% from the same period in the prior
year. The increase is primarily a result of the fueling facility that opened in
December 1998 as well as increased utilization of the Mohegan Sun complimentary
program in the retail outlets. Excluding the expenses associated with the
fueling facility, retail expenses increased 19.3% over the same period in the
prior year.
Bingo operation costs of $8.7 million for the nine-months ended June 30,
1999 decreased $616,000 due to fewer bingo sessions being conducted combined
with increased operational efficiencies in bingo hall operations.
General and administrative costs were $76.0 million for the nine-months
ended June 30, 1999. The increase of $9.9 million or 15% is partially
attributable to the increase in marketing costs aimed at increasing the volume
of patron visits for the nine-months ended June 1999 as compared to the same
period in the prior year.
Management fees earned by Trading Cove Associates totaled $44.1 million for
the nine-months ended June 30, 1999, an increase of $10.1 million or 29.7%. The
increase in management fees is a direct result of the 22.0% increase in
operating income before management fees.
For the nine-months ended June 30, 1999, depreciation and amortization
increased by $2.8 million or 20.6% to $16.4 million over the same period in the
prior year. The increase is attributable to the $1.7 million amortization of
the trademark asset and the increase in depreciation of newly acquired capital
assets utilized in the racebook and fueling facilities, as well as financing
fees associated with the Phase II expansion plans.
Income from operations for the nine-months ended June 30, 1999 totaled
$108.0 million, compared to $90.7 million in the same period in the prior year.
The year over year increase of $17.3 million or 19% is primarily due to the
17.9% increase in gaming revenues and improved operating efficiencies.
Interest and other income were $6.2 million for the nine-months ended June
30, 1999, an increase of $4.4 million over prior year. The increase in interest
income is related to the investment of a portion of the proceeds from the $200
million Senior Notes and the $300 million Senior Subordinated Notes on March 3,
1999, partially offset by the extinguishment of the reserve trust accounts
required under the prior financing arrangement. A portion of the financing was
used to pay off existing debt and the remainder has been invested for
construction of the expansion. The Authority invests in investment-grade
commercial paper having maturities not more than six months from the date of
acquisition.
Interest expense of $41.1 million for the nine-months ended June 30, 1999
represented an increase of $4.1 million or 11.1% over prior period interest
expense. This increase was mainly attributable to the amount of debt
outstanding, which increased from $296 million to $500 million.
Liquidity, Capital Resources and Capital Spending
As of June 30, 1999 and September 30, 1998 the Authority held cash and cash
equivalents of $278.9 million and $110.8 million, respectively. Net cash flows
provided by operating activities for the nine-months ended June 30, 1999 and
1998 were $98.0 million and $84.5 million, respectively.
14
<PAGE>
The Authority's capital expenditures for the three-months ended June 30,
1999 and 1998 totaled $17.3 million and $3.3 million, respectively. Capital
expenditures for the nine-months ended June 30, 1999 and 1998 totaled $30.0
million and $23.2 million, respectively. Capital expenditures for the current
quarter included $3.3 million for facility improvements and the acquisition of
new capital assets, $249,000 for construction costs associated with the
construction of the fueling facility, $50,000 associated with racebook, and
$13.7 million on preliminary spending associated with the expansion of Mohegan
Sun. Capital spending for the nine-months ended June 30, 1999 includes $9.1
million for facility improvements and the acquisition of new capital assets,
$2.8 million for construction costs associated with the fueling facility, $1.3
million associated with racebook, and $16.8 million on preliminary spending
associated with the expansion of Mohegan Sun. Capital spending in fiscal 1998
of $23.2 million included $6.5 million for the purchase of new capital assets,
$1.4 million for preliminary expansion plans, and $15.3 million for the
purchase of assets previously held under operating leases.
During 1998, the Authority finalized contract negotiations with Trading Cove
Associates ("TCA"), a Connecticut general partnership, for the expansion of
Mohegan Sun, which is currently estimated to cost $750 million (excluding
capitalized interest and excluding a $50 million project contingency). 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. The proposed
development plans include 100,000 square feet of additional gaming space, a
luxury hotel with approximately 1,200 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. Construction of a 2,500 space employee parking garage and a
2,700 space patron parking garage commenced in March 1999, and is anticipated
to be completed in February, 2000. 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 result of
the termination of the Management Agreement, has agreed to pay to TCA 5% of
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 associated with the Relinquishment Agreement
was increased $5.5 million for the quarter ended June 30, 1999 to $565.6
million as of June 30, 1999 and will be reassessed quarterly. The liability
will continue to increase at each reassessment until such time that
Relinquishment payments offset or exceed increases resulting from the effect on
present value calculations due to the passage of time.
For the remainder of fiscal 1999, the Authority expects capital expenditures
to be approximately $7.5 million on facility improvements, $12.5 million on the
2,500 space employee parking garage and $37.6 million on the expansion of
Mohegan Sun.
As required under 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 3, 1999,
the holders of the Subordinated Notes also rejected the offer. On February 4,
1999, as permitted by Section 4.07(g) of the Senior Secured Notes, the
Authority distributed the Excess Cash Purchase Offer of $51.2 million to the
Tribe, and subsequently, the Tribe contributed the $51.2 million back to the
Authority, also on February 4, 1999.
The Authority has agreed to redeem the Authority's outstanding Subordinated
Notes on January 1, 2000 at a price of 100% of the principal amount plus
accrued and unpaid interest less $500,000. To do this, the
15
<PAGE>
Authority has exercised its rights under the original purchase agreement for
the Subordinated Notes to effect a defeasance of these Notes. The Authority has
established a separate trust account with a defeasance agent with cash funds
estimated to be sufficient to redeem the Subordinated Notes on January 1, 2000.
As of June 30, 1999, the Defeasance Trust Asset was valued at $137.4 million.
The defeasance trust liability as of June 30, 1999 was valued at $132.9
million. All Subordinated Notes are currently held by Sun International Hotels
Limited, the parent company of a partner in Trading Cove Associates, and by
Waterford Gaming L.L.C., also a partner in Trading Cove Associates.
During the three-months ended June 30, 1999 and 1998, the Authority,
subsequent to meeting its operating expenses and required deposits to reserve
funds under the Management Agreement, distributed a total of $9.6 million and
$9.7 million, respectively, to the Tribe. During the nine-months ended June 30,
1999 and 1998, the Authority distributed a total of $126.8 million and $58.1
million respectively to the Tribe. The Tribe, during the nine months ended June
30, 1999, has contributed $97.1 million back to the Authority, $51.2 million of
which represents the Excess Cash Purchase Offer described above, and $45.9
million of which represents the release of the remaining restricted cash
accounts related to the tender offer of the Senior Secured Notes.
Management believes that existing cash balances, operating cash flow and
available credit facilities 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.
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 assistance from The Gartner Group, 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, compliance planning,
calculating time and cost estimates, 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 June 30, 1999, the Authority is approximately 76% in conformance with
the Gartner Group Year 2000 best practices model, which represents three of a
total of four assessments. Upon completion of the fourth and final assessment,
which is scheduled for late August of 1999, the Authority anticipates a rating,
which
16
<PAGE>
represents 100% facility compliance. The Authority's mission critical system
applications that run the Authority's financial, payroll and casino operating
systems were remediated in April 1999. As of June 30, 1999, the Authority has
received compliance correspondence from 80% of its mission critical vendors and
is 80% complete with its embedded system testing. These embedded systems
include slot machines, heating and cooling machinery and equipment and related
infrastructure. Concurrently, contingency and recovery plans are being
developed for critical entities to eliminate any disruption to operations.
Cost
The Authority has incurred approximately $664,000 in costs associated with
the Year 2000 Program as of June 30, 1999. The Authority does not separately
track costs, except for labor incurred by the information systems group and
outside consulting fees, incurred for the Year 2000 program. 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).
Item 3 -- Quantitative and Qualitative Disclosure of Market Risk
The Authority is exposed to inherent market risk on the following:
Interest rate fluctuations on securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition;
Commercial paper having one of the two highest ratings obtainable from
Moody's or Standard & Poor and in each case maturing within six months
after the date of acquisition;
Money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kind described in the sections above.
The Authority has also entered into a syndicated $425 million reducing,
revolving, secured credit facility ("Bank Credit Facility"). At the Authority's
option, interest will accrue on the basis of a base rate formula or a Reserve
Adjusted LIBOR based formula plus applicable spreads. As of June 30, 1999,
there are no outstanding borrowings on the Bank Credit Facility. Upon the
initial borrowing under the Bank Credit Facility, the Authority will be exposed
to interest rate risk.
The Authority does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments that would
require further disclosure under this item.
17
<PAGE>
PART II -- OTHER INFORMATION:
Item 1 -- Legal Proceedings
The Authority is a defendant in certain litigation incurred in the normal
course of business. In the opinion of management, based on the advice of
counsel, the aggregate liability, if any, arising from such litigation will not
have a material adverse effect on the Authority's financial condition or
results of operations.
Item 2 -- Changes in Securities
None
Item 3 -- Defaults Upon Senior Securities
None
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other Information
None
18
<PAGE>
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
<TABLE>
<C> <S>
Date: August 12, 1999 By: /s/ Roland J. Harris
------------------ -------------------------------------
Roland J. Harris
Chairman, Management Board
Date: August 12, 1999 By: /s/ William J. Velardo
------------------ -------------------------------------
William J. Velardo
President and General Manager
Date: August 12, 1999 By: /s/ Jeffrey E. Hartmann
------------------ -------------------------------------
Jeffrey E. Hartmann, Executive Vice
President
Finance/Chief Financial Officer
(Principal Financial and Accounting
Officer)
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> JUN-30-1999 SEP-30-1998
<CASH> 278,915 110,730
<SECURITIES> 137,389 0
<RECEIVABLES> 3,074 3,415
<ALLOWANCES> (696) (348)
<INVENTORY> 6,673 5,027
<CURRENT-ASSETS> 427,920 102,960
<PP&E> 354,887 326,635
<DEPRECIATION> (59,419) (30,195)
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