<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, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
Commission file number: 033-80655
----------------
MOHEGAN TRIBAL GAMING AUTHORITY
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C>
Connecticut 06-1436334
(State or other jurisdiction (IRS employer
of incorporation or organization) Identification No.)
One Mohegan Sun Boulevard, Uncasville, CT 06382
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (860) 204-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
NONE On Which Registered
Securities registered pursuant to Section 12(g) of the Act:
NONE
---------
(Title of Class)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [_]
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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 December 31,
1999 (unaudited) and September 30, 1999............................... 2
Statements of Income of Mohegan Tribal Gaming Authority for the
Quarters Ended December 31, 1999 and 1998 (unaudited)................. 3
Statements of Capital of Mohegan Tribal Gaming Authority for the
Quarters Ended December 31, 1999 and 1998 (unaudited)................. 4
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the
Quarters Ended December 31, 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...................................... 12-15
ITEM 3 -- Quantitative and Qualitative Disclosure of Market Risk....... 16
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
ITEM 6 -- Exhibits and Reports on Form 8-K ............................ 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 December 31, 1999, and the related statements
of income, capital and cash flows for the three-month periods ended December
31, 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 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, 1999, and the related statements of income, capital and cash
flows for the year then ended (not presented separately herein) and in our
report dated December 3, 1999, 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, 1999, 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 11, 2000
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 221,095 $ 276,598
Defeasance trust asset (Note 2).................. -- 138,845
Receivables, net................................. 3,781 3,306
Inventories...................................... 6,649 5,971
Other current assets............................. 3,538 1,891
--------- ---------
Total current assets........................... 235,063 426,611
========= =========
Non-Current Assets:
Property and equipment, net...................... 286,767 287,858
Construction in process.......................... 101,569 52,031
Trademark, net................................... 125,705 127,423
Other assets, net................................ 21,756 21,039
--------- ---------
Total assets................................... $ 770,860 $ 914,962
========= =========
LIABILITIES AND CAPITAL
Current Liabilities:
Current portion of capital lease obligations
(Note 3)........................................ $ 11,507 $ 12,222
Defeasance trust liability (Note 2).............. -- 136,254
Accounts payable and accrued expenses............ 40,957 45,823
Accrued interest payable......................... -- 10,625
--------- ---------
Total current liabilities...................... 52,464 204,924
--------- ---------
Non-Current Liabilities:
Long-term debt (Note 2).......................... 500,000 500,000
Relinquishment liability (Note 6)................ 666,773 661,010
Capital lease obligations, net of current portion
(Note 3)........................................ 4,759 7,076
--------- ---------
Total liabilities.............................. 1,223,996 1,373,010
--------- ---------
Commitments and Contingencies (Note 4)
Capital:
Total capital.................................. (453,136) (458,048)
--------- ---------
Total liabilities and capital.................. $ 770,860 $ 914,962
========= =========
</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 For the
Quarter Ended Quarter Ended
December 31, 1999 December 31, 1998
----------------- -----------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Gaming................................... $164,925 $152,672
Food and beverage........................ 14,897 15,012
Retail and other......................... 19,626 13,287
Bingo operations......................... 2,421 3,184
-------- --------
Gross revenues........................... 201,869 184,155
Less--Promotional allowances............. (26,273) (21,105)
-------- --------
Net revenues............................. 175,596 163,050
-------- --------
Cost and expenses:
Gaming................................... 75,985 66,591
Food and beverage........................ 5,585 5,386
Retail and other......................... 4,545 4,602
Bingo operations......................... 2,127 2,828
General and administration............... 34,011 31,876
Expansion costs.......................... 522 --
Management fee........................... 13,634 13,646
Depreciation and amortization............ 7,526 4,669
-------- --------
Total costs and expenses................. 143,935 129,598
-------- --------
Income from operations................... 31,661 33,452
-------- --------
Other income (expense):
Relinquishment liability reassessment
(Note 6)................................ (5,763) --
Interest and other income................ 3,289 619
Interest expense......................... (14,028) (12,810)
-------- --------
(16,502) (12,191)
-------- --------
Net income............................... $ 15,159 $ 21,261
======== ========
</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 Quarter Ended For the Quarter Ended
December 31, 1999 December 31, 1998
--------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
Beginning balance.................. $(458,048) $(377,874)
Net income......................... 15,159 21,261
Distributions to Tribe............. (10,247) (12,351)
--------- ---------
Ending balance..................... $(453,136) $(368,964)
========= =========
</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 Quarter Ended For the Quarter Ended
December 31, 1999 December 31, 1998
--------------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows provided by operating
activities:
Net income........................ $ 15,159 $ 21,261
Adjustments to reconcile net
income to net cash flow provided
by operating activities:
Depreciation and amortization... 7,526 4,669
Loss on asset disposal.......... 138 --
Provision for losses on
receivables.................... 167 83
Relinquishment liability and
reassessment................... 5,763 --
Changes in operating assets and
liabilities:
(Increase) decrease in
receivables and other assets... (1,078) 1,034
Decrease in accounts payable and
accrued expenses............... (11,401) (7,974)
-------- --------
Net cash flows provided by
operating activities........... 16,274 19,073
-------- --------
Cash flows used in investing
activities:
Purchase of property and
equipment........................ (4,123) (6,113)
Increase in construction in
process.......................... (49,538) --
-------- --------
Net cash flows used in investing
activities..................... (53,661) (6,113)
-------- --------
Cash flows used in financing
activities:
Distributions to Tribe............ (10,247) (12,351)
Defeasance trust asset............ 135,507 --
Defeasance liability.............. (140,344) --
Proceeds from equipment
financing........................ -- 878
Payment on equipment financing.... (3,032) (2,639)
-------- --------
Net cash flows used in financing
activities..................... (18,116) (14,112)
-------- --------
Net decrease in cash and cash
equivalents.................... (55,503) (1,152)
Cash and cash equivalents at
beginning of period.............. 276,598 110,730
-------- --------
Cash and cash equivalents at end
of period........................ $221,095 $109,578
======== ========
Supplemental disclosures:
Cash paid during the period for
interest......................... $ 71,962 $ 18,309
</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
1.Organization and Basis of Presentation:
The Mohegan Tribal Gaming Authority (the "Authority"), established on July
15, 1995, is an instrumentality of the Mohegan Tribe of Indians of Connecticut
(the "Tribe"). The Tribe established the Authority with the exclusive power to
conduct and regulate gaming activities for the Tribe. Under the Indian Gaming
Regulatory Act of 1988, federally recognized Indian tribes are permitted to
conduct full-scale casino gaming operations on tribal land, subject to, among
other things, the negotiation of a tribal state compact with the affected
state. The Tribe and the State of Connecticut have entered into such a compact
(the "Mohegan Compact"), that was approved by the Secretary of the Interior.
The Authority is governed by a Management Board, which consists of the nine
members of the Tribal Council. The Management Board 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. The
Management Agreement between the Tribe and TCA concluded on January 1, 2000.
(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 1999 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, 1999, 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-months ended December 31, 1999 are not necessarily
indicative of expected results for the full year, as the casino industry in
Connecticut is seasonal in nature.
2.Financing Facilities:
During 1999, the Authority issued $200 million in Senior Notes and $300
million in Senior Subordinated Notes. The proceeds from this financing were
used to extinguish the existing Senior Secured Notes, defease the existing
Subordinated Notes, pay transaction costs for the financing of the newly issued
Senior and Senior Subordinated Notes, and to fund initial costs related to the
expansion of Mohegan Sun ("Project Sunburst").
Subordinated Notes/Defeasance Trust
The Authority redeemed the outstanding Subordinated Notes for $140.3
million, a price representing 100% of the principal amount plus accrued and
unpaid interest, less $500,000 pursuant to the Relinquishment Agreement between
the Tribe and TCA. (See Note 6 for discussion of Relinquishment Agreement
between the Tribe and TCA). The Authority exercised its rights under the
original purchase agreement for the Subordinated Notes to effect a defeasance
of these Notes. The Authority 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 was sufficient to redeem the Subordinated Notes
plus accrued interest. All Subordinated Notes were held by Sun International
Hotels Limited, the parent company of a partner in TCA, and by Waterford Gaming
LLC, also a partner in TCA. The Authority used the defeasance trust funds to
redeem the Subordinated Notes on December 30, 1999.
6
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Financing facilities, as described below, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December September
31, 30,
1999 1999
--------- ---------
<S> <C> <C>
Senior Notes............................................. $ 200,000 $200,000
Senior Subordinated Notes................................ 300,000 300,000
--------- --------
$ 500,000 $500,000
========= ========
</TABLE>
Senior Notes
On March 3, 1999, the Authority issued the Senior Notes with fixed interest
payable at a rate of 8 1/8% per annum. Interest on the Senior Notes is payable
semi-annually on January 1 and July 1. The notes mature on January 1, 2006. The
Senior Notes are unsecured general obligations of the Authority and are
subordinated to the syndicated $459.5 million reducing, revolving secured
credit facility ("Bank Credit Facility") (see below). A total of 50% of the
Relinquishment Agreement (see Note 6) payment to TCA will rank equal in right
of payment to the Senior Notes and the remaining 50% of this payment will rank
junior in right of payment to the Senior Notes.
Senior Subordinated Notes
On March 3, 1999, the Authority issued the Senior Subordinated Notes with
fixed interest payable at a rate of 8 3/4% per annum. Interest on the Senior
Subordinated Notes is payable semi-annually on January 1 and July 1. The notes
mature on January 1, 2009. The Senior Subordinated Notes are unsecured general
obligations of the Authority and are subordinated to the Bank Credit Facility
(see below), to the Senior Notes and to 50% of the Relinquishment Agreement
payment to TCA (see Note 6). The Senior Subordinated Notes rank equally to the
remaining 50% of the Authority's Relinquishment Agreement payment obligations.
Bank Credit Facility
On March 3, 1999, the Authority entered into the $425 million Bank Credit
Facility, which will mature in March of 2004. The Authority has the right,
within two years subsequent to the closing of the Bank Credit Facility, to
arrange for increases in the Bank Credit Facility to an aggregate amount of
$500 million. On November 15, 1999, the Authority exercised its right to
increase the Bank Credit Facility to $459.5 million. The Bank Credit Facility
is secured by a lien on substantially all of the Authority's assets, by a
leasehold mortgage on the land on which Mohegan Sun is located, and by each of
the Authority's cash operating accounts. At the Authority's option, interest
will accrue on the basis of a base rate formula or a Reserve Adjusted London
Inter-Bank Offer Rate ("LIBOR") based formula plus applicable spreads. As of
December 31, 1999, there were no borrowings outstanding on the Bank Credit
Facility. The Bank Credit Facility will automatically reduce by 10% of the
facility commitment as of the earlier of March 31, 2002 or the last full day of
the first full fiscal quarter following the completion date of Project
Sunburst. The Authority plans to draw on the Bank Credit Facility primarily in
connection with Project Sunburst.
The Authority's debt agreements require, among other things, the maintenance
of various financial covenants and terms including a fixed charge coverage
ratio, and certain debt leverage ratios. As of December 31, 1999, the Authority
was in compliance with all covenant requirements.
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. As of December 31, 1999, no amounts were drawn on the letters of credit.
3.Leases:
At December 31, 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>
2000 $1,825 $ 9,897
2001 112 5,062
2002 -- 2,357
2003 -- 64
------ --------
Total minimum lease payment.............................. $1,937 17,380
======
Amount representing interest............................. (1,114)
--------
Total obligation under capital leases.................... 16,266
Less: Amount due within one year......................... (11,507)
--------
Amount due after one year................................ $ 4,759
========
</TABLE>
Rent expense on the non-cancelable operating leases was $902,000 for each of
the quarters ended December 31, 1999 and 1998.
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.
The Slot Win Contribution payments will not be required if the State of
Connecticut legalizes any other gaming operations with slot machines or other
commercial casino table games within Connecticut (except those consented to by
the Tribe and/or the Mashantucket Pequot Tribe). The Authority reflected
expenses associated with Slot Win Contribution totaling $30.9 million and $28.4
million, respectively for the quarters ended December 31, 1999 and 1998.
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
8
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
resulting from decreased tax revenues on reservation land held in trust. Three
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 1999, 1998 and 1997, respectively. Additionally, the Tribe agreed to
make a one-time 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, 1999, the Authority has paid $2.9 million to the Town of Montville towards
improvements to the municipal water system, which has been included in other
assets in the accompanying balance sheet and will be amortized over 40 years.
Expansion Construction Management Agreement with Perini Building Company, Inc.
The Authority has engaged Perini Building Company, Inc. ("Perini") as
Construction Manager to provide construction management services for Project
Sunburst. As Construction Manager, Perini will receive a fee of $20.5 million
for services including, but not limited to, pre-construction review and
construction phase contract administration. As of December 31, 1999, Perini has
received $3.6 million of the $20.5 million fee. The Construction Management
Agreement contains a limited waiver of sovereign immunity to permit the
commencement, maintenance and enforcement of any dispute, claim and/or cause of
action arising under the Construction Management Agreement. In conjunction with
the limited waiver of sovereign immunity, Perini may seek satisfaction of
judgement against the undistributed and/or future revenues of Project Sunburst
and/or the existing Mohegan Sun facility.
Litigation
The Authority is a defendant in certain litigation incurred in the normal
course of business. In the opinion of management, based on the advice of
counsel, the aggregate liability, if any, arising from such litigation will not
have a material adverse effect on the Authority's financial position or results
of operations.
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, 1999 and 1998, the Authority incurred expenses of $2.3 million and
$2.0 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. TCA has a responsibility to manage Mohegan Sun in
exchange for payments ranging from 30% to 40% of net income, before management
fees, as defined, depending upon profitability levels. Management fees totaled
$13.6 million for each of the quarters ended December 31, 1999 and 1998. At
December 31, 1999, $2.9 million was owed to TCA in connection with the
Management Agreement. See discussion on Relinquishment Agreement below.
9
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Relinquishment Agreement
In February 1998, the Authority and TCA entered into an agreement, (the
"Relinquishment Agreement"). The Relinquishment Agreement supercedes the
Management Agreement effective January 1, 2000 (the "Relinquishment Date"), and
provides that the Authority make certain payments to TCA out of, and determined
as a percentage of, the gross revenues generated by the Mohegan Sun over a 15-
year period commencing on the Relinquishment Date. The payments ("Senior
Relinquishment Payments" and "Junior Relinquishment Payments"), each of which
are calculated as 2.5% of revenues, as defined, have separate payment schedules
and priority. Payment of Senior Relinquishment Payments commences on April 25,
2000, twenty-five days subsequent to 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 December 31, 2014. Junior Relinquishment
Payments commence on July 25, 2000, twenty-five days subsequent to the end of
the first six-month period following the Relinquishment Date and continue at
the end of each six month period occurring thereafter until December 31, 2014.
Each Senior Relinquishment Payment and Junior Relinquishment Payment is an
amount equal to 2.5% of the Revenues generated by Mohegan Sun over the
immediately preceding three-month or six month payment period, as the case may
be.
"Revenues" are defined as gross gaming revenues (other than Class II gaming
revenue) and all other facility revenues (including, without limitation, hotel
revenues, 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 obligations
under the Relinquishment Agreement. A relinquishment liability of $549.1
million was established at September 30, 1998 based on the present value of the
estimated future Mohegan Sun revenues utilizing the Authority's risk free
investment rate. At September 30, 1999, the relinquishment liability was
reassessed to be $661.0 million. This reassessment resulted from the increase
in the estimated future Revenues that will be generated by the Authority during
the term of the Relinquishment Agreement, and by the impact of the time value
of money due to the passage of time. At December 31, 1999, the relinquishment
liability, which is reassessed quarterly, has been reassessed to be $666.8
million from $661.0 million at September 30, 1999, and the $5.8 million
increase has been reflected as a relinquishment liability reassessment in the
accompanying statement of income.
As part of the Relinquishment Agreement, the Authority received an exclusive
and perpetual license with respect to trademarks and other similar rights
("Trademarks") including the name "Mohegan Sun." These Trademarks were
appraised by an independent valuation firm to have a value of $130 million at
September 30, 1998. The Authority is amortizing these trademarks over the life
of the facility and land improvements. As of December 31, 1999, the accumulated
amortization was $4.3 million.
Development Agreement
The Authority has negotiated an agreement with TCA (the "Development
Agreement"), which has made TCA the exclusive developer of Project Sunburst.
Under the Development Agreement, TCA oversees the planning, design and
construction of Project Sunburst and will receive compensation of $14 million
for such services based on the incremental completed percentage of Project
Sunburst.
10
<PAGE>
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS--(Continued)
7.Employee Benefits Plans
Effective February 10, 1997, the Authority adopted a retirement savings plan
for its employees under Section 401(k) of the Internal Revenue Code. The plan
allows employees of the Authority to defer up to the lesser of the maximum
amount prescribed by the Internal Revenue Code or 15% of their income on a pre-
tax basis, through contributions to this plan. The Authority had matched 50% of
the first 4% for the period February 10, 1997 to December 31, 1998, and the
Authority now matches 100% of eligible employees' contributions up to a maximum
of 3% of their individual earnings effective January 1, 1999. The Authority
recorded matching contributions of approximately $631,000 and $374,000,
respectively, to this plan for the quarters ended December 31, 1999 and 1998.
The Authority, in conjunction with the Tribe adopted a Nonqualified Deferred
Compensation Plan for certain key employees. This plan allows participants to
defer up to 100% of their post-tax income to the plan. The 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. For the quarter ended
December 31, 1999, contributions totaled $72,000. Cumulative contributions to
the plan have totaled $209,000.
8.Subsequent Events
On January 19, 2000, TCA received their first quarterly payment of $1.4
million under the Development Agreement.
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 December 31, 1999
and 1998:
Net revenues for the three months ended December 31, 1999 were $175.6
million compared with $163.1 million reported for the same period of the prior
year. This 7.7% increase is primarily attributable to an increase in gaming
revenues.
Gaming revenues totaled $164.9 million for the three months ended December
31, 1999, marking an increase of $12.3 million or 8.0% over the three months
ended December 31, 1998. Gaming revenue for the three months ended December 31,
1998 totaled $152.7 million. The increase in gaming revenues is primarily due
to a 9.3% growth in slot machine revenues. Table game revenue grew at 4.1% for
the quarter. Table game revenue was affected by a slightly lower table hold
percentage for the quarter.
For the three months ended December 31, 1999, food and beverage revenues
were $14.9 million versus $15.0 million for the three months ended December 31,
1998. This slight decrease in revenue is attributable to the decrease in food
covers, which totaled 968,000 and 1.0 million for the three months ended
December 31, 1999 and 1998, respectively.
Retail and other revenues were $19.6 million, a growth of $6.3 million or
47.7% over the same period in the prior year. Retail revenues increased by $3.8
million for the quarter as patrons continued to enjoy the retail product
offered by Mohegan Sun. Other revenues increased by $2.5 million, primarily due
to the availability of the Mohegan Sun gasoline and convenience center for the
entire quarter ending December 31, 1999 versus the 24 days of operation for the
period ending December 31, 1998. Retail and other revenues were $13.3 million
for the three months ended December 31, 1998.
Bingo revenues decreased $763,000 or 24.0% to $2.4 million during the three
months ended December 31, 1999 compared to the same period in the prior year as
a result of fewer bingo sessions being conducted. Bingo revenues were $3.2
million for the three months ended December 31, 1998.
Promotional allowances totaled $26.3 million for the three months ended
December 31, 1999, representing a $5.2 million or 24.5% increase over the prior
year. The increase is primarily attributable to increased redemption of Mohegan
Sun Player's Club points. The increase in promotional allowances is also
attributable to the shifting of the redemption of Player's Club points to the
Mohegan Sun gas and convenience center from the retail outlets. Promotional
allowances as a percentage of gaming revenue were 15.9% and 13.8% for the three
months ending December 31, 1999 and 1998, respectively. Promotional allowances
were $21.1 million for the three months ended December 31, 1998.
Total costs and expenses were $143.9 million for the three months ended
December 31, 1999, an increase of $14.3 million or 11.1% over the prior year.
The increase is the combined result of increased gaming volume, the addition of
pre-opening expansion costs for Project Sunburst, and increases in costs
related to the amortization of the Mohegan Sun Trademark. Total costs and
expenses were $129.6 million for the three months ended December 31, 1998.
Gaming costs and expenses were $76.0 million for the three months ended
December 31, 1999, an increase of $9.4 million or 14.1% over the same period in
the prior year. The slot win contribution paid to the State of Connecticut
totaled $30.9 million for the three months ended December 31, 1999. This
represents an increase of $2.5 million over the same period in the prior year,
which is directly attributable to the $10.3 million increase in slot revenues.
Gaming costs and expenses were $66.6 million for the three months ended
December 31, 1998.
Food and beverage costs were $5.6 million for the three months ended
December 31, 1999, an increase of $199,000 or 3.7% from the same period in the
prior year. The increase is attributable to increases in labor and employee
benefits. Food and beverage costs were $5.4 million for the three months ended
December 31, 1998.
12
<PAGE>
Retail and other costs were $4.5 million for the three months ended December
31, 1999, a decrease of $57,000 or 1.2% over the same period in the prior year.
The decrease is primarily attributable to increased operating efficiencies.
Retail and other costs were $4.6 million for the three months ended December
31, 1998.
Bingo operation costs of $2.1 million for the three months ended December
31, 1999 decreased $701,000 or 24.8% over the same period in the prior year due
to fewer sessions being conducted. Bingo operation costs were $2.8 million for
the three months ended December 31, 1998.
General and administrative costs were $34.0 million for the three months
ended December 31, 1999. The increase of $2.1 million or 6.7% for the same
period in the prior year is attributable to continued casino marketing
promotions. General and administrative costs were $31.9 million for the three
months ended December 31, 1998.
Expansion costs totaled $522,000 for the three months ended December 31,
1999. Expansion costs are composed of pre-opening executive level management
associated with the Project Sunburst expansion. Mohegan Sun did not incur any
pre-opening expansion costs for the quarter ended December 31, 1998.
Management fees earned by Trading Cove Associates totaled $13.6 million for
the three months ended December 31, 1999 and 1998, respectively. Management
fees are calculated as a percentage of net income.
For the three months ended December 31, 1999, depreciation and amortization
increased by $2.9 million or 61.2% over the same period in the prior year. The
increase is primarily attributable to the $1.7 million amortization of the
trademark asset. Depreciation and amortization for the three months ended
December 31, 1998 was $4.7 million.
Income from operations for the three months ended December 31, 1999 totaled
$31.7 million, compared to $33.5 million for the same period in the prior year.
The period to period decrease of $1.8 million or 5.4% is primarily due to a
11.1% increase in operating expenses, partially offset by a 7.7% increase in
net revenues. The increase in operating expenses can be attributed to the
increase in gaming revenues, the additional amortization associated with the
Mohegan Sun Trademark, and the pre-opening expansion costs for Project
Sunburst.
At December 31, 1999, the relinquishment liability, which is reassessed
quarterly, has been reassessed to be $666.8 million, an increase of $5.8
million. This reassessment resulted from the impact of the time value of money
due to the passage of time.
Interest and other income were $3.3 million for the three months ended
December 31, 1999, an increase of $2.7 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, the
remainder was invested to fund Project Sunburst construction. The weighted
average invested cash was $218.8 million and $8.0 million for the quarters
ended December 31, 1999 and 1998, respectively. The Authority invests in
investment-grade commercial paper having maturities of not more than six months
from the date of acquisition. Interest and other income were $619,000 for the
three-months ended December 31, 1998.
Interest expense of $14.0 million for the three months ended December 31,
1999 represented an increase of $1.2 million or 9.5% 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, partially offset by the tender of the existing Senior
Secured Notes that had a coupon rate of 13.5%. The weighted average outstanding
debt was $517.3 million and $293.1 million for the quarters ended December 31,
1999 and 1998, respectively. Interest expense was $12.8 million for the three
months ended December 31, 1998.
13
<PAGE>
Liquidity, Capital Resources and Capital Spending
As of December 31, 1999 and 1998, the Authority held cash and cash
equivalents of $221.1 million and $109.6 million, respectively. Of the cash and
cash equivalents held on December 31, 1999, $182.6 million will be used to fund
Project Sunburst. Cash provided by operating activities for 1999 was $16.3
million, compared to cash provided by operations of $19.0 million for 1998. On
March 3, 1999, the Authority issued $200 million in Senior Notes and $300
million in Senior Subordinated Notes. The proceeds from this financing were
used to extinguish the existing $175 million Senior Secured Notes, defease the
existing $90 million of Subordinated Notes, pay for transaction costs
associated with the Senior Note and Senior Subordinated Note financing, and
fund initial costs related to Project Sunburst expansion. The Senior Notes bear
an interest rate of 8 1/8% per annum and mature in March of 2006. The Senior
Subordinated Notes bear an interest rate of 8 3/4% per annum and mature in
March of 2009. Interest on the Senior Notes and Senior Subordinated Notes is
payable on January 1 and July 1 of each year.
During 1998, the Authority finalized contract negotiations with TCA for
Project Sunburst, which is currently estimated to cost $800 million (excluding
capitalized interest). Under the Development Agreement, TCA will oversee the
planning, design and construction of the expansion at Mohegan Sun and will
receive a development fee of $14 million for such services.
On December 30, 1999, the Authority redeemed the outstanding Subordinated
Notes for $140.3 million, a price representing 100% of the principal amount
plus accrued and unpaid interest, less $500,000. The Authority exercised its
rights under the original purchase agreement for the Subordinated Notes to
effect a defeasance of these Notes. The Authority 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 was sufficient to redeem the
Subordinated Notes plus accrued interest. All Subordinated Notes were held by
Sun International Hotels Limited, the parent company of a partner in TCA, and
by Waterford Gaming LLC, also a partner in TCA.
On March 3, 1999, the Authority entered into a syndicated $425 million Bank
Credit Facility maturing in March of 2004. The Authority has the right within
two years subsequent to the closing of the Bank Credit Facility, to arrange for
increases in the Bank Credit Facility to an aggregate amount of $500 million.
On November 15, 1999, the Authority exercised its option to increase the Bank
Credit Facility to $459.5 million. At the Authority's option, interest will
accrue on the basis of a base rate formula or a Reserve Adjusted London Inter-
bank Offer Rate ("LIBOR") based formula plus applicable basis point spreads.
The Bank Credit Facility has various restrictive and financial covenants, which
the Authority remained compliant with as of December 31, 1999.
As of December 31, 1999, there were no borrowings outstanding under the Bank
Credit Facility. The Authority plans to draw on the Bank Credit Facility
primarily in connection with the expansion of Mohegan Sun. In addition to the
financing provided by the Senior Notes, Senior Subordinated Notes and the Bank
Credit Facility, the Tribe has set aside, with a trustee, a $40 million, fully-
funded construction reserve account that, in certain circumstances, will be
used to pay costs in excess of the expansion budget.
The Authority's capital spending has increased significantly with the
commencement of the Project Sunburst expansion. Capital expenditures totaled
$53.7 million for the quarter ended December 31, 1999, versus $6.1 million for
the quarter ended December 31, 1998. Property maintenance capital expenditures
for furniture, fixtures and equipment totaled $3.4 million and $2.9 million for
the quarters ending December 31, 1999 and 1998, respectively. Spending on
Project Sunburst infrastructure improvements totaled $4.4 million for the
quarter ending December 31, 1999. In the quarter ended December 31, 1998, $3.2
million was also spent on the construction of the on-site Mohegan Sun gas and
convenience center, Racebook and Project Sunburst.
Cumulative Project Sunburst construction costs totaled $71.3 million through
December 31, 1999, of which $33.9 million was expended during the quarter. For
the remaining three quarters of fiscal 2000, Mohegan
14
<PAGE>
Sun anticipates spending of $165.1 million on Project Sunburst costs. On
January 3, 2000, approximately 1,000 of the 2,700 spaces opened in the
Riverview Garage. The opening of the Riverview Garage has enabled major
excavation to begin on the site, signaling the start of construction of the
casino hotel resort phase of Project Sunburst. Project Sunburst is expected to
open beginning in the fall of 2001.
The Authority commenced construction on an employee parking center in March
1999. The employee parking center will include 2,700 parking spaces and
amenities such as a dry cleaning service, on-site banking, an employee
computer/training center and an exercise facility. The total cost of the
employee parking center is estimated to be $25.0 million. As of December 31,
1999, the Authority had expended $21.8 million on the construction of the
employee parking center, of which $12.0 million was spent in the quarter ending
December 31, 1999. The employee parking center is funded by cash from
operations. It is anticipated that the employee parking center will be
completed in May 2000.
The Authority commenced construction of the electrical, natural gas, water
and sewer systems infrastructure that will service the employee center and
public utilities department, which are located within the employee garage. The
construction is funded from cash from operations, and is expected to be
complete by May 2000.
For fiscal 2000, the Authority expects capital expenditures to be
approximately $22.8 million on facility improvements and maintenance capital
expenditures, and $199.3 million on Project Sunburst construction.
During the quarters ended December 31, 1999 and 1998, the Authority,
subsequent to meeting its operating expenses and required deposits to reserve
funds under the indenture for the $175 million Senior Secured Notes,
distributed a total of $10.3 million and $12.4 million, respectively, to the
Tribe.
Under the terms of the Relinquishment Agreement, TCA continued to manage the
existing property under the Management Agreement through December 31, 1999. On
January 1, 2000, the Management Agreement terminated, and the Authority assumed
day-to-day management of Mohegan Sun. The Authority, as a result of the
termination of the Management Agreement, has agreed to pay to TCA 5% of gross
revenues (as defined in the Relinquishment Agreement), generated from Mohegan
Sun including the planned expansion, beginning January 1, 2000 and ending
December 31, 2014. The present value of this liability is estimated at $666.8
million as of December 31, 1999.
Management believes that existing cash balances, financing arrangements and
operating cash flow will provide the Authority with sufficient resources to
meet its existing debt obligations, relinquishment payments, tribal
distributions, and foreseeable capital expenditure requirements with respect to
current operations and expansion 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 depends on fully operational computer systems in all areas of
the business. Additionally, the Authority is dependent upon many vendors to
provide uninterrupted service for the operation to run effectively. Exposure to
both of these risk factors are issues the Authority has addressed and has
formulated an approach to handle these issues.
15
<PAGE>
Approach
With assistance from The Gartner Group, the Authority 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
included taking an inventory of entities, identifying problems, compliance
planning, calculating time and cost estimates, generating implementation
strategies, attempting to correct the problems, and testing the solutions. The
consultant examined the methodology 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
Through December 31, 1999, the Authority was in conformance with the Gartner
Group Year 2000 best practices model. Upon completion of the fourth and final
assessment in August of 1999, the Authority received a rating of 4.0, which
represents operational sustainability. The Authority's mission critical system
applications that run financial, payroll and casino operating systems were
remediated in April 1999. The Authority received compliance correspondence from
95% of its mission critical vendors and is complete with embedded system
testing. These embedded systems include slot machines, heating and cooling
machinery and equipment and related infrastructure. Concurrently, contingency
and recovery plans were developed for critical entities to eliminate any
disruptions to operations. As of February 14, 2000 there was no adverse
material impact on the Authority's financial position, results of operations or
cash flow relating to the Year 2000 program.
Cost
The Authority has incurred approximately $1.5 million in costs to date
associated with the Year 2000 program as of December 31, 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.
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 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;
16
<PAGE>
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.
At the Authority's option, Bank Credit Facility interest will accrue on the
basis of a base rate formula or a LIBOR based formula, plus applicable basis
point spreads. In addition, the Authority has the right, within two years
following the close of the Bank Credit Facility, to arrange for increases in
the loan amounts to an aggregate amount of $500 million. As of November 15,
1999 the Authority exercised that right and increased the Bank Credit Facility
to $459.5 million. As of December 31, 1999, the Bank Credit Facility was
undrawn. The Authority expects reductions to the loan amounts will begin in
fiscal 2001. The Authority plans to draw on the Bank Credit Facility primarily
in connection with Project Sunburst.
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
Item 6 -- Exhibits and Reports on Form 8-K
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: February 14, 2000 By: /s/ Roland J. Harris
----------------- --------------------------------------------
Roland J. Harris
Chairman, Management Board
Date: February 14, 2000 By: /s/ William J. Velardo
----------------- --------------------------------------------
William J. Velardo
President and General Manager
Date: February 14, 2000 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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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-2000 SEP-30-1999
<PERIOD-START> OCT-01-1999 OCT-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 221,095 109,578
<SECURITIES> 0 0
<RECEIVABLES> 4,774 2,121
<ALLOWANCES> (993) (386)
<INVENTORY> 6,649 5,776
<CURRENT-ASSETS> 235,063 119,438
<PP&E> 338,912 265,075
<DEPRECIATION> 52,145 33,106
<TOTAL-ASSETS> 770,860 554,746
<CURRENT-LIABILITIES> 52,464 93,241
<BONDS> 500,000 265,000
0 0
0 0
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<OTHER-SE> (453,136) (368,964)
<TOTAL-LIABILITY-AND-EQUITY> 770,860 554,746
<SALES> 201,869 184,155
<TOTAL-REVENUES> 201,869 184,155
<CGS> (13,379) (10,337)
<TOTAL-COSTS> (143,935) (129,598)
<OTHER-EXPENSES> (5,763) 0
<LOSS-PROVISION> (167) (83)
<INTEREST-EXPENSE> (14,028) (12,810)
<INCOME-PRETAX> 15,159 21,261
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 15,159 21,261
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</TABLE>
