-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ju0R83JuS6b0VCNAYNJmFsmS0dv6mYXeTUcbVm5Cna04vp+EdqfZAlr/hBHfM3vv Isr2XxsFbv5GyAK2bCK6aQ== 0000950109-01-501253.txt : 20010514 0000950109-01-501253.hdr.sgml : 20010514 ACCESSION NUMBER: 0000950109-01-501253 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOHEGAN TRIBAL GAMING AUTHORITY CENTRAL INDEX KEY: 0001005276 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEMBERSHIP SPORTS & RECREATION CLUBS [7997] IRS NUMBER: 061436334 FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-80655 FILM NUMBER: 1630103 BUSINESS ADDRESS: STREET 1: 27 CHURCH LANE CITY: UNCASVILLE STATE: CT ZIP: 06382 BUSINESS PHONE: 2038480545 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ Commission file number 033-80655 MOHEGAN TRIBAL GAMING AUTHORITY (Exact name of registrant as specified in its charter) Connecticut 06-1436334 (State or other jurisdiction of (IRS employer incorporation or organization) Identification No.) One Mohegan Sun Boulevard, Uncasville, CT 06382 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (860) 862-8000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class On Which Registered NONE ______________ __________________ ______________ __________________ ______________ __________________ 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 ___ ----------- MOHEGAN TRIBAL GAMING AUTHORITY INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION Page Number ------ Item 1 -- Financial Statements Review Report of Independent Public Accountants 1 Balance Sheets of Mohegan Tribal Gaming Authority as of March 31, 2001 2 (unaudited) and September 30, 2000 Statements of Income of Mohegan Tribal Gaming Authority for the Three and Six 3 Months Ended March 31, 2001 and 2000 (unaudited) Statements of Capital of Mohegan Tribal Gaming Authority for the Six Months 4 Ended March 31, 2001 and 2000 (unaudited) Statements of Cash Flows of Mohegan Tribal Gaming Authority for the Six Months 5 Ended March 31, 2001 and 2000 (unaudited) Notes to Financial Statements of Mohegan Tribal Gaming Authority 6-13 Item 2 -- Management's Discussion and Analysis of Financial Condition and 14-19 Results of Operations Item 3 -- Quantitative and Qualitative Disclosure of Market Risk 20 PART II -- OTHER INFORMATION Item 1 -- Legal Proceedings 21 Item 2 -- Changes in Securities 21 Item 3 -- Defaults upon Senior Securities 21 Item 4 -- Submission of Matters to a Vote of Security Holders 21 Item 5 -- Other Information 21 Item 6 -- Exhibits and Reports on Form 8-K 21 Signatures - Mohegan Tribal Gaming Authority 22
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 March 31, 2001 and the related statements of income for the three and six month periods ended March 31, 2001 and 2000 and the statements of capital and cash flows for the six months ended March 31, 2001 and 2000. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the balance sheet of the Mohegan Tribal Gaming Authority as of September 30, 2000, and the related statements of income (loss), capital and cash flows for the year then ended (not presented separately herein) and in our report dated December 1, 2000, 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, 2000, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Hartford, Connecticut April 26, 2001 Mohegan Tribal Gaming Authority ------------------------------- Balance Sheets -------------- (in thousands) --------------
March 31 September 30, 2001 2000 -------------- -------------- (unaudited) ASSETS ------ Current assets: Cash and cash equivalents $ 62,488 $ 115,731 Receivables, net 7,204 7,161 Due from Tribe 16,803 824 Inventories 7,179 7,577 Other current assets 5,759 4,478 -------------- -------------- Total current assets 99,433 135,771 Non-current assets: Property and equipment, net 337,309 338,243 Construction in process 492,093 264,999 Trademark, net 121,410 123,128 Other assets, net 19,144 23,238 -------------- -------------- Total assets $1,069,389 $ 885,379 ============== ============== LIABILITIES AND CAPITAL ----------------------- Current liabilities: Current portion of capital lease obligations $ 2,721 $ 4,055 Current portion of relinquishment liability 46,508 56,646 Accounts payable and accrued expenses 72,524 57,601 Accrued interest payable 11,041 10,625 -------------- -------------- Total current liabilities 132,794 128,927 Non-current liabilities: Long-term debt 628,000 500,000 Relinquishment liability 623,257 616,234 Capital lease obligations, net of current portion 950 2,336 -------------- -------------- Total liabilities 1,385,001 1,247,497 -------------- -------------- Commitments and contingencies (Notes 5 and 7) Capital: Retained Earnings (313,321) (362,118) Accumulated other comprehensive loss (2,291) - -------------- -------------- (315,612) (362,118) -------------- -------------- Total liabilities and capital $1,069,389 $ 885,379 ============== ==============
The accompanying accountants' review report and notes to the financial statements should be read in conjunction with the financial statements 2 Mohegan Tribal Gaming Authority ------------------------------- Statements of Income -------------------- (in thousands) --------------
For the For the For the For the Quarter Ended Quarter Ended Six Months Ended Six Months Ended March 31, 2001 March 31, 2000 March 31, 2001 March 31, 2000 --------------- -------------- ---------------- ---------------- (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Gaming $180,605 $175,572 $355,563 $340,519 Food and beverage 11,037 11,680 21,761 22,997 Retail and other 11,981 10,603 28,576 26,034 -------- -------- -------- -------- Gross revenues 203,623 197,855 405,900 389,550 Less - Promotional allowances (15,843) (15,646) (35,030) (34,029) -------- -------- -------- -------- Net revenues 187,780 182,209 370,870 355,521 -------- -------- -------- -------- Cost and expenses: Gaming 77,770 74,210 156,159 147,419 Food and beverage 5,942 5,856 12,020 11,864 Retail and other 7,571 6,486 15,474 12,125 General and administration 32,352 31,609 71,789 66,026 Pre-opening costs 1,927 1,110 3,316 2,017 Management fee - - - 13,634 Depreciation and amortization 6,943 7,760 13,522 15,286 -------- -------- -------- -------- Total costs and expenses 132,505 127,031 272,280 268,371 -------- -------- -------- -------- Income from operations 55,275 55,178 98,590 87,150 -------- -------- -------- -------- Other income (expense): Relinquishment liability reassessment (Note 7) (8,958) (5,764) (17,916) (11,527) Interest and other income 578 4,300 1,742 7,545 Interest expense (5,890) (9,131) (11,815) (23,159) Change in fair value of derivative instruments (Note 3) 865 - (1,277) - -------- -------- -------- -------- (13,405) (10,595) (29,266) (27,141) -------- -------- -------- -------- Income from continuing operations 41,870 44,583 69,324 60,009 Loss from discontinued operations (335) (40) (527) (306) -------- -------- -------- -------- Net income $ 41,535 $ 44,543 $ 68,797 $ 59,703 ======== ======== ======== ========
The accompanying accountants' review report and notes to financial statements should be read in conjunction with the financial statements 3 Mohegan Tribal Gaming Authority ------------------------------- Statements of Capital --------------------- (in thousands) --------------
For the Six Months For the Six Months Ended March 31, 2001 Ended March 31, 2000 -------------------- -------------------- (unaudited) (unaudited) Beginning balance $(362,118) ($458,052) Net income 68,797 59,703 Accumulated other comprehensive loss (2,291) - Distributions to Tribe (20,000) (22,246) --------- ------------ Ending balance $(315,612) $ (420,595) ========= ============
The accompanying accountants' review report and notes to financial statements should be read in conjunction with the financial statements 4 Mohegan Tribal Gaming Authority ------------------------------- Statements of Cash Flows ------------------------ (in thousands) ------------
For the Six Months Ended For the Six Months Ended March 31, 2001 March 31, 2000 -------------- -------------- (unaudited) (unaudited) Cash flows provided by operating activities: Net income $ 68,797 $ 59,703 Adjustments to reconcile net income to net cash flow provided by operating activities: Depreciation and amortization 13,522 15,286 Loss on asset disposal - 182 Provision for losses on receivables 275 414 Relinquishment liability reassessment 17,916 11,527 Change in fair value of derivative instruments 1,277 - Changes in operating assets and liabilities: Increase in receivables and other assets (16,547) (4,623) Increase in accounts payable and accrued expenses 15,339 2,956 ------------------------ ------------------------ Net cash flows provided by operating activities 100,579 85,445 ------------------------ ------------------------ Cash flows used in investing activities: Purchase of property and equipment (8,744) (7,029) Increase in construction in process (227,094) (97,915) ------------------------ ------------------------ Net cash flows used in investing activities (235,838) (104,944) ------------------------ ------------------------ Cash flows provided by (used in) financing activities: Distributions to Tribe (20,000) (22,246) Relinquishment payments (21,031) - Payment on equipment financing (2,719) (5,991) Proceeds from issuance of long-term debt 128,000 - Capitalized financing fees (2,234) - Defeasance trust asset - 135,507 Defeasance liability - (140,344) ------------------------ ------------------------ Net cash flows provided by (used in) financing activities 82,016 (33,074) ------------------------ ------------------------ Net decrease in cash and cash equivalents (53,243) (52,573) Cash and cash equivalents at beginning of period 115,731 276,598 ------------------------ ------------------------ Cash and cash equivalents at end of period $ 62,488 $ 224,025 ======================== ======================== Supplemental disclosures: Cash paid during the period for interest $ 22,111 $ 21,908 ======================== ========================
The accompanying accountants' review report and notes to financial statements should be read in conjunction with the financial statements 5 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 previously engaged Trading Cove Associates ("TCA"), a Connecticut general partnership, to manage the operations of Mohegan Sun pursuant to a seven year contract (the "Management Agreement"). The Management Agreement between the Tribe and TCA concluded on January 1, 2000. (See Note 7 for a discussion of the Relinquishment Agreement between the Authority and TCA). The accompanying financial statements have been prepared in accordance with the accounting policies described in the Authority's 2000 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, 2000, contained herein, was taken from audited financial statements, but does not include all disclosures contained in the Form 10-K and required by accounting principles generally accepted in the United States. Certain amounts in the 2000 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 six months ended March 31, 2001 are not necessarily indicative of expected results for the full year, as the casino industry in Connecticut is seasonal in nature. 2. Discontinued Operations: On November 29, 2000 the Authority discontinued bingo operations in order to build a smoke-free slot area. Pursuant to Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30"), the financial statements of the Authority have been restated to reflect the disposition of bingo operations as discontinued operations. Accordingly, the revenues, costs and expenses have been excluded from the captions in the Statements of Income and have been reported as "Loss from discontinued operations." For the quarter ended March 31, 2001, $335,000 was recorded as loss from discontinued operations relating to severance pay and the disposal of bingo inventory. 3. 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 fund initial costs related to the expansion of Mohegan Sun ("Project Sunburst"). 6 MOHEGAN TRIBAL GAMING AUTHORITY ------------------------------- NOTES TO FINANCIAL STATEMENTS--(Continued) ------------------------------------------ Senior Notes On March 3, 1999, the Authority issued the Senior Notes with fixed interest payable at a rate of 8.125% 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 $500.0 million reducing, revolving secured credit facility ("Bank Credit Facility") (see below). A total of 50% of the Relinquishment Agreement payment (see Note 7) 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. As of March 31, 2001, accrued interest on the Senior Notes was $4.1 million. Senior Subordinated Notes On March 3, 1999, the Authority issued the Senior Subordinated Notes with fixed interest payable at a rate of 8.75% 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 7). The Senior Subordinated Notes rank equally to the remaining 50% of the Authority's Relinquishment Agreement payment obligations. As of March 31, 2001, accrued interest on the Senior Subordinated Notes was $6.6 million. Bank Credit Facility On March 3, 1999, the Authority entered into the $425.0 million Bank Credit Facility, which will mature in March of 2004. The Bank Credit Facility agreement provided the Authority the right to increase the Bank Credit Facility to an aggregate amount of $500.0 million within two years subsequent to the closing. In November 1999, the Bank Credit Facility was increased to $459.5 million. On November 30, 2000, the Authority exercised its right to increase the Bank Credit Facility to $500.0 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 1- month, 3-month or 6-month London Inter-Bank Offer Rate ("LIBOR") based formula plus applicable spreads. Interest on each LIBOR loan, which is for a term of three months or less, shall be due and payable on the last day of the related interest period. Interest on each LIBOR loan, which is for a term of more than three months, is due and payable on the date which is three months after the date such LIBOR loan was made and every three months thereafter on the last day of the related interest period. The Bank Credit Facility will automatically reduce by 10% of the 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 draws on the Bank Credit Facility primarily in connection with Project Sunburst. As of March 31, 2001, the Authority has borrowed $128.0 million under the Bank Credit Facility. Accrued interest on the Bank Credit Facility was $416,000 as of March 31, 2001. One-month LIBOR as of March 31, 2001 was 5.08%. 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 March 31, 2001 and 2000, the Authority was in compliance with all financial covenant requirements. 7 MOHEGAN TRIBAL GAMING AUTHORITY ------------------------------- NOTES TO FINANCIAL STATEMENTS--(Continued) ------------------------------------------ Derivative Instruments The Authority uses derivative instruments, including interest rate caps, collars and swaps in its strategy to manage interest rate risk associated with the variable interest rate on the Bank Credit Facility. The Authority's objective in managing interest rate risk is to ensure the Authority has appropriate income and sufficient liquidity to meet the Tribe and debt-holder obligations. The Authority does not believe that there is any material risk exposure with respect to derivative or other financial instruments. The Authority continually monitors these exposures and makes the appropriate adjustments to manage these risks within the established limits. The Authority analyzes interest rate risk using various models that forecast cash flows of the liabilities and their supporting assets, including derivative instruments. The Authority is considered an "end user" of derivative instruments and engages in derivative transactions for risk management purposes only. On October 1, 2000 the Authority adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", designated all derivative instruments as cash flow hedging instruments and marked them to market. The impact of the adoption of SFAS No. 133 was not material to the financial position of the Authority taken as a whole. The Authority excludes the change in time value when assessing the effectiveness of the hedging relationships. All derivatives are evaluated quarterly and were deemed to be effective at March 31, 2001. - -------------------------------------------------------------------------------- Notional Cost Market - -------------------------------------------------------------------------------- Interest Rate Cap Strike Rate - 8% $22,314,600 $410,000 $ 2,000 - -------------------------------------------------------------------------------- Interest Rate Collar Ceiling Strike Rate - 8% Floor Strike Rate - 6% 1,353,800 295,000 (1,665,267) - -------------------------------------------------------------------------------- Interest Rate Swap Pay fixed - 6.35% Receive Variable 676,900 221,000 ( 980,111) - -------------------------------------------------------------------------------- Total $24,345,300 $926,000 ($2,643,378) - -------------------------------------------------------------------------------- All derivative instruments are based on one-month LIBOR. One-month LIBOR was 5.08% and 6.61% on March 31, 2001 and September 30, 2000, respectively. There was no gain or loss recognized on the sale of the derivative instruments. For the quarter ended March 31, 2001, the Authority recognized a net gain of $865,000 relating to the change in fair value of its derivative instruments, which is reflected as other income in the statements of income. The net gain is due to a decrease in the market value of the derivative instrument of approximately $1.4 million offset by a reclassification of approximately $2.3 million to accumulated other comprehensive loss relating to the derivative instruments becoming effective during the quarter ended March 31, 2001. For the six months ended March 31, 2001, the Authority recognized a net loss of $1.3 million relating to the change in the fair value of its derivative instruments, which is reflected as other expense in the statements of income. 8 MOHEGAN TRIBAL GAMING AUTHORITY ------------------------------- NOTES TO FINANCIAL STATEMENTS--(Continued) ------------------------------------------ Letters of Credit The Authority has available a $250,000 unsecured letter of credit that will expire on August 31, 2001 and a $550,000 letter of credit agreement that expires on April 16, 2002. The $550,000 letter of credit was reduced from $1.0 million on April 13, 2001. The Authority had a $250,000 letter of credit that expired on January 11, 2001. As of March 31, 2001, no amounts were drawn on the letters of credit. 4. Leases: At March 31, 2001, the Authority was obligated under capital leases to make future minimum lease payments as follows: For the fiscal year ending September 30, - ------------------------------------------ (In Thousands) 2001 $ 1,452 2002 2,357 2003 64 ------- Total minimum lease payments 3,873 Amount representing interest (202) ------- Total obligation under capital leases 3,671 Less: Amount due within one year (2,721) ------- Amount due after one year $ 950 ======= On April 18, 2001, the Authority paid $1.4 million to buy out two of its capital lease obligations. Operating lease expenses, excluding costs to obtain assets, were $902,000 and $1.8 million, respectively for the three and six months ended March 31, 2000. No operating leases existed during the six months ended March 31, 2001. 5. Commitments and Contingencies: Project Sunburst The Authority has received authorization from the Tribe to expend up to $960.0 million, excluding capitalized interest, on Project Sunburst. As of March 31, 2001, the Authority has spent $468.0 million, excluding capitalized interest. Project Sunburst expenditures for the remainder of fiscal 2001 are expected to total $296.2 million. The remaining $195.8 million is anticipated to be spent during fiscal 2002. 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. 9 MOHEGAN TRIBAL GAMING AUTHORITY ------------------------------- NOTES TO FINANCIAL STATEMENTS--(Continued) ------------------------------------------ The Slot Win Contribution payments will not be required if the State of Connecticut legalizes any other 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). For the three months ended March 31, 2001 and 2000 the Authority incurred expenses associated with the Slot Win Contribution of $33.8 million and $32.7 million, respectively. The Authority reflected expenses associated with Slot Win Contribution totaling $66.8 million and $63.6 million, respectively for the six months ended March 31, 2001 and 2000. 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 a recurring annual payment of $500,000 to minimize the impact to the Town resulting from decreased tax revenues on reservation land held in trust. Additionally, the Tribe agreed to make a one-time payment of $3.0 million towards infrastructure improvements to the Town's water system. As of March 31, 2001, the Authority has fulfilled this obligation and paid $3.0 million to the Town of Montville for improvements to the municipal water system, which has been included in other assets in the accompanying balance sheets and is being amortized over 40 years. The Tribe has assigned its rights and obligations in this agreement to the Authority. 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 March 31, 2001, Perini has received $11.1 million of the $20.5 million fee which has been included in construction in process in the accompanying balance sheets. The Authority retains a portion of the construction expenditures until the completion of Project Sunburst. As of March 31, 2001, construction retainage totaled $20.8 million, which has been included in accounts payable and accrued expenses in the accompanying balance sheets. 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 judgment 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. 6. 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 March 31, 2001 and 2000, the Authority incurred expenses of $2.7 million and $2.5 million, respectively, and $5.5 million and $4.6 million for the six months ended March 31, 2001 and 2000, respectively, for such services. Distributions to the Tribe for the three months ended March 31, 2001 and 2000 were $10.0 million and $12.0 million, respectively. Distributions to the Tribe for the six months ended March 31, 2001 and 2000 were $20.0 million and $22.2 million, respectively. 10 MOHEGAN TRIBAL GAMING AUTHORITY ------------------------------- NOTES TO FINANCIAL STATEMENTS--(Continued) ------------------------------------------ 7. TCA Agreements: Management Agreement Previously, the Tribe and TCA had 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 had 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 the six months ended March 31, 2000. There were no management fees for the quarters ended March 31, 2001 and 2000 and for the six months ended March 31, 2001 due to the termination of the Management Agreement. (See discussion of Relinquishment Agreement below.) Relinquishment Agreement In February 1998, the Authority and TCA entered into an agreement (the "Relinquishment Agreement") which superseded the Management Agreement effective January 1, 2000 (the "Relinquishment Date"). The Relinquishment Agreement provides that the Authority will make certain payments to TCA out of, and determined as a percentage of, the 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 commenced on April 25, 2000 and continue at the end of each three-month period occurring thereafter until December 31, 2014. Junior Relinquishment Payments commenced 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, room service, food and beverage sales, ticket 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). TCA has notified the Authority that it does not agree with the Authority's treatment of certain promotional transactions that, in TCA's opinion, has resulted in a reduction in revenues subject to the Relinquishment Agreement. The amount in dispute does not have a material effect on the Authority's financial statements as of March 31, 2001. 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 March 31, 2001, approximately $10.2 million was included in the relinquishment liability resulting from relinquishment fees earned from January 1, 2001 through March 31, 2001. At March 31, 2001, the relinquishment liability was reassessed to be $669.8 million from $672.9 million as of September 30, 2000. For the three and six months ended March 31, 2001, the reassessment for the time value of money due to the passage of time was $9.0 million and $17.9 million, respectively. For the three months ended March 31, 2001, the Authority made Senior Relinquishment Payments of $5.1 million and Junior Relinquishment Payments of $10.5 million. For the six months ended March 31, 2001, the Authority made Senior Relinquishment Payments of $10.5 million and Junior Relinquishment Payments of $10.5 million. 11 MOHEGAN TRIBAL GAMING AUTHORITY ------------------------------- NOTES TO FINANCIAL STATEMENTS--(Continued) ------------------------------------------ Development Agreement The Authority has negotiated an agreement with TCA (the "Development Agreement"), pursuant to which TCA has been made 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 $14.0 million for such services based on the incremental completed percentage of Project Sunburst. As of March 31, 2001, TCA had earned $7.1 million of the $14.0 million in development fees. This fee is included in construction in process. 8. Employee Benefits Plans: The Authority maintains 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 matches 100% of eligible employees' contributions up to a maximum of 3% of their individual earnings. The Authority recorded matching contributions of approximately $775,000 and $681,000 respectively, to this plan for the quarters ended March 31, 2001 and 2000. Cumulative contributions have totaled $1.5 million and $1.3 million for the six months ended March 31, 2001 and 2000, respectively The Authority, together with the Tribe, maintains a Non-Qualified Deferred Compensation Plan for certain key employees. This plan allows participants to defer up to 100% of their pre-tax income to the plan. For the quarter ended March 31, 2001, contributions, net of withdrawals, by Authority employees totaled ($68,000). For the six months ended March 31, 2001 and 2000, contributions, net of withdrawals, by Authority employees totaled $231,000 and $192,000. Cumulative contributions by Authority employees to the plan have totaled $1.1 million. 9. Due from the Tribe: At March 31, 2001, amounts due from the Tribe relate to payments made by the Authority on behalf of the Tribe for various operating expenses and the construction of the Tax-Exempt Utilities and the Public Safety Facility that will service the Mohegan Reservation. The Tribe anticipates obtaining tax-exempt financing which will, among other things, be used to repay the Authority. 10. Comprehensive Income: SFAS No. 130 "Reporting Comprehensive Income", requires that the Authority disclose comprehensive income and its components. The objective of SFAS No. 130 is to report a measure of all changes in equity of a company that result from transactions and other economic events of the period other than transactions with stockholders. Comprehensive income is the total of net income and all other non-stockholder changes in equity ("Other Comprehensive Income"). The Authority has reclassified the intrinsic value associated with its derivative instruments in accordance with SFAS No. 133 upon becoming effective during the quarter ended March 31, 2001.
For the For the For the Six For the Six Quarter Quarter Months Ended Months Ended Ended March 31, 2001 Ended March 31, 2000 March 31, 2001 March 31, 2000 -------------------- -------------------- ---------------- ---------------- Net Income $ 41,535 $ 44,543 $ 68,797 $ 59,703 Derivative Instruments adjustment (2,291) - (2,291) - ------------------- -------------------- ---------------- ---------------- Comprehensive Income $ 39,244 $ 44,543 $ 66,506 $ 59,703 =================== ==================== ================ ================
12 11. Subsequent Events: On April 18, 2001, the Authority opened its smoke-free slot area, The Hall of the Lost Tribes. The highly thematic smoke-free gaming venue features 637 slot machines, quick service dining, and a new cocktail bar with video poker. The Hall of the Lost Tribes is anticipated to be completed for $18.0 million, $2.0 million below the original $20.0 million budget. On April 18, 2001, the Authority announced that all employees will be enrolled in a Defined Contribution Retirement Plan ("The Plan") sponsored by the Authority. The Plan will be effective July 2001 and contributions by the Authority will be based on hours worked. Employees become eligible after 90 days of employment and will be fully vested at the completion of seven years. 13 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations Comparison of Operating Results for the Three Months Ended March 31, 2001 and 2000: Net revenues for the three months ended March 31, 2001 were $187.8 million compared to $182.2 million reported for the same period of the prior year. This 3.1% increase is primarily attributable to an increase in gaming revenues. Gaming revenues totaled $180.6 million for the three months ended March 31, 2001 compared to $175.6 million for the three months ended March 31, 2000. The 2.9% increase in gaming revenues is due to a 2.1% growth in slot machine revenues and a 5.8% increase in table game revenues. For the three months ended March 31, 2001, food and beverage revenues were $11.0 million compared to $11.7 million for the three months ended March 31, 2000. The 5.5% decrease in food and beverage revenues is attributable to a 11.8% decrease in food covers for the three months ended March 31, 2001 as compared to the same period in the prior year. Retail and other revenues were $12.0 million and $10.6 million for the three months ended March 31, 2001 and 2000, respectively. This represents growth of $1.4 million, or 13.0%, over the same period in the prior year. Of the $1.4 million increase in retail and other revenues, $313,000 is attributable to increased retail revenues, $586,000 is attributable to the increased sales at the Mohegan Sun gasoline and convenience center and $389,000 is attributable to increased entertainment revenue. Promotional allowances totaled $15.8 million for the three months ended March 31, 2001, representing a $197,000, or 1.3%, increase over the same period in the prior year. The growth is attributable to increased redemption of Mohegan Sun Player's Club points by patrons. Promotional allowances as a percentage of gaming revenues were 8.8% and 8.9% for the three months ended March 31, 2001 and 2000, respectively. Total costs and expenses were $132.5 million for the three months ended March 31, 2001, an increase of $5.5 million or 4.3% over the same period in the prior year. The increase is primarily the result of increases in gaming, retail, general and administrative costs and higher utility costs. Gaming costs and expenses were $77.8 million for the three months ended March 31, 2001, an increase of $3.6 million, or 4.8%, over the same period in the prior year. The slot win contribution totaled $33.8 million and $32.7 million for the three months ended March 31, 2001 and 2000, respectively. The Slot Win Contribution increase of $1.1 million, or 3.4%, over the same period in the prior year is attributable to the $2.7 million, or 2.1%, increase in slot revenues. Also contributing to the increase was an effective slot tax rate of 25.7% for the three months ended March 31, 2001 compared to 25.4% for the same period in the prior year. Food and beverage costs were $5.9 million for the three months ended March 31, 2001, an increase of $86,000, or 1.5%, over the same period in the prior year. The increase is primarily attributable to higher labor and benefit costs. Retail and other costs were $7.6 million for the three months ended March 31, 2001, an increase of $1.1 million, or 16.7%, over the same period in the prior year. The increase is directly attributable to the 13.0% growth in retail and other revenues which is attributable to the shift of complimentary point redemption from food and beverage to retail outlets and the Mohegan Sun gasoline and convenience center. General and administrative costs were $32.4 million for the three months ended March 31, 2001. The increase of $743,000, or 2.4%, over the same period in the prior year is attributable to continued marketing and advertising campaigns, higher utility costs and the addition of the Uncas Pavilion, a temporary entertainment structure used for special events. Management believes marketing programs have driven incremental patronage, expanding our brand awareness and market share. 14 Pre-opening costs totaled $1.9 million for the three months ended March 31, 2001 and are primarily comprised of pre-opening labor and advertising costs associated with the Project Sunburst expansion. Mohegan Sun incurred pre-opening expansion costs of $1.1 million for the three months ended March 31, 2000. For the three months ended March 31, 2001, depreciation and amortization decreased by $817,000, or 10.5%, over the same period in the prior year. The decrease is attributable to decreased depreciation on furniture and equipment, versus the same period in the prior year, and the acceleration of the amortization of capitalized interest in the prior year. Depreciation and amortization for the three months ended March 31, 2001 and 2000 were $6.9 million and $7.8 million, respectively. Income from operations for the three months ended March 31, 2001 totaled $55.3 million, compared to $55.2 million for the same period in the prior year. This represents a $97,000 increase over the same period in the prior year. For the three months ended March 31, 2001, the relinquishment liability reassessment was $9.0 million compared to $5.8 million for the same period in the prior year. This increase of $3.2 million, or 55.4%, is due to the Authority's quarterly reassessment of the liability to reflect the impact of the time value of money due to the passage of time. Interest and other income were $578,000 for the three months ended March 31, 2001, a decrease of $3.7 million, or 86.6%, over the same period in the prior year. The decrease in interest income resulted from the liquidation of investments to fund Project Sunburst. The weighted average invested cash was $20.6 million and $193.7 million for the three months ended March 31, 2001 and 2000, respectively. The Authority invests its excess cash in investment-grade commercial paper having maturities of not more than six months from the date of acquisition. Interest expense of $5.9 million for the three months ended March 31, 2001 represented a decrease of $3.2 million, or 35.5%, over the same period in the prior year. This decrease was mainly attributable to a lower average interest rate and increased capitalization of interest related to Project Sunburst, partially offset by an increase in average debt outstanding. Capitalized interest was $5.9 million for the three months ended March 31, 2001 compared to $1.8 million for the same period in the prior year. The weighted average interest rate for the three months ended March 31, 2001 was 8.2%, compared to 8.4% for the three months ended March 31, 2000. The weighted average outstanding debt was $595.9 million for the three months ended March 31, 2001, compared to $514.3 million for the three months ended March 31, 2000. The change in fair value of derivative instruments of $865,000 was attributable to a decrease in the market value of the derivative instrument held at March 31, 2001 of $1.4 million. This was offset by a reclassification of $2.3 million to accumulated other comprehensive loss relating to the derivative instruments becoming effective during the quarter ended March 31, 2001. The Authority held no derivative instruments during the quarter ended March 31, 2000. Comparison of Operating Results for the Six Months Ended March 31, 2001 and 2000: Net revenues for the six months ended March 31, 2001 were $370.9 million compared to $355.5 million reported for the same period of the prior year. This 4.3% increase is primarily attributable to growth in gaming revenues. Gaming revenues totaled $355.6 million for the six months ended March 31, 2001 compared to $340.5 million for the six months ended March 31, 2000. The increase of 4.4% in gaming revenues is due to a 3.9% growth in slot machine revenues and a 6.6% increase in table game revenues. For the six months ended March 31, 2001, food and beverage revenues were $21.8 million compared to $23.0 million for the six months ended March 31, 2000. The 5.4% decrease in food and beverage revenues is attributable to an 8.0% decrease in food covers for the six months ended March 31, 2001 as compared to the same period in the prior year. 15 Retail and other revenues were $28.6 million and $26.0 million for the six months ended March 31, 2001 and 2000, respectively. This represents growth of $2.6 million or 9.8%, over the same period in the prior year. Of the $2.6 million increase in retail and other revenues, $1.6 million is attributable to increased retail revenues and $1.5 million is attributable to the increased sales at the Mohegan Sun gasoline and convenience center. The increase is offset by a decrease in entertainment and other revenue of $550,000. Promotional allowances totaled $35.0 million for the six months ended March 31, 2001, representing a $1.0 million, or 2.9%, increase over the same period in the prior year. The growth is primarily attributable to increased redemption of Mohegan Sun Player's Club points by patrons. Promotional allowances as a percentage of gaming revenues were 9.9% and 10.0% for the six months ended March 31, 2001 and 2000, respectively. Total costs and expenses were $272.3 million for the six months ended March 31, 2001, an increase of $3.9 million or 1.5% over the same period in the prior year. The increase is a result of increases in gaming, retail, general and administrative costs and higher utility costs, partially offset by a reduction in management fees due to the termination of the Management Agreement. Gaming costs and expenses were $156.2 million for the six months ended March 31, 2001, an increase of $8.7 million, or 5.9%, over the same period in the prior year. The Slot Win Contribution totaled $66.8 million and $63.6 million for the six months ended March 31, 2001 and 2000, respectively. The Slot Win Contribution increase of $3.2 million, or 5.1%, over the same period in the prior year is attributable to the $9.8 million, or 3.9%, increase in slot revenues. Also contributing to the increase was an effective slot tax rate of 25.7% for the six months ended March 31, 2001 compared to 25.4% for the same period in the prior year. Food and beverage costs were $12.0 million for the six months ended March 31, 2001, an increase of $156,000, or 1.3%, over the same period in the prior year. The increase is primarily attributable to higher labor and benefit costs. Retail and other costs were $15.5 million for the six months ended March 31, 2001, an increase of $3.3 million, or 27.6%, over the same period in the prior year. The increase is attributable to the 9.8% growth in retail and other revenues which is attributable to the shift of complimentary point redemption from food and beverage to retail outlets and the Mohegan Sun gasoline and convenience center. General and administrative costs were $71.8 million for the six months ended March 31, 2001. The increase of $5.8 million, or 8.7%, over the same period in the prior year is attributable to continued marketing and advertising campaigns, combined with higher utility costs. Management believes marketing programs have driven incremental patronage, expanding our brand awareness and market share. Pre-opening costs totaled $3.3 million for the six months ended March 31, 2001 and are primarily comprised of pre-opening labor and advertising costs associated with the Project Sunburst expansion. Mohegan Sun incurred pre-opening expansion costs of $2.0 million for the six months ended March 31, 2000. For the six months ended March 31, 2001, depreciation and amortization decreased by $1.8 million, or 11.5%, over the same period in the prior year. The decrease is attributable to decreased depreciation on furniture and equipment versus the same period in the prior year, and the acceleration of the trademark and capitalized interest amortization in the prior year. Depreciation and amortization for the six months ended March 31, 2001 and 2000 were $13.5 million and $15.3 million, respectively. Income from operations for the six months ended March 31, 2001 totaled $98.6 million, compared to $87.2 million for the same period in the prior year. This represents a $11.4 million or 13.1% increase over the same period in the prior year. For the six months ended March 31, 2001, the relinquishment liability reassessment was $17.9 million compared to $11.5 million for the same period in the prior year. This increase of $6.4 million, or 55.4%, is due to the Authority's quarterly reassessment of the liability to reflect the impact of the time value of money due to the passage of time. 16 Interest and other income were $1.7 million for the six months ended March 31, 2001, a decrease of $5.8 million, or 76.9%, over the same period in the prior year. The decrease in interest income resulted from the liquidation of investments to fund Project Sunburst. The weighted average invested cash was $21.3 million and $110.0 million for the six months ended March 31, 2001 and 2000, respectively. The Authority invests in investment-grade commercial paper having maturities of not more than six months from the date of acquisition. Interest expense of $11.8 million for the six months ended March 31, 2001 represented a decrease of $11.3 million, or 49.0%, over the same period in the prior year. This decrease was mainly attributable to a lower average interest rate and increased capitalization of interest related to Project Sunburst, partially offset by an increase in average debt outstanding. Capitalized interest was $10.7 million for the six months ended March 31, 2001 compared to $2.9 million for the same period in the prior year. The weighted average interest rate for the six months ended March 31, 2001 was 8.3%, compared to 8.4% for the six months ended March 31, 2000. The weighted average outstanding debt was $550.1 million for the six months ended March 31, 2001, compared to $515.8 million for the six months ended March 31, 2000. The change in fair value of derivative instruments of $1.3 million was attributable to the decrease in the market value of derivative instruments held at March 31, 2001. The Authority held no derivative instruments during the six months ended March 31, 2000. Liquidity, Capital Resources and Capital Spending As of March 31, 2001 and September 30, 2000, the Authority held cash and cash equivalents of $62.5 million and $115.7 million, respectively. Cash provided by operating activities was $100.6 million for the six months ended March 31, 2001 compared to cash provided by operating activities of $85.4 million for the same period in the prior year. During fiscal 2001, the Authority has drawn $128.0 million from the Bank Credit Facility. During fiscal 2000, the Authority tendered $90.0 million of Subordinated Notes using the defeasance trust asset established in fiscal 1999, for the sum of $140.3 million including all accrued and deferred interest on December 30, 1999. On March 3, 1999, the Authority entered into a syndicated $425.0 million Bank Credit Facility maturing in March 2004. In November 2000, the Authority exercised its right to arrange for increases in the Bank Credit Facility to an aggregate amount of $500.0 million. At the Authority's option, interest will accrue on the basis of a 1-month, 3-month or 6-month London Inter-bank Offer Rate ("LIBOR") based formula plus applicable spreads. Interest on each LIBOR loan, which is for a term of three months or less, shall be due and payable on the last day of the related interest period. Interest on each LIBOR loan which is for a term of more than three months is due and payable on the date which is three months after the date such LIBOR loan was made and every three months thereafter on the last day of the interest period. The Bank Credit Facility will automatically reduce by 10% of the commitment as of the earlier of March 31, 2002 or the last full day of the first full quarter following the completion date of Project Sunburst. As of March 31, 2001, there was $128.0 million outstanding on the Bank Credit Facility. The Authority draws on the Bank Credit Facility primarily in connection with Project Sunburst. Subsequent to March 31, 2001 the Authority borrowed an additional $52.0 million under the Bank Credit Facility to fund Project Sunburst costs. The Authority anticipates Bank Credit Facility draws to total $240.0 million for fiscal 2001. The Authority has entered into certain hedging transactions effective October 1, 2000 and January 2, 2001, to mitigate against the exposure to interest rate fluctuations on the Bank Credit Facility. 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 $40.0 million, fully-funded construction reserve account that, in certain circumstances, may be used to pay costs in excess of the Project Sunburst budget. 17 In November 2000, the Tribe approved a formal resolution increasing the expansion budget from $800.0 million to $960.0 million (excluding capitalized interest, which will be paid from internally generated funds). The Authority, in conjunction with the Tribe, has increased the Project Sunburst budget to $960.0 million for three reasons: (1) expected increases in Project Sunburst labor costs because of the extremely competitive nature of the Northeast construction labor market; (2) enhancements to project scope such as an increase in the number of slot machines scheduled to be placed on the gaming floor; and (3) quality improvements to the hotel and public areas. As a result of the increase to the Project Sunburst budget, the Authority anticipates seeking to issue an additional $150.0 million of subordinated notes or a term loan. The remainder of the increase will be funded through internally generated funds. The Authority's capital spending has increased significantly with the commencement of the Project Sunburst expansion. Capital expenditures totaled $235.8 million for the six months ended March 31, 2001 versus $104.9 million for the same period in the prior year. Project Sunburst construction costs of $203.2 million, excluding $10.7 million of capitalized interest, were expended during the six months ended March 31, 2001. The Casino of the Sky, Mohegan Sun Arena and the Shops at Mohegan Sun are expected to open in October 2001. The 1,200- room hotel and the convention space are expected to open in April 2002. Property maintenance capital expenditures for furniture, fixtures and equipment totaled $11.7 million and $7.7 million for the six months ended March 31, 2001 and 2000, respectively. Expenditures for the Eagleview employee parking center ("Employee Parking Center") totaled $24.9 million of which $1.2 million was spent during the six months ended March 31, 2001. Expenditures on the property's utility enhancements have totaled $20.9 million, of which $3.9 million was spent during the six months ended March 31, 2001. Expenditures for the new 637-unit smoke- free slot area, The Hall of the Lost Tribes, have totaled $5.1 million through March 31, 2001. Cumulative Project Sunburst construction costs totaled $468.0 million, excluding capitalized interest, through March 31, 2001. For the remainder of fiscal 2001, based on TCA estimates, the Authority anticipates Project Sunburst spending to be $296.2 million, excluding capitalized interest. For fiscal 2001, the Authority expects capital expenditures to total approximately $25.0 million on facility improvements and maintenance capital expenditures, $499.4 million, excluding capitalized interest, on Project Sunburst construction, $1.0 million on an employee day care center and $8.0 million on an additional patron garage. The Authority anticipates spending $18.0 million on The Hall of the Lost Tribes, $2.0 million below the $20.0 million budget. The Authority commenced construction of an electrical and water system infrastructure ("Infrastructure Improvements"), estimated to cost $35.0 million, that will service Mohegan Sun and other facilities. The upgrades provide the most efficient manner of handling the increased utility demands of the expanded facility that are attributable to the Project Sunburst expansion. The construction was funded by the Authority, and is expected to be complete concurrent with the opening of Project Sunburst. As of March 31, 2001, approximately $20.9 million has been incurred. Anticipated Infrastructure Improvements spending for the final six months of fiscal 2001 is $14.1 million. The Authority, in conjunction with the Project Sunburst expansion, commenced construction on the Employee Parking Center in March 1999. The Employee Parking Center includes 2,700 parking spaces and amenities such as a dry cleaning service, on-site banking, an employee computer/training center and a 15,000 square foot exercise facility. The Employee Parking Center opened in June 2000. The total cost of the Employee Parking Center was $24.9 million. The Employee Parking Center was completed in January 2001. The Tribe commenced construction of a Public Safety Facility, within the Eagleview complex, that will service the Mohegan Reservation. Construction was initially funded by the Authority and subsequently reimbursed by the Tribe. The total cost of the Public Safety Facility is $6.8 million. The Authority has also initially funded other Tribal projects, including the construction of a temporary Tribal office, construction of roads and improvements made to the Town of Montville's wastewater collection and treatment facilities. The total amount incurred by the Authority for these projects, including the Public Safety spaces referred to above, is $32.1 million. To date $16.3 million has been reimbursed by the Tribe, and $15.8 million is reflected in amounts due from Tribe in the Authority's balance sheet as of March 31, 2001. 18 During fiscal year 1998, the Authority finalized contract negotiations with TCA for Project Sunburst ("Development Agreement"). 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 $14.0 million for such services. As of March 31, 2001, TCA has earned $7.1 million of the development fee of which $5.5 million has been paid. 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 beginning January 1, 2000 and ending December 31, 2014. The present value of this liability is estimated to be $669.8 million as of March 31, 2001. In October 2000, the Authority paid $5.5 million in Senior Relinquishment Payments. On January 25, 2001, the Authority paid $5.1 million in Senior Relinquishment payments and $10.5 million in Junior Relinquishment Payments. On April 25, 2001, the Authority paid $5.1 million in Senior Relinquishment Payments. During the six months ended March 31, 2001 and 2000, the Authority distributed $20.0 million and $22.2 million, respectively, to the Tribe. 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 Project Sunburst for at least the next 12 months. Disclosure Regarding 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, 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). 19 Item 3 -- Quantitative and Qualitative Disclosure of Market Risk The Authority is exposed to inherent market risk on the following: 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 spreads. As of March 31, 2001, the Authority has drawn $128.0 million on the Bank Credit Facility. On April 26, 2001, the Authority drew an additional $52.0 million on the Bank Credit Facility in connection with Project Sunburst. The Authority uses derivative instruments, including interest rate caps, collars and swaps in its strategy to manage interest rate risk associated with the variable interest rate on the Bank Credit Facility. The Authority's objective in managing interest rate risk is to ensure the Authority has appropriate income and sufficient liquidity to meet the Tribe and debt-holder obligations. The Authority does not believe that there is any material risk exposure with respect to derivative or other financial instruments. The Authority continually monitors these exposures and makes the appropriate adjustments to manage these risks within management's established limits. The Authority analyzes interest rate risk using various models that forecast cash flows of the liabilities and their supporting assets, including derivative instruments. The Authority is considered an "end user" of derivative instruments and engages in derivative transactions for risk management purposes only. On October 1, 2000 the Authority adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," designated all derivative instruments as cash flow hedging instruments and marked them to market. The Authority excludes the change in time value when assessing the effectiveness of the hedging relationships. All derivatives are evaluated quarterly and were deemed to be effective at March 31, 2001. Derivative instruments held by the Authority at March 31, 2001 are as follows:
- ----------------------------------------------------------------------------------------------------- Effective Maturity Notional Cost Market Date Date - ----------------------------------------------------------------------------------------------------- Interest Rate Cap Strike Rate - 8% October 1, October $22,314,600 $410,000 $ 2,000 2000 1, 2003 - ----------------------------------------------------------------------------------------------------- Interest Rate Collar Ceiling Strike Rate - 8% Floor Strike Rate - 6% January 2, March 1, 1,353,800 295,000 (1,665,267) 2001 2004 - ----------------------------------------------------------------------------------------------------- Interest Rate Swap Pay fixed - 6.35% Receive Variable January 2, March 1, 676,900 221,000 (980,111) 2001 2004 - ----------------------------------------------------------------------------------------------------- Total $24,345,300 $926,000 ($2,643,378) - -----------------------------------------------------------------------------------------------------
All derivative instruments are based upon one-month LIBOR, which was 5.08% on March 31, 2001. 20 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 21 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 ------------------------------- Date: May 11, 2001 By: /s/ Mark F. Brown ------------------------------- Mark F. Brown Chairman, Management Board Date: May 11, 2001 By: /s/ William J. Velardo ------------ ----------------------------------- William J. Velardo President and General Manager Date: May 11, 2001 By: /s/ Jeffrey E. Hartmann ------------ ----------------------------------- Jeffrey E. Hartmann, Executive Vice President Finance/ Chief Financial Officer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----