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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1999
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 06382
(Address of principal executive (Zip Code)
offices)
(860) 204-8000
Registrant's telephone number, including area code
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:
Title of Class
NONE
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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MOHEGAN TRIBAL GAMING AUTHORITY
INDEX TO FORM 10-K
Page
----
PART I
ITEM 1.--Business......................................................... 1
ITEM 2.--Properties....................................................... 11
ITEM 3.--Legal Proceedings................................................ 11
ITEM 4.--Submission of Matters to a Vote of Security Holders.............. 11
PART II
ITEM 5.--Market for Registrant's Common Equity and Related Stockholders
Matters.................................................................. 12
ITEM 6.--Selected Financial Data.......................................... 12
ITEM 7.--Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 12
ITEM 7a.--Quantitative and Qualitative Disclosure of Market Risk.......... 20
ITEM 8.--Financial Statements and Supplementary Data...................... 20
ITEM 9.--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 20
PART III
ITEM 10.--Executive Officers of the Registrant............................ 21
ITEM 11.--Executive Compensation.......................................... 23
ITEM 12.--Security Ownership of Certain Beneficial Owners and Management.. 23
ITEM 13.--Certain Relationships and Related Transactions.................. 23
PART IV
ITEM 14.--Exhibits, Financial Statements, Schedules, and Reports on Form
8-K...................................................................... 25
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PART I
Item 1. Business
A. General
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 is a federally recognized Indian tribe with a 390-
acre reservation located in southeastern Connecticut.
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 compact with the affected state. The Tribe and the State
of Connecticut have entered into such a compact (the "Mohegan Compact") that
has been approved by the U.S. Secretary of the Interior. On October 12, 1996,
the Authority opened a casino known as Mohegan Sun Casino ("Mohegan Sun"). The
Authority is currently engaged in a major expansion of Mohegan Sun ("Project
Sunburst"), including the addition of a hotel, increased gaming and retail
space, a convention center and an entertainment arena.
The Authority is governed by a Management Board, which consists of the nine
members of the Tribal Council. The Management Board engaged Trading Cove
Associates ("TCA"), a Connecticut general partnership, to operate, manage and
market Mohegan Sun under a seven-year contract ("Management Agreement"). TCA
is 50% owned by Sun Cove Limited, an affiliate of Sun International Hotels
Limited ("Sun International"), and 50% by Waterford Gaming, L.L.C. In February
1998, the Authority and TCA entered into a new agreement ("Relinquishment
Agreement") which will supercede the Management Agreement effective January 1,
2000. As a result of the Relinquishment Agreement, the Authority will assume
full management of Mohegan Sun and has agreed to pay TCA 5% of gross revenues
(as defined in the agreement) generated from Mohegan Sun and from the planned
expansion, beginning January 1, 2000 and ending December 31, 2014. See "--
Relinquishment Agreement with TCA" and Note 13 to the Authority's Financial
Statements.
B. Description of Business
Mohegan Sun is a full-service gaming and entertainment complex on a 240-acre
site overlooking the Thames River on the Tribe's reservation in southeastern
Connecticut. The Authority has entered into a land lease with the Tribe
whereby the Tribe leases to the Authority the site on which Mohegan Sun is
located. Mohegan Sun opened in October 1996 at a total cost of approximately
$303 million. Mohegan Sun is one of two legally authorized gaming operations
in the Northeastern United States outside of Atlantic City, New Jersey
offering both traditional slot machines and table games.
Mohegan Sun is an approximately 634,500 square foot facility which conveys a
historical northeastern Indian theme through architectural features and the
use of natural design elements such as timber, stone and water. It is
comprised of four quadrants, each of which has its own unique entrance and
reflects a separate seasonal theme--winter, spring, summer and fall--
emphasizing the importance of the seasonal changes to Mohegan Tribal life.
Mohegan Sun has approximately 176,500 square feet of gaming space, 3,026
slot machines, 150 table games (including blackjack, roulette, craps,
baccarat, caribbean stud poker and let it ride), 42 poker tables, a high
stakes bingo hall and a 9,000 square foot simulcast race book facility. Food
and beverage amenities include a 680-seat buffet, three full-service themed
gourmet restaurants, a 24-hour coffee shop, a New York style delicatessen, a
nine station food court featuring international and domestic cuisine, and
multiple full and floor service bars for a total of 1,888 restaurant seats.
The 350-seat, 10,000 square foot Wolf Den Lounge located in the center of the
casino hosts musical entertainment seven days a week. Larger events are
currently held in the bingo hall or in temporary facilities constructed on the
grounds of the casino, including entertainment and casino marketing
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activities. Six retail shops covering 2,276 square feet of space provide
shopping opportunities ranging from Mohegan Sun souvenirs to clothing and
cigars. For non-gaming entertainment, Mohegan Sun also offers an arcade-style
recreation area and a child care facility operated by New Horizons Kids Quest,
Inc. The Authority opened a 4,000 square foot, 16-pump gasoline service
station and convenience store in December 1998.
The Authority believes ease of access is one of the important factors that
differentiate Mohegan Sun from the competition. Mohegan Sun is located
approximately one mile from the interchange of Interstate 395 and Connecticut
Route 2A in Uncasville, Connecticut. The Authority constructed a four-lane
access road and entrance/exit ramps off of Route 2A, giving guests direct
access to Interstate 395 and Interstate 95, the main highways connecting
Boston, Providence and New York. Mohegan Sun has parking spaces for 7,500
guests and 2,700 employees.
During 1999, the Authority raised $200 million in Senior Notes ("Senior
Notes") and $300 million in Senior Subordinated Notes ("Senior Subordinated
Notes"). The proceeds from this financing were used to extinguish or defease
existing debt, pay transaction costs and fund initial costs related to the
$800 million Project Sunburst expansion. Project Sunburst will also be funded
by cash from operations and by a syndicated $425 million reducing, revolving,
secured credit facility ("Bank Credit Facility"), which the Authority entered
into on March 3, 1999. The Authority has the right within two years subsequent
to the closing of the Bank Credit Facility to arrange for increases to an
aggregate amount of $500 million. As of November 15, 1999 the Authority
exercised its right and increased the Bank Credit Facility to $459.5 million.
Project Sunburst will include approximately 100,000 square feet of
additional gaming space, a luxury hotel with approximately 1,200 rooms,
approximately 100,000 square feet of convention space, an entertainment
complex with seating for up to 10,000, approximately 6,000 additional guest
parking spaces, specialty retail shops and uniquely themed restaurants. The
cost of developing, constructing, equipping and opening the expansion is
expected to total approximately $800 million (excluding capitalized interest).
The Tribe has issued a formal resolution capping the scope of the expansion
budget at $800 million (excluding capitalized interest). 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 following is a summary of certain physical attributes of Mohegan Sun
before and after expansion:
Casino Retail Convention Guest
Space Slot Table Poker Restaurant Hotel Space Event Space Parking
(sq. ft.) Machines Games Tables Seats Rooms (sq. ft.) Seating (sq. ft.) Spaces
--------- -------- ----- ------ ---------- ----- --------- ------- ---------- -------
Resort before expansion
(September 30, 1999)... 176,500 3,026 150 42 1,888 0 2,276 1,800 0 7,500
Resort after expansion
(approx.).............. 276,500 5,026 225 42 2,976 1,200 300,000 10,000 100,000 13,500
The Authority believes that the market favors expansion now for three
reasons: (1) unsatisfied current demand for current gaming space at the
existing facility; (2) a growing gaming market in the Northeast region; and
(3) length of stay data indicating the need for a hotel and other amenities.
Project Sunburst is intended to attract a greater number of guests to the
facility, particularly during mid-week periods, and to increase the amount of
time and money guests spend at Mohegan Sun.
The Authority has established the Mohegan Tribal Gaming Commission (the
"Commission"), which is responsible for the regulation of gaming activities of
Mohegan Sun. The Commission ensures the integrity of the
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gaming operation through the promulgation and enforcement of appropriate
regulations. The Commission staff is also responsible for performing
background investigations on gaming license applicants and for issuance and
revocation of such gaming licenses.
Seasonality
The gaming industry in Connecticut is seasonal, with the heaviest gaming
activity at Mohegan Sun occurring during the period from July through October.
Competition from Other Gaming Operations
The gaming industry is highly competitive. Mohegan Sun currently competes
primarily with Foxwoods Resort Casino ("Foxwoods") and, to a lesser extent,
with casinos in Atlantic City, New Jersey. Foxwoods is approximately 10 miles
from Mohegan Sun and is the largest gaming facility in the United States in
terms of total gaming positions. It is owned and operated by the Mashantucket
Pequot Tribe ("Pequot Tribe") under a separate compact with the State of
Connecticut. Foxwoods has been in operation for nearly eight years and may
have greater financial resources than the Authority or the Tribe.
Mohegan Sun's current market area is predominantly for day-trip customers.
Upon the completion of Project Sunburst, however, the Authority intends to
broaden its market beyond day-trip customers to include patrons making
overnight or extended stays at Mohegan Sun. The Authority will begin to
compete for customers more directly with casinos in Atlantic City, New Jersey.
Many of these casinos and other gaming resorts may have greater resources and
greater name recognition than the Authority.
Currently, outside of Atlantic City, New Jersey, casino gaming in the
northeastern United States may be conducted only by federally recognized
Indian tribes operating under the federal Indian gaming law. Currently, the
Oneida Indian Nation operates Turning Stone Casino Resort in Verona, New York,
approximately 270 miles from Mohegan Sun. The St. Regis Mohawks opened a
casino located in Hogansburg, New York on the Canadian border in April 1999.
In addition, at least two other federally recognized tribes in New England are
each seeking to establish gaming operations. Several other tribes in New
England are seeking federal recognition in order to establish gaming
operations. A number of states, including Connecticut, have also investigated
legalizing casino gaming by non-Indians in one or more locations. The
Authority cannot predict whether any of these other tribes or other efforts to
legalize casino gaming will be successful in establishing gaming operations,
and if established, whether such gaming operations will have a material
adverse effect on the operations by the Authority.
The following is an assessment of the competitive prospects in Connecticut,
each of the Authority's neighboring states and certain other states in the
Northeast.
Connecticut
Currently, only the Tribe and the Pequot Tribe are authorized to conduct
gaming in Connecticut. As required by their state compacts, the Tribe and the
Pequot Tribe make monthly payments to the State of Connecticut based on 25% of
annual gross slot revenues. Together, these payments totaled over $297.0
million for the 12 months ended September 30, 1999. The Authority contributed
$121.1 million during that period. These payments are linked to an exclusivity
clause and will terminate if the State legalizes other gaming operations,
(except those consented to by the Tribe and/or the Pequot Tribe) with slot
machines or other commercial casino table games. There are currently at least
four tribes in Connecticut that are attempting to gain federal recognition, a
lengthy process managed by the Bureau of Indian Affairs ("BIA"). Two of these
are the Eastern Pequot and the Paucatuck Eastern Pequot Tribe, both of which
share a reservation located next to that of the Pequot Tribe. The federal
recognition process for these tribes is proceeding, but it is not clear if or
when recognition will be achieved. Even upon gaining recognition, a tribe must
have land taken into trust by the federal government, negotiate a compact with
the State, and construct a facility before gaming operations may commence.
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Rhode Island
There is no commercial casino gaming in Rhode Island although the state's
two pari-mutuel facilities, Lincoln Greyhound Park and Newport Grand Jai Alai,
offer approximately 1,900 video slot machines and have petitions pending
before the Rhode Island Lottery Commission for additional machines. In
November 1994, Rhode Island voters defeated numerous local and state-wide
gaming referenda and passed a referendum, which requires that any new gaming
proposals will have to be approved in a state-wide referendum. The
Narragansett Tribe, with a reservation in Charlestown, is the only federally
recognized Indian tribe in Rhode Island. However, under specific federal
legislation, the Narragansett Tribe is legally barred from opening a gaming
facility. Thus, the Narragansett Tribe could open a facility only if it were
successful in winning both local and state-wide votes. There are two pending
federal recognition petitions from other Rhode Island tribes, filed by the
Pokanoket Tribe and the Seaconke Wampanoag Tribe. It is not clear if or when
federal recognition for these tribes will be achieved.
Massachusetts
Leisure Casino Cruises, located in Gloucester, Massachusetts, currently
operates a casino cruise ship with gaming amenities including 14 table games
and 180 slot machines. The casino cruise also offers a buffet style dinner and
live entertainment. These "cruises to nowhere," during which gaming activities
are conducted on board once the boat is in international waters, are permitted
under federal law unless prohibited by the state from which they operate.
Massachusetts to date has not prohibited such operations. The Wampanoag Tribe,
located on the island of Martha's Vineyard, is currently the only federally
recognized Indian tribe in the state. This tribe has determined that a casino
on the island would not be economically feasible, and the state legislature
has rejected proposals to locate an Indian casino off tribal lands. The tribe
has announced plans to open a high-stakes bingo facility in Fall River, for
which no state compact would be required, but significant hurdles, including
local government approval still remain. In addition, a number of other
petitions for federal recognition are pending in Massachusetts, but the
Authority believes potential recognition is several years away.
New York
There currently are no non-Indian casinos operating in New York, and the
establishment of commercial casino operations would require the approval of
two successive state legislatures, followed by the voters in a state-wide
referendum. However, gambling boats began operating out of the New York City
area in January 1998. New York to date has not prohibited gambling boat
operations. Only a small number of operators have applied for licenses for
off-shore gambling cruises, and currently there are no operations in existence
at this time. Due to the difference in the gaming experience, the Authority
does not believe the "cruises to nowhere" are potentially significant
competition to Mohegan Sun. New York has seven federally recognized tribes
with reservations in the northern part of the state. Two tribes, the Oneida
Tribe and the St. Regis Mohawk Tribe, have executed compacts with the State.
These compacts allow casino table games, but no conventional slot machines.
The Oneida Tribe opened the Turning Stone Casino in July 1993 on its
reservation in Verona, near Syracuse. The facility has 3,500 video lottery
machines (which operate on a pari-mutuel system as opposed to the traditional
fixed odds reel-type machines operated by most casinos), 150 table games and
285 hotel rooms. Turning Stone currently draws primarily from the Syracuse,
New York market and does not compete directly with Mohegan Sun for customers.
The St. Regis Mohawk Tribe, which has a reservation in Hogansburg on the
Canadian border, opened a gaming facility in April 1999 housing 78 table games
and 400 video lottery machines. The St. Regis Mohawk Tribe and officials from
Sullivan County have also signed an agreement that contemplates the
establishment of a tribal operated casino at the Monticello Raceway in the
Catskills (located approximately 170 miles from Mohegan Sun), but the Governor
of New York has not indicated that he would support this proposal. In
addition, the Seneca Nation of Indians have bingo operations on two of their
three reservations in western New York. These bingo halls are located in
Vandalia, New York and Gowanda, New York, both over 400 miles from Mohegan
Sun. The Seneca Indians have not entered into a compact with the state of New
York, which would allow this tribe to expand their gaming operations to
include casino games.
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Maine
There are no commercial casinos allowed in Maine and there are no
significant initiatives currently underway to legalize such casinos. There are
four federally recognized tribes in Maine, one of which (the Penobscot Tribe)
opened a high stakes bingo facility in the township of Albany in western
Maine. None of the federally recognized tribes have negotiated a tribal-state
compact or otherwise significantly begun the process of developing casino
operations.
New Hampshire
There are no casinos allowed in New Hampshire and no significant initiatives
currently underway to facilitate legalization. A bill to allow the state's
racetracks to offer slot machines was defeated in a House committee in May
1997, the fourth consecutive time that New Hampshire legislators voted against
gaming expansion. There are no federally recognized Indian tribes in the state
and no petitions for recognition pending.
Vermont
There are no casinos allowed in Vermont and no significant initiatives
currently underway to allow legislation. There are no federally recognized
tribes in the state, but there is a petition pending from the St.
Francis/Sokoki Band of Abenakis, in Swanton. The Authority believes any
approval is still several years away.
Employees and Labor Relations
As of September 30, 1999, Mohegan Sun employed approximately 5,051 full time
employees, and 652 seasonal and part-time employees. When recruiting
personnel, Mohegan Sun is obligated to give preference first to qualified
members of the Tribe (and qualified spouses and children of members of the
Tribe) and second to members of other federally recognized Indian tribes. None
of Mohegan Sun's employees are covered by collective bargaining agreements.
Material Agreements
Gaming Compact with the State of Connecticut
The Tribe and the State of Connecticut, in April 1994, entered into a gaming
compact to authorize and regulate the Tribe's conduct of gaming on the Tribe's
lands. This agreement, the Mohegan Compact, is substantively similar to the
agreement governing gaming operations of the Pequot Tribe in Connecticut and
provides, among other things, as follows:
(1) The Tribe is authorized to conduct certain Class III gaming
activities on its reservation. The forms of Class III gaming authorized
under the Mohegan Compact include (i) certain games of chance, (ii) video
facsimiles of such authorized games of chance (i.e., slot machines), (iii)
off-track pari-mutuel betting on animal races, (iv) pari-mutuel betting,
through simulcasting, on animal races and (v) certain types of pari-mutuel
betting on games and races conducted at the gaming facility (some types of
which currently are, together with off-track pari-mutuel telephone betting
on animal races, under a moratorium).
(2) The Tribe must establish standards of operations and management of
all gaming operations in order to protect the public interest, ensure the
fair and honest operation of gaming activities and maintain the integrity
of all Class III gaming activities. The first of such standards were set
forth in the Mohegan Compact and approved by the State gaming agency. State
gaming agency approval is required for any revision to such standards. The
Tribe must supervise the implementation of these standards by regulation
through a Tribal gaming agency. Additionally, effective February 4, 1999,
the National Indian Gaming Commission established Minimum Internal Control
Standards ("MICS") that require each tribe or its designated tribal
government body or agency, by federal regulation, to establish and
implement tribal MICS. Mohegan Sun is required to be in compliance with the
MICS by February 4, 2000.
5
(3) Law enforcement matters relating to Class III gaming activities are
under the jurisdiction of the State of Connecticut and the Tribe.
(4) All gaming employees must obtain and maintain a gaming license issued
by the State gaming agency.
(5) Any enterprise providing gaming services or gaming equipment to the
Tribe is required to hold a current valid registration issued by the
Connecticut Division of Special Revenue.
(6) The State of Connecticut will annually assess the Tribe for the costs
attributable to its regulation of the Tribe's gaming operations and for the
provision of law enforcement at the Tribe's gaming facility.
(7) Net revenues from the Tribe's gaming operations may be applied only
for the certain purposes related to Tribal operations and welfare,
charitable contributions and payments to local governmental agencies.
(8) Tribal ordinances and regulations governing health and safety
standards at the gaming facilities may be no less rigorous than the
applicable laws and regulations of the State.
(9) Service of alcoholic beverages within any gaming facility will be
subject to regulation by the State of Connecticut.
(10) The Tribe waives any defense, which it may have by virtue of
sovereign immunity in respect to any action in United States District Court
to enforce the Mohegan Compact.
The Tribe and the State of Connecticut entered into a Memorandum of
Understanding ("MOU") setting forth certain matters regarding the
implementation of the Mohegan Compact. The Mohegan Compact stipulates that a
portion of the revenues earned on slot machines must be paid to the State of
Connecticut ("Slot Win Contribution"). The Slot Win Contribution shall be the
lesser of (a) 30% of gross revenues from slot machines, or (b) the greater of
(i) 25% of gross revenues from slot machines or (ii) $80 million. The Slot Win
Contribution payments will not be required if the State of Connecticut
legalizes any other gaming operations with slot machines or other commercial
casino games within the state of Connecticut except those consented to by the
Tribe and the Pequot Tribe. The Authority's financial statements reflect
expenses associated with the Slot Win Contribution totaling $121.1 million,
$102.3 million and $80.7 million for the fiscal years ended September 30, 1999
and 1998, and for the period October 12, 1996 (date of commencement of
operations) through September 30, 1997, respectively.
Agreement with the Town of Montville
In June 1994, the Tribe and the neighboring town of Montville entered into
an agreement whereby the Tribe makes annual payments of $500,000 to the town
to minimize the impact to Montville resulting from the decreased tax revenues
on the land taken into trust for the Tribe's reservation. The Tribe also
agreed to pay Montville $3.0 million for infrastructure improvements to the
town's water system and to pay for its use of the town's disposal and
wastewater collection and treatment systems. Finally, the Tribe agreed to make
payments in lieu of taxes to Montville on lands that the Tribe acquires
outside of its current reservation. The Tribe has assigned its rights and
obligations under this agreement to the Authority. As of September 30, 1999,
the Town of Montville had billed and received payment for approximately $2.1
million of the $3.0 million obligation. The incurred cost has been included in
other assets in the accompanying balance sheet, and will be amortized over 40
years, once payments are complete.
Land Lease from the Tribe to the Authority
The land in Uncasville, Connecticut upon which Mohegan Sun is situated and
upon which Project Sunburst will be constructed is held in trust for the Tribe
by the United States of America. The Tribe and the Authority
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have entered into a land lease under which the Tribe is leasing to the
Authority the property and all buildings, improvements and related facilities
constructed or installed on the property. The lease was approved by the
Secretary of the Interior. Summarized below are certain key provisions of this
lease.
Term
The term of the lease is 25 years with an option, exercisable by the
Authority, to extend the term for one additional 25-year period. Upon the
termination of the lease, the Authority will be required to surrender to the
Tribe possession of the property and improvements, excluding any equipment,
furniture, trade fixtures or other personal leased property.
Rent; Expenses
The Authority is required to pay to the Tribe annual rent in the amount of
$1.00. For any period when the Tribe or another agency or instrumentality of
the Tribe is not the tenant under the lease, the rent will be 8% of the
tenant's gross revenues from the premises. The Authority is responsible for
the payment of all costs of owning, operating, constructing, maintaining,
repairing, replacing and insuring the leased property.
Use of Leased Property
The Authority may use the leased property and improvements solely for the
construction and operation of Mohegan Sun and Project Sunburst, unless prior
approval is obtained from the Tribe for any proposed alternative use.
Similarly, no construction or alteration of any building or improvement
located on the leased property by the Authority may be made unless complete
and final plans and specifications have been approved by the Tribe. Following
foreclosure of any mortgage on the Authority's interest under the lease or any
transfer of such interest to the holder of such mortgage in lieu of
foreclosure, the leased property and improvements may be used for any lawful
purpose, subject only to applicable codes and governmental regulations;
provided, however, that a non-Indian holder of the leased property may in no
event conduct gaming operations thereon.
Permitted Mortgages and Rights of Permitted Mortgages
The Authority may not mortgage, pledge or otherwise encumber its leasehold
estate in the leased property except to a holder of a permitted mortgage.
Under the lease, a "permitted mortgage" includes the leasehold mortgage
securing the Authority's obligations under the Bank Credit Facility granted by
the Authority that provides, among other things, that (1) the Tribe shall have
the right to notice of, and to cure, any default of the Authority thereunder,
(2) the Tribe shall have the right to prior notice of an intention by the
holder to foreclose on such permitted mortgage and the right to purchase such
mortgage in lieu of any foreclosure, and (3) such permitted mortgage is
subject and subordinated to any and all access and utility easements granted
by the Tribe under the lease. As provided in the lease, each holder of a
permitted mortgage has the right to notice of any default of the Authority
under the lease and the opportunity to cure such default within any applicable
cure period.
Default Remedies
The Authority will be in default under the lease if, subject to certain
notice provisions, it fails to make lease payments or to comply with its
covenants under the lease or if it pledges, encumbers or conveys its interest
in the lease in violation of the terms of the lease. Following a default, the
Tribe may, with approval from the Secretary of the Interior, terminate the
lease unless a permitted mortgage remains outstanding with respect to the
leased property. In that case, the Tribe may not (1) terminate the lease or
the Authority's right to possession of the leased property, (2) exercise any
right of re-entry, (3) take possession of and/or relet the leased property or
any portion thereof, or (4) enforce any other right or remedy which may
materially and adversely affect the rights of the holder of the permitted
mortgage, unless the default triggering such rights was a monetary default
which such holder failed to cure after notice.
7
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 basic fee of $20.5
million for services including, but not limited to, pre-construction review
and construction phase contract administration. 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.
Expansion Development Services Agreement with Trading Cove Associates
General
The Authority has a Development Services Agreement ("Development Agreement")
with TCA, under which TCA will oversee the design, construction, furnishing,
equipping and staffing of Project Sunburst for a $14.0 million development
fee. The Development Agreement provides that the design and construction of
the expansion must comply with all federal and Connecticut statutes and
regulations that otherwise would apply if the expansion were located outside
the jurisdictional boundaries of the Tribe's land.
Design Phase
During the design phase, TCA will assist the Authority in the engagement of
the architect and the construction manager, the preparation of design,
construction, and budgets, preliminary program evaluation, design development
and the approval of final detailed plans and specifications prepared by the
architect. The Authority has chosen Kohn Pedersen Fox Associates PC as the
architect for the expansion. The Authority has agreed to assign to TCA its
responsibilities under any architectural and/or engineering agreements to
allow TCA to supervise and administer directly the duties of the architect
and/or engineer thereunder.
Construction Phase
During the construction phase, TCA will be responsible for the
administration and supervision of the construction manager and the entire
construction process. TCA will act as the Authority's representative in
connection with construction contracts that are approved by the Authority.
Specifically, TCA will be responsible for overseeing all persons performing
work on the expansion site, inspecting the progress of construction,
determining completion dates and reviewing contractor payment requests
submitted to the Authority. The Development Agreement specifically gives TCA
the right to include provisions in construction contracts that impose
liquidated damage payments in the event of failure to meet construction
schedules.
Retail Facilities
As permitted by the Development Agreement, the Authority has elected to
engage a retail consultant to oversee the design and construction of the
retail facilities in the expansion. The Authority has chosen the Gordon Group
Holdings, Ltd. as the retail consultant for the retail expansion. This work
will be under the overall supervision of TCA, which will integrate the design
and construction of the retail facilities with that of the other components of
the expansion.
Engagement of Certified Entities; Staffing the Expansion
The Development Agreement requires TCA to implement procedures described in
the Tribal Employment Rights Ordinance. In effect, this requires TCA to give
preference to business entities or persons, which have been approved by the
Authority in the selection of all contractors, vendors and suppliers engaged
in the development of the expansion. In addition, in staffing the operation of
the expansion, the Development
8
Agreement requires that TCA give preference to qualified members of the Tribe
(and their spouses and children) and thereafter to enrolled members of other
federally recognized Indian tribes.
Equipping the Expansion
The Authority will purchase equipment, furniture and furnishings required to
operate the expanded facilities from vendors selected by TCA.
Payment of the Development Fee
The Authority will pay the development fee to TCA quarterly, beginning on
January 15, 2000, until the completion date of the expansion based on
incremental completion of the expansion as of each payment date.
Termination and Disputes
The Development Agreement terminates after the earlier of completion of the
expansion or February, 2008. In addition, each party has the right to
terminate the Development Agreement if there is a default or failure to
perform by the other party. The parties must submit disputes arising under the
agreement to arbitration and have agreed that punitive damages may not be
awarded to either party by any arbitrator. The Authority has also waived
sovereign immunity for the purpose of permitting, compelling or enforcing
arbitration and has agreed to be sued by TCA in any court of competent
jurisdiction for the purposes of compelling arbitration or enforcing any
arbitration or judicial award arising out of the Development Agreement.
Relinquishment Agreement with Trading Cove Associates
General
Under the Relinquishment Agreement, the Authority and TCA have agreed to
terminate the existing agreement with TCA under which TCA manages the
Authority's gaming operations (described in greater detail in the following
section). This termination will occur as of January 1, 2000, at which time the
Authority will assume day-to-day management of Mohegan Sun. To compensate TCA
for terminating its management rights, the Authority has agreed to pay to TCA
5% of the gross revenues generated by Mohegan Sun and the planned expansion
during the 15-year period commencing on January 1, 2000, and ending December
31, 2014.
Relinquishment Payments
The payments under the Relinquishment Agreement will be divided into Senior
Relinquishment Payments and Junior Relinquishment Payments, each of which will
be 2.5% of "Revenues," as defined in the Relinquishment Agreement. Senior
Relinquishment Payments will be payable quarterly in arrears commencing on
April 25, 2000 and the Junior Relinquishment Payments will be payable semi-
annually in arrears commencing on July 25, 2000. "Revenues" are defined as
gross gaming revenues (other than Class II gaming revenue) and all other
facility revenues (including hotel revenues, food and beverage sales, parking
revenues, ticket revenues and other fees or receipts from the
convention/events center in the expansion and all rental or other receipts
from the lessees, licensees and concessionaires operating in the facility but
not the gross receipts of such lessees, licensees and concessionaires).
Subordination of Relinquishment Payments/Minimum Priority Distribution to the
Tribe
The Relinquishment Agreement provides that each of the Senior and Junior
Relinquishment Payments are subordinated in right to payment of senior secured
obligations, which includes the Bank Credit Facility, and that the Junior
Relinquishment Payments are further subordinated to payment of all other
senior obligations, including the Authority's Senior Notes. The Relinquishment
Agreement also provides that all relinquishment payments are
9
subordinated in right of payment to an annual minimum priority distribution of
$14 million to the Tribe from the operations of Mohegan Sun. The minimum
priority distribution will be adjusted annually to reflect the cumulative
increase in the Consumer Price Index.
Covenants of the Authority
Under the Relinquishment Agreement, the Authority makes certain covenants
for the benefit of TCA, including the following.
(1) Payments to Tribe. Except for payments of the minimum priority
distributions and reasonable charges for utilities or other governmental
services supplied by the Tribe to the Authority, the Authority may not make
any distributions to the Tribe or its members at any time any
Relinquishment Payments are outstanding.
(2) Affiliate Transactions. Except for payments of the minimum priority
distributions and reasonable charges for utilities or other governmental
services supplied by the Tribe to the Authority, the Authority agrees to
abide by certain restrictions on transactions with the Tribe and its
members, all as set forth in the Relinquishment Agreement.
(3) Replacement/Restoration of Mohegan Sun. If any portion of Mohegan
Sun's facilities are damaged by fire or other casualty, the Authority shall
replace or restore such facilities to substantially the same condition as
prior to such casualty, but only to the extent insurance proceeds are
available to do so. If sufficient insurance proceeds are not available, the
Authority will use reasonable efforts to obtain the required financing, on
commercially reasonable terms, to undertake and complete such replacement
or restoration.
(4) Business Purpose. The Authority has agreed that during the term of
the Relinquishment Agreement it will only engage in the casino gaming and
resort business (and any incidental business or activity) and will continue
to operate Mohegan Sun as currently operated.
Marks
TCA has granted to the Authority an exclusive and perpetual license with
respect to trademarks and other similar rights, including the "Mohegan Sun"
name, used at or developed for Mohegan Sun. The Authority has agreed, however,
that it will only use the word "Sun" in conjunction with Mohegan Sun and
together with "Mohegan" or "Mohegan Tribe."
Existing Management Agreement with Trading Cove Associates
General
Until January 1, 2000, TCA will continue as the exclusive manager of Mohegan
Sun. Under the Management Agreement, TCA is responsible for the day-to-day
management, operation and maintenance of Mohegan Sun. TCA is obligated to
manage and operate the facility in compliance with all Tribal legal
requirements and other applicable laws. Certain major decision-making and
oversight duties have been delegated to the Business Board, a committee
comprised of an equal number of representatives of the Authority and of TCA.
Actions by the Business Board require the unanimous approval of its members or
their respective designees.
Management Fee
The Management Agreement authorizes TCA to pay itself a management fee in
monthly installments based on 30% to 40% of net income, before management
fees, as defined depending on profitability levels. The management fees for
the 12 months ended September 30, 1999 and 1998, and for the period from
October 12, 1996 through September 30, 1997 were $59.5 million, $47.4 million
and $23.2 million, respectively.
10
Item 2. Properties
Mohegan Sun is located on 240 acres of the Tribe's reservation just outside
of Uncasville, Connecticut, approximately one mile from the interchange of
Interstate 395 and Connecticut Route 2A. Mohegan Sun has its own exit from
Route 2A, giving patrons direct access to Interstate 395 and Interstate 95,
the main highways connecting Boston, Providence, and New York. By highway,
Mohegan Sun is approximately 125 miles from New York City, 100 miles from
Boston, Massachusetts, 35 miles from Hartford, Connecticut and 50 miles from
Providence, Rhode Island.
The Authority has a lease with the Tribe for land on which Mohegan Sun is
located. The initial term of the lease is 25 years, with an option to renew
for one additional 25-year term provided that the Authority is not in default
under the lease. The lease also provides that all improvements constructed on
the site will become the property of the Tribe. The lease is a net lease
requiring that the Authority assume all costs of operating, constructing,
maintaining, repairing, replacing and insuring the leased property, in
addition to the payment of a nominal annual rental fee.
The Authority has entered into various lease agreements for properties
adjacent to Mohegan Sun. The properties are owned by MTIC Acquisitions,
L.L.C., a Connecticut limited liability company controlled by the Tribe. The
properties are used for providing access and/or parking for Mohegan Sun. For
the fiscal years ending September 30, 1999 and 1998, the Authority incurred
charges of $412,000 and $446,000, respectively relating to the lease
agreements. For the period from October 12, 1996 (date of commencement of
operations) through September 30, 1997, the Authority incurred charges
totaling $271,000.
Item 3. 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 position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
The Authority has not issued or sold any equity securities.
Item 6. Selected Financial Data
(Amounts In Thousands)
For the period
October 12, 1996
(date of commencement of
For the Year Ended For the Year Ended operations) through
September 30, 1999 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------------
Operating Results:
Gross revenues........ $ 766,562 $ 649,479 $522,502
Promotional
allowances........... (84,420) (66,272) (44,265)
--------- --------- --------
Net revenues.......... $ 682,142 $ 583,207 $478,237
--------- --------- --------
Income from
operations........... $ 155,722 $ 135,350 $ 80,029
Other expense, net.... (156,210)(1) (47,772) (43,342)
Extraordinary items... (38,428) (419,457)(2) --
--------- --------- --------
Net income (loss)..... $ (38,916) $(331,879) $ 36,687
========= ========= ========
Other Data:
Interest expense...... $ 55,595 $ 50,172 $ 45,137
Capital expenditures.. $ 62,736 $ 32,731 $ 35,749
Year-End Status:
Net cash flows
provided by operating
activities........... $ 143,819 $ 134,575 $117,220
Total assets.......... $ 914,962 $ 554,480 $386,974
Long-term debt and
capital lease
obligations.......... $ 519,298 $ 294,567 $298,237
- --------
(1) Includes expense of $111.9 million related to the reassessment of the
Relinquishment Liability--See Note 13 to the Authority's Financial
Statements for valuation of this liability.
(2) Includes expense of $419.1 million related to the Relinquishment
Liability--See Note 13 to the Authority's Financial Statements for
valuation of this liability.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Overview of Operating Results for Fiscal Years Ended September 30, 1999,
1998, and the Period from October 12, 1996 (date of commencement of
operations) through September 30, 1997
Mohegan Sun has continued to experience favorable growth since opening in
October 1996. Net revenues for fiscal 1999 increased $203.9 million or 42.6%
to $682.1 million compared to $478.2 million for fiscal 1997. The earnings
before interest, taxes, depreciation, amortization and management fees for the
year ended September 30, 1999 increased $103.2 million or 76.2% to $238.7
million compared to $135.4 million in fiscal 1997. Additionally, Mohegan Sun's
operating margins have steadily increased over the past three years,
indicating strong operating efficiencies. Mohegan Sun achieved a fiscal year
1999 operating margin of 35.0% compared to a 28.3% operating margin during the
period ended September 30, 1997.
12
Comparison of Operating Results for the Fiscal Years Ended September 30, 1999
and September 30, 1998
The Connecticut slot market continues to grow as does Mohegan Sun's market
share. The Connecticut slot market grew at a rate of 11.5% from fiscal 1998 to
fiscal 1999. The State of Connecticut reported a gross slot win of $1.2
billion and $1.1 billion for the fiscal years ended September 30, 1999 and
1998, respectively. Connecticut slot revenues increased by $123.6 million for
the fiscal year ended September 30, 1999. Mohegan Sun has exceeded the
market's growth in slot win as it experienced a fiscal 1999 increase in net
slot revenues of 19.8% over the prior year. Slot revenues were $474.9 million
and $396.3 million for the fiscal years 1999 and 1998, respectively. Net slot
win per unit per day was $430 and $361 for the same respective periods.
Gaming revenues totaled $641.1 million and $543.9 million for the years
ended September 30, 1999 and 1998, respectively. This marks an increase of
$97.2 million or 17.9% over the prior year. The increase in gaming revenues is
primarily due to a 19.8% growth in Mohegan Sun slot revenues as a result of
the continued growth of the Mohegan Sun customer base. Membership in the
Mohegan Sun Player's Club totaled 1.2 million and approximately 909,000 as of
September 30, 1999 and 1998, respectively.
For the year ended September 30, 1999, food and beverage revenues were $60.9
million, indicating a growth of $5.4 million or 9.7% over the prior year. The
increase is attributable to an increase in patronage, combined with an
increase in average food check. Food and beverage revenues for the year ended
September 30, 1998 were $55.5 million.
Retail and other revenues were $51.0 million, indicating a growth of $14.7
million or 40.5% over the prior year. Retail and other revenues for the year
ended September 30, 1998 were $36.3 million. This increase is attributed to
increased utilization of complimentaries and the opening of the gas station
facility in December 1998.
Bingo revenues totaled $13.5 million for the year ended September 30, 1999,
representing a $246,000 decrease from the prior year. Bingo revenues totaled
$13.7 million for the year ended September 30, 1998. The decrease is a result
of fewer bingo sessions being conducted in fiscal 1999 as compared to fiscal
1998.
Promotional allowances totaled $84.4 million for the year ended September
30, 1999, representing an $18.1 million or 27.4% increase over the prior year.
The increase is attributable to an increase in the customer base as well as an
increased utilization of the Mohegan Sun Player's Club complimentary program.
Promotional allowances for the year ended September 30, 1998 were $66.3
million. Additionally, promotional allowances as a percentage of gross revenue
increased from 10.2% in fiscal 1998 to 11.0% in fiscal 1999.
Total costs and expenses were $526.4 million for the year ended September
30, 1999, an increase of $78.6 million or 17.5% over the prior year. The
increase in expenses is a direct result of an 18.0% increase in gross
revenues. Total costs and expenses were $447.9 million for fiscal 1998.
Gaming costs and expenses were $281.1 million for the year, an increase of
$43.1 million or 18.1% over the prior year. Gaming costs for fiscal 1998 were
$237.9 million. The slot win contribution for the years ended September 30,
1999 and 1998 totaled $121.1 million and $102.3 million, respectively. The
increase in slot win contribution is directly related to the increase in slot
revenues.
Food and beverage costs were $21.3 million compared to $21.2 million in the
prior year. The increase is attributable to increased volumes in food and
beverage sales, partially offset by savings gained through operational
efficiencies.
Retail and other costs were $30.3 million for the year, an increase of $5.7
million or 23.1% over the prior year. The increase is primarily attributable
to the opening of the gas station facility in December 1998, as well as the
continued utilization of the Mohegan Sun complimentary program in the retail
outlets. Retail and other costs were $24.6 million for fiscal year 1998.
13
Bingo costs were $12.0 million for the year, a decrease of $347,000 or 2.8%,
which is mainly attributable to fewer bingo sessions being conducted in fiscal
1999 as compared to fiscal 1998. Bingo costs were $12.3 million for the fiscal
year ended September 30, 1998.
General and administrative costs were $98.9 million for the year ended
September 30, 1999. The increase of $12.1 million or 13.9% is partially
attributable to continued marketing campaigns associated with efforts to
increase the frequency of patron visits. General and administrative costs for
fiscal 1998 were $86.8 million.
Management fees earned by TCA totaled $59.5 million for the year ended
September 30, 1999, an increase of $12.1 million or 25.5% over the prior year.
The increase in management fees is a direct result of the increase in net
income before management fees and extraordinary items. Management fees for
fiscal 1998 totaled $47.4 million.
For the year ended September 30, 1999, depreciation and amortization
increased $5.9 million to $23.4 million, an increase of 33.5% over the prior
period. The increase is primarily attributable to the $2.6 million
amortization of the trademark asset and the increase in depreciation of newly
acquired capital assets utilized in the racebook and fueling facilities.
Depreciation and amortization for fiscal 1998 totaled $17.5 million.
Income from operations for the year ended September 30, 1999 totaled $155.7
million, compared to $135.4 million in the previous period. The year over year
increase is primarily due to an increase in gaming revenues.
For the year ended September 30, 1999 the relinquishment liability
associated with the Relinquishment Agreement with TCA was reassessed to $661.0
million, an increase of $111.9 million. The reassessment is based on the
change in forecasted incremental revenues through December 31, 2014 discounted
to present value using the Authority's current risk-free rate of investment.
See Note 13 to the Authority's Financial Statements.
Interest and other income was $11.3 million for the year ended September 30,
1999, an increase of $8.9 million over the prior year. The increase in
interest income is related to the investment of a portion of the proceeds from
the Authority's Senior Notes and Senior Subordinated Notes issued on March 3,
1999, partially offset by the extinguishment of the reserve trust accounts
required under the prior financing arrangement. A portion of the financing was
used to pay off existing debt and the remainder has been temporarily invested
and will be used for construction of the expansion. The Authority's treasury
program requires investment in investment-grade commercial paper having
maturities not more than six months from the date of acquisition.
Interest expense of $55.6 million for the year ended September 30, 1999
represents an increase of $5.4 million or 10.8% over prior year's interest
expense. The increase was mainly attributable to the amount of debt
outstanding, which increased from $294.6 million at September 30, 1998 to
$519.3 million at September 30, 1999. The increase in debt was the result of
the payoff of the $175 million Senior Secured Notes, and the issuance of the
Senior Notes and Senior Subordinated Notes in March 1999.
Extraordinary items of $38.4 million include a loss on the early
extinguishment of debt of $33.7 million due to the tender of the $175 million
Senior Secured Notes on March 3, 1999, and the write-off of associated
financing fees of $5.2 million. Also included is a $500,000 extraordinary gain
for the forgiveness of debt associated with the defeasance of the Subordinated
Notes. See Note 8 to the Authority's Financial Statements.
Net loss for the year ended September 30, 1999 totaled $38.9 million, which
is primarily attributable to the relinquishment reassessment expense of $111.9
million related to the Relinquishment Agreement with TCA. Under this
Relinquishment Agreement, the Authority has agreed to pay to TCA 5% of gross
revenues, (as defined in the agreement), generated from Mohegan Sun and the
planned expansion, beginning January 1, 2000 and ending December 31, 2014 (See
Note 13 to the Authority's Financial Statements). Net loss for fiscal year
1998 totaled $331.9 million, which was primarily attributable to the
relinquishment expense of $419.1 million.
14
Comparison of Operating Results for the Fiscal Year Ended September 30, 1998
and the Period October 12, 1996 (date of commencement of operations) through
September 30, 1997
Connecticut slot revenue grew at a rate of 18.7% from fiscal 1997 to fiscal
1998, reporting a gross slot win of $1.1 billion, an increase of $168.9
million from the period ended September 30, 1997. Mohegan Sun exceeded the
market's growth as it experienced a 26.8% increase in slot win over the prior
year. Slot revenues of $396.3 million for the year ended September 30, 1998
reflected a net slot win per unit per day of $361. Net slot win per unit per
day for the period ended September 30, 1997 was $319. The slot win growth was
$83.8 million or 26.8% over the previous year.
Gaming revenues totaled $543.9 million for the year ended September 30,
1998, marking an increase of $103.3 million or 23.5% over the period ended
September 30, 1997. The increase in gaming revenues is primarily due to an
18.7% growth in Connecticut slot revenue and the continued growth of the
Mohegan Sun customer base. Membership in the Mohegan Sun Player's Club totaled
approximately 909,000 and 588,000 as of September 30, 1998 and 1997,
respectively.
For the year ended September 30, 1998, food and beverage revenues were $55.5
million, reflecting a growth of $8.6 million or 18.4% over the prior year. The
increase is attributable to an increase in patronage year over year. Food and
beverage revenues were $46.9 million for the period ended September 30, 1997.
Retail and other revenues were $36.3 million, a growth of $14.8 million or
69.1% over the prior year. These increases are attributed to increased
utilization of complimentaries and the addition of two new retail outlets to
the facility. Retail and other revenues were $21.5 million for the period
ended September 30, 1997.
Bingo revenues totaled $13.7 million for the year ended September 30, 1998,
representing a $189,000 or 1.4% increase over the prior year. The increase is
a result of an increase in the overall awareness of the bingo operation. Bingo
revenues were $13.5 million for the period ended September 30, 1997.
Promotional allowances totaled $66.3 million for the year ended September
30, 1998, representing a $22.0 million or 49.7% increase over the prior year.
The increase is attributable to the development of the Mohegan Sun customer
base as well as an increased utilization of the Mohegan Sun Player's Club
complimentary program. Additionally, promotional allowances as a percentage of
gross revenue increased from 8.5% in fiscal 1997 to 10.2% in fiscal 1998.
Promotional allowances were $44.3 million for the period ended September 30,
1997.
Total costs and expenses were $447.9 million for the year ended September
30, 1998, an increase of $49.6 million or 12.5% over the prior year. The
increase in expenses is a direct result of a 24.3% increase in gross revenues
partially offset by improved operating efficiencies. Total costs and expenses
were $398.2 million for the period ended September 30, 1997.
Gaming costs and expenses were $237.9 million for the year, an increase of
$28.9 million or 13.8% over the prior year. The slot win contribution for the
year ended September 30, 1998 totaled $102.3 million. This represents an
increase of $21.6 million over the prior year, which is directly attributable
to increased slot revenues. Gaming costs and expenses were $209.1 million for
the period ended September 30, 1997.
Food and beverage costs were $21.2 million compared to $24.2 million in the
prior year. The decrease is attributable to savings gained through operational
efficiencies.
Retail and other costs were $24.6 million for the year, an increase of $8.3
million or 51.1% over the prior year. The increase is primarily attributable
to the addition of new retail outlets, as well as the continued utilization of
the Mohegan Sun complimentary program in the retail outlets. Retail and other
costs were $16.3 million for the period ended September 30, 1997.
Bingo costs decreased $2.8 million or 18.3% to $12.3 million from fiscal
1997 to fiscal 1998. Bingo costs were $15.1 million for fiscal 1997. The
decrease is mainly attributable to fewer bingo sessions being conducted.
15
General and administrative costs were $86.8 million for the year ended
September 30, 1998. The increase of $8.6 million or 11.0% is partially
attributable to continued marketing campaigns associated with efforts to
increase the frequency of patron visits. General and administrative costs were
$78.2 million for fiscal 1997.
Management fees earned by TCA totaled $47.4 million for the year ended
September 30, 1998, an increase of $24.2 million or 104.1%. The increase in
management fees is a direct result of the increase in net income before
management fees and extraordinary items. Management fees were $23.2 million
for the period ended September 30, 1997.
For the year ended September 30, 1998, depreciation and amortization
decreased by $14.6 million or 45.5% over the prior period to $17.5 million.
The decrease is primarily attributable to pre-opening expenditures of $18.2
million that were fully depreciated over the first 12 months of business
operations, partially offset by an increase in depreciation for newly acquired
capital assets. Depreciation and amortization totaled $32.2 million for the
period ended September 30, 1997.
Income from operations for the year ended September 30, 1998 totaled $135.4
million, compared to $80.0 million in the previous period. The year over year
increase is primarily due to an increase in gaming revenues and improved
operating efficiencies.
Interest and other income were $2.4 million for the year ended September 30,
1998, an increase of $605,000 or 33.7% over prior year. The increase is
primarily due to interest earned on higher cash balances.
Interest expense of $50.2 million for the year ended September 30, 1998
increased $5.0 million or 11.2% over prior period interest. This increase was
mainly attributable to an increase in Cash Flow Participation Interest under
the Authority's formerly outstanding Senior Secured Notes, which was derived
as a percent of increased gross operating profits.
Extraordinary items include loss on the early extinguishment of debt of
$332,000 due to the retirement of a capital lease and a $419.1 million
relinquishment expense. This amount was derived by discounting the present
value of 5% of projected gross revenues, for the period ending December 31,
2014, by the Authority's risk free investment rate. See Note 13 to the
Authority's Financial Statements.
Net loss for the year ended September 30, 1998 totaled $331.9 million, which
is primarily attributable to the relinquishment expense of $419.1 million
related to the Relinquishment Agreement with TCA. Net income for fiscal year
1997 was $36.7 million.
Liquidity, Capital Resources and Capital Spending
As of September 30, 1999, 1998, and the period from October 12, 1996 through
September 30, 1997, the Authority held cash and cash equivalents of $276.6
million, $110.7 million and $88.8 million, respectively. Cash provided by
operating activities for 1999 was $143.8 million, compared with $134.6 million
for 1998 and $117.2 for 1997. 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 $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.
16
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. 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
September 30, 1999, there were no borrowings outstanding on the Bank Credit
Facility. The Authority plans to draw on the Bank Credit Facility primarily in
connection with the expansion of Mohegan Sun. 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
$62.7 million for the fiscal year ended September 30 1999, versus $32.7
million for the fiscal year ended September 30, 1998 and $35.7 million for the
period October 12, 1996 through September 1997. Project Sunburst construction
costs totaled $37.4 through September 30, 1999, of which $37.1 million was
expended in fiscal 1999 and $327,000 was expended in fiscal 1998 on
preliminary consulting. At September 30, 1999, construction was also
proceeding on schedule for the 2,500 space patron parking garage. Project
Sunburst is expected to open beginning in the fall of 2001. Property
maintenance capital expenditures for furniture, fixtures and equipment totaled
$11.2 million in 1999, and $24.0 million in 1998. The $24.0 million expended
in fiscal 1998 included the buyout of $15.2 million in operating leases.
The Authority, in conjunction with the Project Sunburst expansion, 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, a post office, an employee computer/training center
and an exercise facility. The total cost of the employee parking center is
estimated to be $30.0 million. As of September 30, 1999, the Authority had
expended $9.8 million on the construction of the employee parking center,
which is funded by cash from operations. It is anticipated that the parking
garage will be completed in March 2000.
In September 1998, the Authority introduced a race book facility as an
additional gaming amenity. This 9,000 square foot facility features horse
racing from the New York Racing Association circuit as well as greyhound
racing and jai alai from throughout the United States. The race book facility
features 218 seats with individual television monitors and computerized self-
service betting capabilities. Expenditures associated with the race book
facility totaled $5.2 million, of which $1.3 million was expended in fiscal
1999 and $3.9 million was expended in fiscal 1998.
The Authority opened a 4,000 square foot gas station facility on December 7,
1998. The facility consists of 16 gasoline pumps, one diesel fuel pump, and a
convenience store that offers baked goods and retail items. The total cost of
the facility was $5.8 million, $2.8 million of which was expended in the
fiscal year ending September 30, 1998. The remaining $3.0 million in
expenditures were completed during the fiscal year ended September 30, 1999.
Both the gas station and race book were financed through equipment leasing and
internally generated funds.
During the fiscal year ending September 30, 1998, Mohegan Sun underwent a
renovation of its Winter entrance of the casino and retail area. This $2.0
million project extended Mohegan Sun's historical northeastern Indian theme in
the depiction of a stylized version of an ancient Mohegan Longhouse. The
wooden panels depicting old Indian tales, the ceiling of blankets, and the
clay pipe decor enhance the interior design of the casino, which was inspired
by Mohegan tradition and culture. Renovations to the north entry totaled $1.7
million and $0.3 million for the fiscal years ended September 30, 1998 and
1999, respectively, and were financed through internally generated funds.
17
For fiscal 2000, the Authority expects capital expenditures to be
approximately $22.8 million on facility improvements and $200.6 million on
Project Sunburst construction.
During fiscal 1999 and 1998, the Authority, subsequent to meeting its
operating expenses and required deposits to reserve funds under the indenture
for the Senior Secured Notes, distributed a total of $137.5 million and $72.4
million, respectively, to the Tribe. As required under the indenture for the
Senior Secured Notes, the Authority made Excess Cash Purchase Offers of $51.2
million and $29.1 million to all holders of the Senior Secured Notes in
January 1999 and 1998, respectively. The holders of the Senior Secured Notes
rejected the offers, which were subsequently offered to the holders of the
Authority's Junior Subordinated Notes. The holders of the Junior Subordinated
Notes also rejected the offers. The Excess Cash Purchase Offers of $51.2
million and $29.1 million were distributed to the Tribe in February 1999 and
April 1998, respectively. In fiscal 1999, the $51.2 million was subsequently
returned to the Authority by the Tribe as a capital contribution to partially
finance Project Sunburst. The release of restricted cash of $45.9 million upon
the tender of the Senior Secured Notes was also distributed to the Tribe, and
subsequently returned as a capital contribution towards Project Sunburst.
On November 15, 1998, May 15, 1998 and November 15, 1997 the Authority made
interest payments of $11.8 million each to the holders of the Senior Secured
Notes. On the same dates the Authority made Cash Flow Participation Interest
payments of $5.8 million, $4.2 million and $4.1 million, respectively, to the
holders of the Senior Secured Notes. In March 1999, the Authority redeemed the
Senior Secured Notes for $220.0 million, including accrued interest of $11.3
million and a tender premium of $33.7 million. There were no cash interest
payment requirements on the Subordinated Notes as interest is accrued and
deferred until the payoff date. In March 1999, the Authority established a
defeasance trust of $135.5 million, in conjunction with the defeasance of the
Subordinated Notes, which will fully satisfy the principal and accrued
interest due on the Subordinated Notes on January 1, 2000, the first permitted
redemption date. On July 1, 1999, the Authority made interests payment of $5.3
million and $8.6 million each to the holders of the $200 million Senior Notes
and $300 million Senior Subordinated Notes, respectively.
Under the terms of the Relinquishment Agreement, TCA will continue to manage
the existing property under the Management Agreement until December 31, 1999.
On January 1, 2000, the Management Agreement will terminate, and the Authority
will assume day-to-day management of Mohegan Sun. The Authority, as a result
of the termination of the Management Agreement, has agreed to pay to TCA 5% of
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
$661.0 million as of September 30, 1999, an increase of $111.9 over the $549.1
million liability recognized as of September 30, 1998. The relinquishment
liability will be reassessed periodically to account for increases in
projected revenues and the impact on the time value of money due to the
passage of time. The Authority has capitalized $130.0 million of the
relinquishment liability associated with the trademark value of the Mohegan
Sun brand name.
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.
18
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.
Approach
With assistance from The Gartner Group, the Authority has implemented a Year
2000 program to provide an independent analysis of the Authority's Year 2000
preparedness and the adequacy of the Authority's Year 2000 plans. The program
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 November 30, 1999, the Authority is approximately 95% 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. As of November 30, 1999, the Authority
has received compliance correspondence from 95% of its mission critical
vendors and is 95% complete with its embedded system testing. These embedded
systems include slot machines, heating and cooling machinery and equipment and
related infrastructure. Concurrently, contingency and recovery plans have been
developed for critical entities to eliminate any disruptions to operations.
Cost
The Authority has incurred approximately $1.2 million in costs to date
associated with the Year 2000 program as of September 30, 1999. The Authority
does not separately track costs, except for labor incurred by the information
systems group and outside consulting fees, incurred for the Year 2000 program.
Although there can be no assurances, it is anticipated that costs associated
with the remediation and verification to become Year 2000 compliant will not
exceed $1.5 million and will not have a material adverse impact on the
Authority's financial position, results of operations, or cash flow.
New Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), "Accounting for Derivative Instruments and Hedging Activities" was
issued. This statement revises the accounting for derivative financial
instruments. The Authority is currently analyzing the impact of this
statement, which is required to be adopted effective for all fiscal years
beginning after June 15, 2000, and does not expect this statement to have a
material impact on the Authority's financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-Up Activities," which revises the accounting for start-up costs
and will require the expensing of certain costs which the Authority has
historically capitalized. The Authority is currently analyzing the impacts of
this statement, which is required to be adopted in fiscal years beginning
after December 15, 1998, and does not expect this statement to have a material
impact on the Authority's financial position or results of operations.
19
Certain Forward Looking Statements
Certain information included in this Form 10-K and other materials filed or
to be filed by the Authority with the Securities and Exchange Commission
contain forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements include information relating to plans for future expansion and
other business development activities as well as other capital spending,
financing sources and the effects of regulation (including gaming and tax
regulation) and competition. Such forward-looking information involves
important risks and uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may differ from those
expressed in any forward- looking statements made by or on behalf of the
Authority. These risks and uncertainties include, but are not limited to,
those relating to development and construction activities, dependence on
existing management, leverage and debt service, domestic or global economic
conditions, issues related to the Year 2000, pending litigation, changes in
federal tax laws or the administration of such laws and changes in gaming laws
or regulations (including the legalization of gaming in certain
jurisdictions).
Item 7a. Qualitative and Quantitative Disclosure of Market Risk
The Authority is exposed to inherent market risk on the following:
Interest rate fluctuations on securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities of not more than six
months from the date of acquisition;
Commercial paper having one of the two highest ratings obtainable from
Moody's or Standard & Poor and in each case maturing within six months after
the date of acquisition;
Money market funds at least 95% of the assets of which constitute cash
equivalents of the kind described in the sections above.
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. 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 has exercised that right and increased the Bank Credit Facility to
$459.5 million. As of September 30, 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.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Notes to Financial Statements of the Mohegan
Tribal Gaming Authority, referred to in Item 14(A)(1) of this Form 10-K, are
included at pages F-1 to F-19.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
PART III
Item 10. Executive Officers of the Registrant
The Authority is governed by a nine-member Management Board, consisting of
the same nine members as the Tribal Council (the governing body of the Tribe).
The General Manager of Mohegan Sun is hired by TCA, subject to the approval of
the Authority; other senior officers of Mohegan Sun are hired by TCA. The
General Manager and other senior officers are employees of the Authority.
The following table provides information as of September 30, 1999 with
respect to each of (i) the members of the Management Board and (ii) the
executive officers of Mohegan Sun.
Name Age Position
- ---- --- --------
Roland J. Harris........ 52 Chairman and member, Management Board
Jayne G. Fawcett........ 63 Vice Chair and member, Management Board
William J. Velardo...... 45 President and General Manager
Mitchell Grossinger
Etess.................. 41 Executive Vice President, Marketing
Jeffrey E. Hartmann..... 38 Executive Vice President, Finance and Chief Financial Officer
Carlisle M. Fowler...... 71 Treasurer and member, Management Board
Loretta F. Roberge...... 68 Corresponding Secretary and member, Management Board
Shirley M. Walsh........ 55 Recording Secretary and member, Management Board
Mark F. Brown........... 42 Member, Management Board
Courtland C. Fowler..... 72 Member, Management Board
Maynard L. Strickland... 59 Member, Management Board
Glen R. LaVigne......... 39 Member, Management Board
Roland J. Harris--Mr. Harris has been Chairman and a member of the
Management Board since October 1995. Mr. Harris is the founder and former
president of the corporation Harris and Clark, Inc.--Civil Engineers, Land
Surveyors & Land Planners, which has performed services for the Authority. The
corporation, now known as McFarland Johnson, Inc., has retained Mr. Harris as
a consultant for a fixed fee. Mr. Harris has served as First Selectman and CEO
of the Town of Griswold, Connecticut and also as its Planning and Zoning
Commissioner. He has served as Deputy Chief of the Griswold Fire Department
and as Fire Marshall and Inspector of the Town of Griswold. Prior to assuming
the Chairmanship of the Management Board, Mr. Harris served as the Tribal
Planner.
Jayne G. Fawcett--Ms. Fawcett has been Vice Chair of the Management Board
since December 1995 and a member of the Management Board since July 1995. Ms.
Fawcett worked as a social worker for the State of Connecticut in 1987 and is
a retired teacher after 27 years of service. Ms. Fawcett was Chair of the
Tribe's Constitutional Review Board from 1992 to 1993. Currently, she oversees
the Tribe's public relations.
William J. Velardo--Mr. Velardo has been President and General Manager of
Mohegan Sun since October 1995 and has 23 years of experience in gaming
operations. Prior to his employment with the Authority, Mr. Velardo was Chief
Operating Officer for River City, a riverboat gaming joint venture in New
Orleans, Louisiana. From 1991 to 1994, Mr. Velardo served as Senior Vice
President, Casino Operations at Trump Plaza Hotel and Casino in New Jersey.
Mr. Velardo was part of the management team that opened the Mirage in Las
Vegas and served as Vice President, Table Games from 1989 to 1991. Mr. Velardo
also worked as Assistant Casino Manager and Pit Manager for Caesar's Tahoe and
Caesar's Palace.
Mitchell Grossinger Etess--Mr. Etess has been Executive Vice President of
Marketing at Mohegan Sun since November 1995 and has 19 years experience in
the casino and hotel industry. Prior to his employment with the Authority, Mr.
Etess was Vice President of Marketing at Players Island and, from 1989 to
1994, was Senior Vice President of Marketing and Hotel Operations at Trump
Plaza Hotel and Casino. Prior thereto, Mr. Etess held various management
positions in the hospitality and advertising industries.
21
Jeffrey E. Hartmann--Mr. Hartmann has been Executive Vice President of
Finance and the Chief Financial Officer of Mohegan Sun since December 1996 and
has 8 years of experience in the casino and hotel industry. Prior to joining
the Authority, Mr. Hartmann worked for Foxwoods Resort Casino from August 1991
to December 1996, most recently as Vice President of Finance for Foxwoods
Management Company. Mr. Hartmann was employed by Price WaterhouseCoopers, LLP,
as an Audit Manager from 1984 to 1991. Mr. Hartmann is a certified public
accountant.
Carlisle M. Fowler--Mr. Fowler has been the Treasurer and a member of the
Management Board since July 15, 1995 and has been active in the Tribe's
government for over 20 years. Prior to his retirement in 1989, Mr. Fowler was
an electronics technician for the State of Connecticut and operated his own
electronics business. Mr. Carlisle Fowler is the brother of Mr. Courtland
Fowler.
Loretta F. Roberge--Ms. Roberge has been Corresponding Secretary and a
member of the Management Board since July 1995. Ms. Roberge has served as a
paraprofessional at the Mohegan School for 25 years, working with children
with special needs. Ms. Roberge has remained active in the Tribal community
throughout her life, including her previous service as secretary of the
Management Board. Ms. Roberge presently chairs the Finance Committee.
Shirley M. Walsh--Ms. Walsh has been the Recording Secretary of the
Management Board since October 1995 and has been a member of the Management
Board since July 1995. Ms. Walsh has worked for the Tribe in various
capacities for almost eight years. Prior to that time, she was employed for 13
years by a local certified public accountant. Ms. Walsh chaired the Tribal
Election Committee from 1994 to 1995 and serves on several other Committees of
the Tribe.
Mark F. Brown--Mr. Brown has been a member of the Management Board since
October 1995 and serves as the Public Safety liaison for the Tribal Council.
Mr. Brown worked with the Tribe's historian during the period in which the
Tribe was working to obtain federal recognition and also served on the Tribal
Constitutional Review Board from 1993 to 1995. Mr. Brown served as a Law
Enforcement officer for over twelve years. Prior to Law Enforcement he was
involved in retail sales and management.
Courtland C. Fowler--Mr. Fowler has been a member of the Management Board
since July 1995 and was a major contributor to the cultural research that led
to the federal recognition of the Tribe. Mr. Fowler was previously employed as
a chemical operator and assistant foreman at Pfizer, Inc. until his retirement
in 1990. He served as Vice Chairman of the Management Board, and as a member
of the Tribe's Constitutional Review Board. Mr. Fowler was on the committee
that drafted the first constitution of the Tribe. Mr. Courtland Fowler is the
brother of Mr. Carlisle Fowler.
Maynard L. Strickland--Mr. Strickland has been a member of the Management
Board since October 1995. During the past 20 years, Mr. Strickland owned and
operated several restaurants in Norwich, Connecticut and in Florida.
Glen R. LaVigne--Mr. LaVigne has been a member of the Management Board since
January 1996. Mr. LaVigne was previously employed by the Town of Montville,
Connecticut and oversaw building and maintenance for Montville's seven
municipal buildings.
22
Item 11. Executive Compensation
The following table summarizes the compensation paid to the senior executive
officers:
SUMMARY COMPENSATION TABLE
Fiscal
Name and Principal Position Year Ended Salary Bonus
- --------------------------- ---------- -------- --------
William J. Velardo................................ 1999 $503,000 $150,000
President and General Manager..................... 1998 $400,000 $150,000
1997 $353,000 $175,000
Mitchell Grossinger Etess......................... 1999 $306,000 $100,000
Executive Vice President, Marketing............... 1998 $262,500 $100,000
1997 $223,000 $110,000
Jeffrey E. Hartmann............................... 1999 $250,000 $100,000
Executive Vice President, Finance................. 1998 $210,000 $100,000
and Chief Financial Officer....................... 1997(1) $130,000 $ 60,000
- --------
(1) Mr. Hartmann commenced employment with the Authority on December 30,
1996.
During April 1999, the Authority entered into employment agreements with
certain key executive employees. The employment agreements provide for a base
salary, annual compensation increases and annual bonuses subject to certain
restrictions as set forth within the agreement. The employment agreements
became effective upon the approval of the Secretary of the United States
Department of the Interior, and will remain effective through and including
December 31, 2004. The employment agreements automatically renew for an
additional term of five years unless terminated, as defined.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Authority has no outstanding equity securities.
Item 13. Certain Relationships and Related Transactions
The Tribe provided governmental and administrative services to the Authority
in conjunction with the operation of Mohegan Sun. For the year ended September
30, 1999, the Authority incurred $8.3 million of expenses for such services,
of which $7.2 million was paid as of September 30, 1999. For both the year
ended September 30, 1998 and the period October 12, 1996 (date of commencement
of operations) through September 30, 1997, the cost of governmental and
administrative services was $7.7 million.
The Tribe, through one of its limited liability companies, has provided
goods to the Authority for resale at its retail location. For the fiscal years
ended September 30, 1999 and 1998, the Authority expended $417,000 and
$400,000, respectively for the resale goods. For the period October 12, 1996
(date of commencement of operations) through September 30, 1997, the Authority
expended $296,000.
The Tribe, also through one of it's limited liability companies controlled
by the Tribe, has entered into various land lease agreements with the
Authority for access, parking and related purposes for Mohegan Sun. For the
fiscal years ended September 30, 1999 and 1998, the Authority expended
$412,000 and $446,000, respectively relating to the lease agreements. For the
period October 12, 1996 (date of commencement of operations) through September
30, 1997, the Authority expended $271,000.
The Authority engages McFarland Johnson, Inc. for surveying, civil
engineering, and professional design services. Roland Harris, Chairman of the
Management Board is a consultant for this corporation for a fixed fee. For the
fiscal years ended September 30, 1999 and 1998, and for the period October 12,
1996 (date of commencement of operations) through September 30, 1997, the
Authority incurred $495,000, $41,000, and
23
$125,000, respectively for such services. McFarland Johnson formerly conducted
business as Harris & Clark. The Authority believes the terms of these
engagements are comparable to those that would pertain to arms length
engagements of unaffiliated firms.
As of September 30, 1999, the Authority employed 117 Mohegan tribal members.
24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K
A(1). Financial Statements
See Index to financial statements included herein.
A(2). Financial Statement Schedules
Included in Part IV of this Report:
Schedule II--Valuation and Qualifying Accounts and Reserves
Schedules other than that listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
financial statements or notes to the financial statements.
A(3). Exhibits
Exhibit No. Description
----------- -----------
3.1 Constitution of the Mohegan Tribe of Indians of Connecticut*
3.2 Ordinance No. 95-7/15-1 of the Tribe for Gaming on Tribal Lands,
enacted on July 20, 1995*
4.1 Note Purchase Agreement dated September 29, 1995 between the
Mohegan Tribal Gaming Authority and Sun International Hotels
Limited (filed as Exhibit 10.10 to 1996 Form S-1and incorporated
herein by reference)*
4.2 Form of Junior Subordinated Notes due 2003 of the Mohegan Tribal
Gaming Authority (contained in the Note Purchase Agreement as
filed as Exhibit 4.1)*
4.3 Indenture dated March 3, 1999 among the Mohegan Tribal Gaming
Authority, the Mohegan Tribe of Indians of Connecticut and First
Union National Bank, as Trustee, relating to the 8 1/8% Senior
Notes Due 2006 of the Mohegan Tribal Gaming Authority**
4.4 Form of Global 8 1/8% Senior Notes Due 2006 of the Mohegan Tribal
Gaming Authority (contained in the Indenture filed as Exhibit
4.3)**
4.5 Registration Agreement dated March 3, 1999 among the Mohegan
Tribal Gaming Authority, Salomon Smith Barney Inc., NationsBanc
Montgomery Securities, LLC, SG Cowen Securities Corporation, Bear,
Stearns & Co., Inc., BankBoston Robertson Stephens Inc. and Fleet
Securities, Inc.**
4.6 Indenture dated as of March 3, 1999 among the Mohegan Tribal
Gaming Authority, Mohegan Tribe of Indians of Connecticut and
State Street Bank and Trust Company, as Trustee, relating to the 8
3/4% Senior Subordinated Notes Due 2009 of the Mohegan Tribal
Gaming Authority**
4.7 Form of Global 8 3/4% Senior Subordinated Notes Due 2009 of the
Mohegan Tribal Gaming Authority (contained in the Indenture filed
as Exhibit 4.3)**
4.8 Registration Agreement dated March 3, 1999 among the Mohegan
Tribal Gaming Authority, Salomon Smith Barney Inc., NationsBanc
Montgomery Securities LLC, SG Cowen Securities Corporation, Bear,
Stearns & Co. Inc., BankBoston Roberston Stephens Inc. and Fleet
Securities, Inc.**
10.1 The Mohegan Tribe--State of Connecticut Gaming Mohegan Compact
between the Tribe and the State of Connecticut (the "Compact")*
25
10.2 Agreement dated April 25, 1994 between the Tribe and the State of Connecticut resolving certain land
claims (the "Resolution Agreement")*
10.3 Memorandum of Understanding dated April 25, 1994 between the Tribe and the State of Connecticut
regarding implementation of the Compact and the Resolution Agreement*
10.4 Agreement between the Tribe and the Town of Montville, Connecticut*
10.5 Land Lease dated September 29, 1995 between the Tribe and the Authority; Amendment of Land Lease
dated September 29, 1995*
10.6 Amended to the Land Lease dated February 19, 1999 between the Mohegan Tribe of Indians of
Connecticut and the Mohegan Tribal Gaming Authority**
10.7 Amended and Restated Gaming Facility Management Agreement dated August 30, 1995 between the Mohegan
Tribe of Indians of Connecticut, the Mohegan Tribal Gaming Authority and TCA*
10.8 Development Services Agreement dated February 7, 1998 by and among the Mohegan Tribal Gaming
Authority, the Mohegan Tribe of Indians of Connecticut and TCA***
10.9 Relinquishment Agreement dated February 7, 1998 by and among the Mohegan Tribal Gaming Authority,
the Mohegan Tribe of Indians of Connecticut, Bank of America National Trust and Savings Association
as administrative agent, and NationsBanc Montgomery Securities as lead arranger**
10.10 The Loan Agreement dated as of March 3, 1999 by and among the Mohegan Tribal Gaming Authority, the
Mohegan Tribe of Indians of Connecticut and Fleet National Bank**
10.11 Defeasance Escrow Deposit Agreement dated as of March 3, 1999 by and among the Mohegan Tribal Gaming
Authority, the Mohegan Tribe of Indians of Connecticut and First Union National Bank**
10.12 Construction Reserve Disbursement Agreement dated March 3, 1999 among the Mohegan Tribal Gaming
Authority, the Mohegan Tribe of Indians of Connecticut and Fleet National Bank**
10.13 The Merrill Lynch Non-Qualified Deferred Compensation Plan Trust Agreement dated September 1, 1998
between the Authority and Merrill Lynch Trust***
10.14 Employment Agreement dated April 22, 1999 by and between the Mohegan Tribal Gaming Authority and
William J. Velardo**
10.15 Employment Agreement dated April 22, 1999 by and between the Mohegan Tribal Gaming Authority and
Mitchell Grossinger Etess**
10.16 Employment Agreement dated April 22, 1999 by and between the Mohegan Tribal Gaming Authority and
Jeffrey E. Hartmann**
- --------
* Filed by the Authority with its Registration Statement on Form S-1 (file
no. 33-80655), and incorporated herein by reference
** Filed by the Authority with its Registration Statement on Form S-4 (file
no. 333-76753), and incorporated herein by reference
*** Filed by the Authority with 1998 Form 10-K and incorporated herein by
reference
A(4). Report on Form 8-K
None.
26
B. SCHEDULE II
MOHEGAN TRIBAL GAMING AUTHORITY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED SEPTEMBER 30, 1999 and 1998
AND FOR THE PERIOD OCTOBER 12, 1996 (DATE OF COMMENCEMENT OF OPERATIONS)
THROUGH SEPTEMBER 30, 1997
Column A Column B Column C Column D Column E
- -------- ------------------- ------------------------------- --------------- -------------
Balance at Charged to costs Charged to Deductions from Balance at
beginning of period and expenses other accounts reserves(1) end of period
Description: ------------------- ---------------- -------------- --------------- -------------
Year Ended September 30,
1999
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 348,236 $ 679,218 $ -- $193,102 $ 834,352
Relinquishment
liability............ $549,125,000 $111,885,000 $ -- $ -- $661,010,000
Year Ended September 30,
1998
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 186,599 $ 523,317 $ -- $361,680 $ 348,236
Relinquishment
liability............ $ -- $ -- $549,125,000 $ -- $549,125,000
Period Ended September
30, 1997
Reserves and allowances
from asset accounts:
Allowance for doubtful
accounts............. $ -- $ 231,249 $ -- $ 44,650 $ 186,599
- ----
Note (1):Deductions from reserves include the write-off of uncollectible
accounts, net of recoveries of accounts previously written off.
27
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants........................... F-1
Balance Sheets of Mohegan Tribal Gaming Authority as of September
30, 1999 and 1998.................................................. F-2
Statements of Income (Loss) of Mohegan Tribal Gaming Authority for
the years ended September 30, 1999 and 1998, and the Period October
12, 1996 (date of commencement of operations) through September 30,
1997............................................................... F-3
Statements of Capital of the Mohegan Tribal Gaming Authority for
the years ended September 30, 1999 and 1998, and the Period October
12, 1996 (date of commencement of operations) through September 30,
1997............................................................... F-4
Statements of Cash Flows of Mohegan Tribal Gaming Authority for the
years ended September 30, 1999 and 1998 and the Period October 12,
1996 (date of commencement of operations) through September 30,
1997............................................................... F-5
Notes to Financial Statements of Mohegan Tribal Gaming Authority... F-6 to F-14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Mohegan Tribal Gaming Authority:
We have audited the accompanying balance sheets of the Mohegan Tribal Gaming
Authority (the Authority) as of September 30, 1999 and 1998, and the related
statements of income (loss), capital, and statements of cash flows for the
years ended September 30, 1999 and 1998 and for the period October 12, 1996
(date of commencement of operations), through September 30, 1997. These
financial statements and the schedule referred to below are the responsibility
of the Authority's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Mohegan Tribal Gaming
Authority as of September 30, 1999 and 1998, and the results of its operations
and cash flows for the years ended September 30, 1999 and 1998 and for the
period October 12, 1996 (date of commencement of operations), through
September 30, 1997.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in Item 14 is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Hartford, Connecticut
December 3, 1999
F-1
MOHEGAN TRIBAL GAMING AUTHORITY
BALANCE SHEETS
(in thousands)
September 30, September 30,
1999 1998
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 276,598 $ 36,264
Restricted cash (Note 4)......................... -- 74,466
Defeasance trust asset (Note 8).................. 138,845 --
Receivables, net................................. 3,306 3,067
Inventories...................................... 5,971 5,027
Other current assets............................. 1,891 2,136
---------- ---------
Total current assets........................... 426,611 120,960
Non-current assets:
Property and equipment, net (Note 6)............. 287,858 283,964
Construction in process (Note 6)................. 52,031 12,476
Trademark, net................................... 127,423 130,000
Other assets, net................................ 21,039 7,080
---------- ---------
Total assets................................... $ 914,962 $ 554,480
========== =========
LIABILITIES AND CAPITAL
Current liabilities:
Current portion of capital lease obligations
(Note 9)........................................ $ 12,222 $ 11,004
Defeasance trust liability (Note 8).............. 136,254 --
Accounts payable and accrued expenses (Note 7)... 49,403 46,857
Accrued interest payable......................... 10,625 46,231
---------- ---------
Total current liabilities...................... 208,504 104,092
---------- ---------
Non-current liabilities:
Long-term debt (Note 8).......................... 500,000 265,000
Relinquishment liability (Note 13)............... 661,010 549,125
Capital lease obligations, net of current portion
(Note 9)........................................ 7,076 18,563
---------- ---------
Total liabilities.............................. 1,376,590 936,780
---------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
Capital:
Total capital.................................... (461,628) (382,300)
---------- ---------
Total liabilities and capital.................... $ 914,962 $ 554,480
========== =========
The accompanying notes are an integral part of these financial statements
F-2
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF INCOME (LOSS)
(in thousands)
For the period
October 12,
1996 (date of
commencement
For the For the of operations)
Year Ended Year Ended through
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- --------------
Revenues:
Gaming............................ $ 641,117 $ 543,870 $440,540
Food and beverage................. 60,920 55,544 46,925
Retail and other.................. 51,034 36,328 21,489
Bingo operations.................. 13,491 13,737 13,548
--------- --------- --------
Gross revenues.................... 766,562 649,479 522,502
Less--Promotional allowances...... (84,420) (66,272) (44,265)
--------- --------- --------
Net revenues...................... 682,142 583,207 478,237
--------- --------- --------
Cost and expenses:
Gaming............................ 281,065 237,946 209,086
Food and beverage................. 21,304 21,212 24,168
Retail and other.................. 30,289 24,607 16,282
Bingo operations.................. 11,962 12,309 15,067
General and administration........ 98,871 86,813 78,207
Management fee.................... 59,532 47,442 23,243
Depreciation and amortization..... 23,397 17,528 32,155
--------- --------- --------
Total costs and expenses........ 526,420 447,857 398,208
--------- --------- --------
Income from operations............ 155,722 135,350 80,029
--------- --------- --------
Other income (expense):
Relinquishment liability
reassessment (Note 13)........... (111,885) -- --
Interest and other income......... 11,270 2,400 1,795
Interest expense.................. (55,595) (50,172) (45,137)
--------- --------- --------
(156,210) (47,772) (43,342)
--------- --------- --------
Income (loss) before extraordinary
items............................ (488) 87,578 36,687
Extraordinary items (Notes 13 and
14).............................. (38,428) (419,457) --
--------- --------- --------
Net income (loss)................. $ (38,916) $(331,879) $ 36,687
========= ========= ========
The accompanying notes are an integral part of these financial statements
F-3
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CAPITAL
(in thousands)
For the period
October 12, 1996
(commencement
For the For the of operations)
Year Ended Year Ended through
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- ----------------
Beginning balance.................. $(382,300) $ 21,931 $ --
Net income (loss).................. (38,916) (331,879) 36,687
Capital contribution by Tribe...... 97,096 -- --
Distributions to Tribe............. (137,508) (72,352) (14,756)
--------- --------- --------
Ending balance..................... $(461,628) $(382,300) $ 21,931
========= ========= ========
The accompanying notes are an integral part of these financial statements.
F-4
MOHEGAN TRIBAL GAMING AUTHORITY
STATEMENTS OF CASH FLOWS
(in thousands)
For the period
October 12,
1996 (date of
commencement
For the For the of operations)
Year Ended Year Ended through
September 30, September 30, September 30,
1999 1998 1997
------------- ------------- --------------
Cash flows provided by operating
activities:
Net income (loss)................. $ (38,916) $(331,879) $ 36,687
Adjustments to reconcile net
income (loss) to net cash flow
provided by operating activities:
Depreciation and amortization... 23,397 17,528 32,155
Loss on early extinguishment of
debt, net...................... 33,217 332 --
Write-off of financing fees..... 5,211 -- --
Loss on asset disposal.......... 453 124 --
Provision for losses on
receivables.................... 679 523 231
Relinquishment liability and
reassessment................... 111,885 419,125 --
Changes in operating assets and
liabilities:
(Increase) decrease in
receivables and other assets... (5,300) (1,064) 177
Increase in accounts payable and
accrued expenses............... 13,193 29,886 47,970
--------- --------- --------
Net cash flows provided by
operating activities............ 143,819 134,575 117,220
--------- --------- --------
Cash flows used in investing
activities:
Purchase of property and
equipment........................ (23,181) (25,700) (7,565)
Increase in construction in
process.......................... (39,555) (7,031) (5,445)
Decrease in construction payable.. -- (3,604) (40,646)
--------- --------- --------
Net cash flows used in investing
activities...................... (62,736) (36,335) (53,656)
--------- --------- --------
Cash flows provided by (used in)
financing activities:
Distributions to Tribe............ (137,508) (72,352) (14,756)
Contribution of capital by Tribe.. 97,096 -- --
Proceeds from issuance of long-
term debt........................ 500,000 -- 23,000
Capitalized financing fees........ (20,309) -- --
Defeasance trust asset............ (135,507) -- --
Proceeds from equipment financing. 878 9,772 24,495
Payment on equipment financing.... (11,148) (13,774) (19,996)
Extinguishment of Senior Secured
Notes............................ (208,717) -- --
--------- --------- --------
Net cash flows provided by (used
in) financing activities........ 84,785 (76,354) 12,743
--------- --------- --------
Net increase in cash and cash
equivalents..................... 165,868 21,886 76,307
Cash and cash equivalents at
beginning of period.............. 110,730 88,844 12,537
--------- --------- --------
Cash and cash equivalents at end
of period........................ $ 276,598 $ 110,730 $ 88,844
========= ========= ========
Supplemental disclosures:
Cash paid during the period for
interest......................... $ 44,981 $ 34,763 $ 30,140
Trademark......................... -- $ 130,000 --
Debt assumed from the acquisition
of property...................... -- -- $ 22,739
The accompanying notes are an integral part of these financial statements
F-5
MOHEGAN TRIBAL GAMING AUTHORITY
NOTES TO FINANCIAL STATEMENTS
Note 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 has been approved by the U.S. 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. (See
Note 13 for discussion of the Relinquishment Agreement between the Tribe and
TCA).
Note 2--Summary of Significant Accounting Policies
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Authority classifies as cash all highly liquid investments with a
maturity of six months or less when purchased. Cash equivalents are carried at
cost, which approximates market value.
Inventories
Inventories are stated at weighed average cost.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the assets using the straight-line basis. Useful
life estimates of asset categories are as follows:
Buildings and land improvements................................ 40 years
Furniture and equipment........................................ 3-7 years
The costs of significant improvements are capitalized. Costs of normal
repairs and maintenance are charged to expense as incurred. Gains or losses on
disposition of property and equipment are included in the determination of
income.
F-6
Fair Value of Financial Instruments
The fair value amounts disclosed below have been reported to meet the
disclosure requirements of Statement of Financial Accounting Standards No. 107
("SFAS No. 107"), "Disclosures about Fair Values of Financial Instruments" and
are not necessarily indicative of the amounts that the Authority could realize
in a current market exchange.
The carrying amount of cash and cash equivalents, receivables, accounts
payable and accrued expenses, financing facilities and capital lease
obligations approximate fair value.
At September 30, 1999, the fair value of the Authority's financing
facilities is as follows:
Senior Notes.............................................. $200.0 million
Senior Subordinated Notes................................. $300.0 million
Revenue Recognition
The Authority recognizes casino revenue as gaming wins less gaming losses.
Revenues from food and beverage, retail and special events are recognized at
the time the service is performed.
Promotional Allowances
The retail value of food, beverage and other services furnished to casino
guests without charge is included in gross revenue and then deducted as
promotional allowances to arrive at net revenues.
The estimated value of providing such promotional allowances was included in
revenues as follows (in thousands):
For the period
October 12, 1996 (date of
commencement
For the For the of operations)
Year Ended Year Ended through
September 30, September 30, September 30,
1999 1999 1997
------------- ------------- -------------------------
Food and beverage... $39,197 $34,783 $26,871
Retail and Other.... 45,223 31,489 17,394
------- ------- -------
$84,420 $66,272 $44,265
======= ======= =======
Advertising
The Authority expenses the production costs of advertising the first time
the advertising takes place, with the exception of billboard advertising,
which is treated as a prepaid and amortized over the expected period of future
benefits.
Trademarks
Trademarks are amortized on a straight-line basis over the estimated period
of benefit, which has been determined to be 37 years. As of September 30,
1999, the unamortized portion of the trademark is $127.4 million. See Note 13
for further discussion of the trademark.
Income Taxes
The Tribe is an "Indian Tribal Government" within the meaning of sections
7701(a)(40) and 7871 of the Internal Revenue Code of 1986. As such, the
Authority has tax-exempt status with respect to federal and state income
taxes.
New Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS No.
133"), "Accounting for Derivative Instruments and Hedging Activities" was
issued. This statement revises the accounting for derivative
F-7
financial instruments. The Authority is currently analyzing the impact of this
statement which is required to be adopted in the first fiscal year after June
15, 2000 and does not expect it to have a material impact on the Authority's
financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-Up Activities," which revises the accounting for start-up costs
and will require the expensing of certain costs which the Authority has
historically capitalized. The Authority is currently analyzing the impact of
this statement, which is effective for fiscal years beginning after December
15, 1998. Management does not expect this statement to have a material impact
on the Authority's financial position or results of operations.
Reclassifications
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform with the 1999 presentation.
Note 3--Cash and Cash Equivalents
At September 30, 1999 and 1998, the Authority had $237.9 million and $5.3
million, respectively invested in highly liquid investments with original
maturities not to exceed six months. For reporting purposes, cash equivalents
include all operating cash, in-house funds, and cash set aside for the
expansion of Mohegan Sun ("Project Sunburst").
Note 4--Restricted Cash
Components of restricted cash were as follows (in thousands):
September 30, September 30,
1999 1998
------------- -------------
Replacement reserve.......................... $-- $ 250
Cash maintenance............................. -- 10,000
Interest and excess cash flow................ -- 64,216
--- -------
$-- $74,466
=== =======
The restricted cash balances at September 30, 1998 were required by the $175
million Senior Secured Notes ("Senior Secured Notes") (See Note 8). During
1999, the Authority issued $200 million in Senior Notes ("Senior Notes") and
$300 million in Senior Subordinated Notes ("Senior Subordinated Notes"). The
proceeds from this financing were used to extinguish the existing Senior
Secured Notes, defease the existing 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 repayment of
the Senior Secured Notes eliminated the restricted cash requirement set forth
in the indenture. The remainder of the proceeds was set aside for Project
Sunburst and will not be used for general operations.
Note 5--Accounts Receivable
The Authority maintains an allowance for doubtful accounts which is based on
management's estimate of the amount expected to be uncollectible considering
historical experience and the information management obtains regarding the
credit worthiness of the customer. The collectibility of these receivables
could be affected by future business or economic trends. Although management
believes the allowance is adequate, it is possible that the estimated amount
of cash collections could change. At September 30, 1999 and 1998, the
Authority established approximately $834,000 and $348,000, respectively in
allowance for doubtful accounts.
F-8
Note 6--Property and Equipment, Net
Components of property and equipment were as follows (in thousands):
September 30, September 30,
1999 1998
------------- -------------
Land........................................... $ 28,581 $ 28,581
Land improvements.............................. 47,297 47,350
Buildings...................................... 185,534 173,421
Furniture and equipment........................ 73,630 63,346
-------- --------
Subtotal....................................... 335,042 312,698
Less: accumulated depreciation................. (47,184) (28,734)
-------- --------
Property and Equipment, net.................... 287,858 283,964
Construction in Process........................ 52,031 12,476
-------- --------
Total Property and Equipment................... $339,889 $296,440
======== ========
Note 7--Accounts Payable and Accrued Expenses
Components of accounts payable and accrued expenses were as follows (in
thousands):
September 30, September 30,
1999 1998
------------- -------------
Trade payables................................ $ 6,581 $ 7,558
Accrued payroll and related taxes and
benefits..................................... 12,621 9,931
Accrued gaming taxes.......................... 10,394 9,242
Other accrued liabilities..................... 19,807 20,126
------- -------
$49,403 $46,857
======= =======
Note 8--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 Notes and Senior Subordinated Notes, and to fund initial costs
related to Project Sunburst.
Financing facilities, as described below, consisted of the following (in
thousands):
September 30, September 30,
1999 1998
------------- -------------
Senior Secured Notes........................... $ -- $175,000
Subordinated Notes............................. -- 90,000
Senior Notes................................... 200,000 --
Senior Subordinated Notes...................... 300,000 --
-------- --------
$500,000 $265,000
======== ========
Senior Secured Notes
On March 3, 1999, the Authority redeemed the Senior Secured Notes for $220.0
million, including accrued interest of $11.3 million and a tender premium of
$33.7 million.
Subordinated Notes/Defeasance Trust
At September 30, 1998, the Authority had $90.0 million of subordinated
financing from Sun International and Waterford Gaming L.L.C. in the form of
notes ("Subordinated Notes"). The Authority had $20.0 million of Subordinated
Notes to each of Sun International and Waterford Gaming LLC, bearing interest
at 15.0% per annum. The Authority also had issued $50.0 million of
Subordinated Notes to Sun International evidencing draws
F-9
made by the Authority under the Secured Completion Guarantee provided by Sun
International and Waterford Gaming LLC during the initial construction of
Mohegan Sun. Sun International currently holds $42.5 million of the Secured
Completion Guarantee, and Waterford Gaming LLC holds the remaining $7.5
million. The interest rate on each Subordinated Note issued under the Secured
Completion Guarantee is at prime rate plus 1%, which is revised at intervals
of six months. The interest rate was 8.75% per annum at September 30, 1999 and
9.5% per annum at September 30, 1998 and 1997. In November 1999, the interest
rate was revised to 9.25% per annum. Interest on the Subordinated Notes is
payable semi-annually, provided that all such interest is deferred and will
not be paid until at least half of the Senior Secured Notes have been offered
to be repurchased or retired, pursuant to the terms of the Senior Secured
Notes, and certain other conditions have been fulfilled.
The Authority has agreed to redeem the outstanding Subordinated Notes on
January 1, 2000, the first permitted redemption date, at a price of 100% of
the principal amount plus accrued and unpaid interest, less $500,000. To do
this, the Authority has exercised its rights under the original purchase
agreement for the Subordinated Notes to effect a defeasance of these Notes.
The Authority has established a separate trust account with First Union
National Bank, the defeasance agent, in the form of U.S. Government
securities, in an amount that is estimated to be sufficient to redeem the
Subordinated Notes plus accrued interest on January 1, 2000. The defeasance
liability at September 30, 1999 was $136.3 million, representing the
outstanding principal balance of $90.0 million and accrued interest of $46.3
million. The Authority has reduced accrued interest by $500,000 to account for
the gain on the extinguishment of debt related to the tender of the Senior
Subordinated Notes.
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 $425 million reducing, revolving secured credit
facility ("Bank Credit Facility") (see below). A total of 50% of the
Relinquishment Agreement (see Note 13) 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. 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 (see Note 15). 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 September 30, 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 the expansion of Mohegan Sun.
F-10
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 September 30, 1999,
the Authority was in compliance with all covenant requirements.
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
agreement with Fleet National Bank. The replacement includes a $250,000
unsecured letter of credit with Fleet National Bank that will expire on August
31, 2000, and a $1.6 million letter of credit agreement with Bank of America,
which expires in April 2000. As of September 30, 1999 no amounts were drawn on
the letters of credit.
Excess Cash Purchase Offer
Pursuant to the Senior Secured Notes, the Authority was required to make an
excess cash purchase offer to all holders of the Senior Secured Notes within
120 days after each fiscal year end of the Authority, commencing September 30,
1997. The excess cash purchase offer was equal to 50% of the excess cash flow,
as defined, plus 100% of the deferred subordinated interest.
An Excess Cash Purchase Offer of $51.2 million was made on December 30,
1998. The Excess Cash Purchase Offer expired, by its terms, on January 29,
1999, and all holders declined to exercise the offer. On February 1, 1999,
pursuant to the Subordinated Note purchase agreement, an offer to repurchase
in the amount of the Excess Cash Purchase Offer was made to the holders of the
Subordinated Notes. On February 1, 1999, the holders of the Subordinated Notes
also rejected the offer. On February 2, 1999, as permitted by Section 4.07(g)
of the Senior Secured Notes, the Authority distributed the Excess Cash
Purchase Offer of $51.2 million to the Tribe. The Tribe contributed the $51.2
million back to the Authority on February 2, 1999.
Note 9--Leases
At September 30, 1999, the Authority was obligated under non-cancelable
operating leases and capital leases to make future minimum lease payments as
follows:
Operating Capital
Fiscal Year Ending September 30, Leases Leases
-------------------------------- --------- --------
(In Thousands)
2000.................................................. $2,726 $ 13,297
2001.................................................. 112 5,062
2002.................................................. -- 2,357
2003.................................................. -- 64
------ --------
Total minimum lease payments.......................... $2,838 $ 20,780
====== ========
Amount representing interest.......................... (1,482)
--------
Total obligation under capital leases................. 19,298
Less: Amount due within one year...................... (12,222)
--------
Amount due after one year............................. $ 7,076
========
Rent expense on the non-cancelable operating leases was $3.6 million for the
years ended September 30, 1999 and 1998, respectively, and $11.1 million for
the period from October 12, 1996 (date of commencement of operations) through
September 30, 1997.
Note 10--Related Party Transactions
The Tribe provided governmental and administrative services to the Authority
in conjunction with the operation of Mohegan Sun for the fiscal years ended
September 30, 1999 and 1998, and for the period October 12, 1996 (date of
commencement of operations) through September 30, 1997. During the fiscal year
ended
F-11
September 30, 1999, the Authority incurred $8.3 million of expenses for such
services, of which $7.2 million was paid as of September 1999. The Authority
incurred $7.7 million of expenses for fiscal 1998 and for the period ended
September 30, 1997.
The Tribe, through one of its limited liability companies, has provided
goods to the Authority for resale at its retail location. For the fiscal years
ended September 30, 1999 and 1998, the Authority expended $417,000 and
$400,000, respectively for the resale goods. For the period from October 12,
1996 (date of commencement of operations) through September 30, 1997, the
Authority expended $296,000.
The Tribe, also through one of it's limited liability companies controlled
by the Tribe, has entered into various land lease agreements with the
Authority for access, parking and related purposes for Mohegan Sun. For the
fiscal years ended September 30, 1999 and 1998, the Authority expended
$412,000 and $446,000, respectively relating to the lease agreements. For the
period October 12, 1996 (date of commencement of operations) through September
30, 1997, the Authority expended $271,000.
The Authority engages McFarland Johnson, Inc. for surveying, civil
engineering, and professional design services. Roland Harris, Chairman of the
Management Board is a consultant for this corporation for a fixed fee. For the
fiscal years ended September 30, 1999 and 1998, and for the period ended
September 30, 1997, the Authority incurred $495,000, $41,000, and $125,000,
respectively for such services. McFarland Johnson formerly conducted business
as Harris & Clark. The Authority believes the terms of these engagements are
comparable to those that would pertain to arms length engagements of
unaffiliated firms.
As of September 30, 1999, the Authority employed 117 Mohegan tribal members.
Note 11--Employee Benefit 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 $2.0 million, $1.4
million and $792,000, respectively, to this plan for the year ended September
30, 1999 and 1998, and the period ended September 30, 1997.
Effective September 1, 1998, the Authority, in conjunction with the Tribe,
adopted a Non-Qualified Deferred Compensation Plan for certain key employees.
This plan allows participants to defer up to 100% of their post-tax income to
the plan. As of September 30, 1999, contributions have totaled $138,000.
Note 12--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 (except those consented to by the Tribe and/or
the Mashantucket Pequot Tribe) gaming operations with slot machines or other
commercial casino table games within Connecticut. The Authority reflected
expenses associated with Slot Win Contribution totaling $121.1 million, $102.3
million and $80.7 million, respectively for the fiscal years ended September
30, 1999 and 1998, and for the period from October 12, 1996 (date of
commencement of operations) through September 30, 1997.
F-12
Town of Montville Agreement
On June 16, 1994, the Tribe and the Town of Montville (the "Town") entered
into an agreement whereby the Tribe agreed to pay to the Town an annual
payment of $500,000 to minimize the impact to the Town resulting from
decreased tax revenues on reservation land held in trust. 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 September
30, 1999, the Authority has paid $2.1 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 basic fee of $20.5
million for services including, but not limited to, pre-construction review
and construction phase contract administration. 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.
Note 13--TCA Agreements
Management Agreement
The Tribe and TCA entered into the Amended and Restated Gaming Facility
Management Agreement (the "Management Agreement"), pursuant to which the Tribe
has retained and engaged TCA, on an independent contractor basis, to operate,
manage and market Mohegan Sun.
The Tribe has assigned its rights and obligations under the Management
Agreement to the Authority. The term of the Management Agreement is seven
years ending on October 11, 2003. TCA holds responsibility to manage Mohegan
Sun in exchange for payments ranging from 30% to 40% of net income, before
management fees, as defined, depending upon profitability levels. Management
fees totaled $59.5 million, $47.4 million and $23.2 million, respectively, for
the fiscal years ended September 30, 1999, 1998 and for the period October 12,
1996 (date of commencement of operations) through September 30, 1997. At
September 30, 1999, $4.4 million was owed to TCA in connection with the
Management Agreement. See discussion on Relinquishment Agreement below.
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 the "Junior Relinquishment Payments"), each of
which are calculated as 2.5% of revenues, as defined, have separate payment
schedules and
F-13
priority. Payment of Senior Relinquishment Payments commence on April 25,
2000, twenty-five days following 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 following 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. The Relinquishment Liability of $549.1
million was established at September 30, 1998 based on the present value of
the estimated future obligations under the agreement.
At September 30, 1999, the Relinquishment Liability has been reassessed to
be $661.0 million and the $111.9 million increase has been reflected as a
Relinquishment Liability Reassessment in the accompanying statement of
income(loss). 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 on the time value of money due to
the passage of time.
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. Therefore,
for the year ended September 30, 1998, the difference between the estimated
relinquishment liability of $549.1 million and the value of the Trademark of
$130 million, has been reflected as an extraordinary item of $419.1 million in
the accompanying statement of income(loss) for the year ended September 30,
1998.
Development Agreement
The Authority has also negotiated a second agreement with TCA (the
"Development Agreement"), which makes TCA the exclusive developer of the
planned expansion of Mohegan Sun. Under the Development Agreement, TCA
oversees the planning, design and construction of the expansion of Mohegan Sun
and will receive a development fee of $14.0 million for such services. The
development fee shall be paid as follows: on January 15, 2000 and thereafter
within fifteen days following the end of each calendar quarter until Project
Sunburst is completed, the Authority shall pay TCA a percentage of the
development fee equal to the completed percentage of Project Sunburst as of
December 31, 1999 and on the incremental completed percentage at the end of
each successive quarter.
Note 14--Extraordinary Items
The Authority incurred $38.4 million in extraordinary items for the year
ended September 30, 1999. Included in the expense is $33.7 million related to
the early extinguishment of the Senior Secured Notes and $5.2 million related
to the write-off of financing fees associated with the original facility
construction. Also included is an extraordinary gain for the forgiveness of
debt of $500,000 associated with the defeasance of the Subordinated Notes (See
Note 8). For the year ended September 30, 1998, the Authority incurred $419.5
million of extraordinary items consisting of $419.1 million related to the
Relinquishment Liability and $332,000 related to an early extinguishment of
debt.
Note 15--Subsequent Events
The Authority has exercised its right to increase the Bank Credit Facility,
as further described in Note 8. On November 15, 1999, the Bank Credit Facility
was increased from $425 million to $459.5 million.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Mohegan Tribal Gaming Authority has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on December 14, 1999.
MOHEGAN TRIBAL GAMING AUTHORITY
By: /s/ Roland J. Harris
________________________________________
Roland J. Harris
Chairman, Management Board,
Duly Authorized
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on December 14, 1999.
Signature Title
/s/ Roland J. Harris Chairman and Member, Management
- --------------------------------------- Board
Roland J. Harris
/s/ Jayne G. Fawcett Vice-Chair and Member, Management
- --------------------------------------- Board
Jayne G. Fawcett
/s/ William J. Velardo President and General Manager,
- --------------------------------------- Mohegan Sun (Principal Executive
William J. Velardo Officer)
/s/ Jeffrey E. Hartmann Executive Vice President, Finance
- --------------------------------------- and Chief Financial Officer,
Jeffrey E. Hartmann Mohegan Sun (Principal Financial
and Accounting Officer)
/s/ Carlisle M. Fowler Treasurer and Member, Management
- --------------------------------------- Board
Carlisle M. Fowler
/s/ Loretta F. Roberge Corresponding Secretary and Member,
- --------------------------------------- Management Board
Loretta F. Roberge
/s/ Shirley M. Walsh Recording Secretary and Member,
- --------------------------------------- Management Board
Shirley M. Walsh
/s/ Mark F. Brown Member, Management Board
- ---------------------------------------
Mark F. Brown
/s/ Courtland C. Fowler Member, Management Board
- ---------------------------------------
Courtland C. Fowler
/s/ Maynard L. Strickland Member, Management Board
- ---------------------------------------
Maynard L. Strickland
/s/ Glen R. LaVigne Member, Management Board
- ---------------------------------------
Glen R. LaVigne