SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: 9/30/97
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period to .
Commission file number: 333-17795
WATERFORD GAMING, L.L.C.
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1465402
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
914 HARTFORD TURNPIKE,
P.O. BOX 715 WATERFORD, CT 06385
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 860-442-4559
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
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
---------------------
The following discussion should be read in conjunction with, and is qualified
in its entirety by, the Company's financial statements and the notes thereto
included elsewhere herein.
Development and Operational Activities
- --------------------------------------
The operation of the Company or its predecessors in its role as a managing
general partner of Trading Cove Associates (the "Manager") has been to
negotiate the Management Agreement as defined, to assist the Mohegan Tribe
of Indians of Connecticut (the "Tribe") and the Mohegan Tribal Gaming
Authority (the "Authority") in obtaining federal recognition, negotiate the
tribal-state compact with the State of Connecticut, obtain financing for the
development of the Mohegan Sun Casino (the "Mohegan Sun") located in
Uncasville, Connecticut, and participate in the design and development of the
Mohegan Sun which commenced operations on October 8, 1996. Since the opening
of the Mohegan Sun, the Company has overseen the Mohegan Sun's day-to-day
operations.
Overview of Current and Future Cash Flows
- -----------------------------------------
The Company expects to fund its operating debt service and capital needs
from cash flows from the Management Agreement as defined, Subordinated Notes
(to the extent interest and Subordinated Notes Fee Amounts, as defined, are
payable in cash on the Subordinated Notes and to the extent of principal
payments on the Subordinated Notes), Non-PIK Completion Guarantee Notes,
as defined, (to the extent interest and Non-PIK Completion Guarantee Notes
Fee Amounts, as defined, are payable in cash on the Non-PIK Completion
Guarantee Notes as defined) and from amounts in the Company's cash collateral
account (the "Cash Collateral Account"). Based upon the Company's anticipated
future operations, management believes that available cash flow will be
sufficient for that purpose. The following is a summary of the cash flows of
the Company.
For the nine month period ended September 30, 1997, the Company received
$3,946,749 from the Manager and $1,904,516 was due from the Manager, which
represents the Company's share of approximately $21,254,000 in net
management fees earned by the Manager from the Authority pursuant to the
terms of the Management Agreement, as defined, for the same period. The
actual amount of management fees earned by the Manager for any annual period
are subject to year-end adjustment. For the nine month period ended
September 30, 1997 the Company also received $299,574 in cash distributions
from the Manager which represents the Company's share of repayments by
the Tribe to the Manager of amounts due in terms of the promissory note
dated September 29, 1995 between the Manager and the Tribe.
10
Sources of Revenues
- -------------------
The Company has three primary sources of revenues: distributions on its
partnership interest in the Manager, payments on the Subordinated Notes and
payments on the Non-PIK Completion Guarantee Notes, as defined.
Distribution on the Company's partnership interest in the Manager
- -----------------------------------------------------------------
Pursuant to an agreement between the Manager and the Tribe, the Manager
manages the Mohegan Sun for a management fee under a seven year management
agreement (the "Management Agreement"). The Manager's primary source of
revenue is management fees under the Management Agreement. The management
fees are calculated in three tiers based upon Net Revenues, as defined, of
the Mohegan Sun set forth below (in thousands):
I II III
________________ __________________ __________________
40% of Net Revenues in Tier I Revenues in
Revenues up to plus Tiers I &
35% of Net II plus 30% of
Revenues Net Revenues
between above
________________ __________________ __________________
Year 1............. $50,546 $50,547-$63,183 $63,183
Year 2............. $73,115 $73,116-$91,394 $91,394
Year 3............. $91,798 $91,799-$114,747 $114,747
Year 4............. $95,693 $95,694-$119,616 $119,616
Year 5............. $104,107 $104,108-$130,134 $130,134
Year 6 (subject to
Buyout Option)..... $114,335 $114,336-$142,919 $142,919
Year 7 (subject to
Buyout Option).... $130,944 $130,945-$163,680 $163,680
The monthly management fee payments are calculated against 1/12th of the
amounts set forth above, and then adjusted annually within 60 days of the close
of the fiscal year. This annual adjustment may or may not have a material
effect on cash flow. As defined in the Management Agreement, "Net Revenues"
of the Mohegan Sun means the amount of the gross revenues of the facility
less operating expenses and certain specified categories of revenue, such as
income from any financing or refinancing, taxes or charges received from
patrons on behalf of and remitted to a governmental entity, proceeds from the
sale of capital assets, insurance proceeds and interest on the capital
replacement reserve. Net Revenues also include Net Gaming Revenues, which are
equal to the amount of the "net win" from Class III Gaming operations (i.e.,
the difference between gaming wins and losses) less all gaming-related
operational expenses (excluding the management fee). Within 25 days after
the end of each calendar month, the Manager is required to calculate and
report to the Tribe, the gross revenues, operating expenses and net revenues.
11
In addition, the Manager is required to fund $1.2 million per year ($100,000
per month) from its management fees into a capital replacement reserve. The
Management Agreement has a term of seven years that commenced upon the
opening of the Mohegan Sun, subject to a right of the Authority to buy-out
the Management Agreement after the fifth year. If the Management Agreement
is bought out after the fifth year, the Company will use its share of the
proceeds to redeem the Notes.
Pursuant to the Amended and Restated Omnibus Financing Agreement, as agreed
to by the Manager, the Company and Sun International, dated September 10,
1997 (effective as of September 29, 1995), upon receipt of the management
fees, the Manager is required to make a number of different types of
payments to its subcontractors. The subcontracts are primarily with the
Manager's partners or their affiliates. Some of these payments are one-time
non-recurring payments (the "Non-recurring Payments") and others are required
on a continuing basis (the "Continuing Payments"). The payments marked with
an asterisk (*) below are Non-recurring Payments and the others are Continuing
Payments. One of the considerations used by the National Indian Gaming
Commission in determining whether or not to approve a management contract is
whether the Manager is providing a portion of the capital required.
Accordingly, the Manager agreed to provide or cause to be provided $40 million
of capital in the form of the Subordinated Notes. However, at the time that
the subordinated loan was made, the partners of the Manager, including the
Company's predecessors-in-interest, did not participate in the loan in
accordance with their economic interests in the Manager. Therefore, the
partners of the Manager agreed that Sun International, who subscribed for
almost all of the Subordinated Notes, would be entitled to fees (the
"Subordinated Notes Fee Amounts") for agreeing to participate in the Mohegan
Sun project. Other fees payable are to compensate the recipients for other
subcontracted services provided by them to the Mohegan Sun.
As of September 30, 1997 the Authority had outstanding the following
Authority Subordinated Notes as defined.
1. 15% subordinated notes principal amount $40,000,000.
2. Completion guarantee subordinated notes principal amount $50,000,000.
For purposes of points (c), (d) and (e) below the Company, Sun
International and the Manager have agreed that the completion guarantee
subordinated notes principal amount of $50,000,000 be split into two
principal amounts of $32,500,000 completion guarantee subordinated notes
(the "Non-PIK Completion Guarantee Notes") and $17,500,000 completion
guarantee subordinated notes (the "PIK Completion Guarantee Notes").
The following table sets forth the priority of the distribution of the
management fee from the Manager to its partners:
(a) First, for the period ending on November 8, 1996, a maximum sum of
$938,000 will be paid from the Management Services Fee as defined for
expenses incurred with respect to the Mohegan Sun through such date, and
for the period commencing on November 9, 1996 and ending on September 30,
1997, and for each fiscal year of the Authority thereafter, up to
$2,000,000 per fiscal year for the Authority of the Management Services
Fee will be paid by the Manager for expenses.
12
*(b) Second, to return capital contributions made by the partners of the
Manager after September 29, 1995. These capital contributions
aggregated $2.2 million and were repaid to the partners, 50% to the
Company and 50% to Sun Cove Ltd. These capital contributions were
deemed returned at the consummation of the offering of the Notes upon
the distribution by the Manager of the $1.7 million in principal amount
of Subordinated Notes together with accrued interest and a cash
distribution totalling $275,000, 50% to Sun Cove Ltd. and 50% to the
Company.
(c) Third, to pay Sun International fee amounts of $2,500,000 on April 30,
1996, $2,500,000 on October 31, 1996, $2,700,000 on April 30, 1997 and
every six months thereafter, beginning October 31, 1997 an amount equal
to the product of (1) $2,300,000 and (2) a fraction, the numerator of which
is the weighted average principal amount of Subordinated Notes outstanding
including all PIK Amounts (defined as interest that is not paid in cash
by the Authority on any interest payment date, May 15 and November 15),
during the applicable Semi-Annual Period (defined as the six month periods
ending, respectively, on April 30 and October 31) and the denominator of
which is $40,000,000 (the "Subordinated Notes Fee Amounts"). On November
8, 1996 the Company acquired from Sun International $19,150,000 principal
amount of Subordinated Notes and Sun International assigned to the Company
its right to receive $3,850,000 of the Subordinated Notes Fee Amounts
payable on April 30, 1996, October 31, 1996 and April 30, 1997
and from May 1, 1997 and every six months thereafter each of the Company
and Sun International are entitled to one half of the Subordinated
Notes Fee Amounts payable beginning October 31, 1997.
(d) Fourth, i) to pay Sun International fee amounts of $525,000 on October
31, 1996, $2,600,000 on April 30, 1997 and every six months thereafter,
beginning October 31, 1997 an amount equal to the product of the number
arrived at by dividing the difference between (26 1/2% and the Base Rate)
by two (the "Multiplier") and the weighted average of principal amount of
Non-PIK Completion Guarantee Notes outstanding during the applicable
Semi-Annual Period ( the "Non-PIK Completion Guarantee Notes Fee Amounts"),
and ii) payment of an amount equal to the Base Rate on the Non-PIK
Completion Guarantee Notes to the extent the Authority is not permitted
to pay interest thereon (the "Deferred Interest Amounts"). This amount
will be paid semi-annually pari passu with the amount under paragraph
(d)i) above. When the authority can pay such interest, payment under this
paragraph (d)ii) shall be reduced accordingly.
In addition when the Authority pays Sun International any amounts relating
to the Non-PIK Completion Guarantee Notes (other than current interest),
such amounts that relate to the Deferred Interest Amounts acquired by the
Manager shall be immediately paid over to the Manager.
13
Up until October 12, 1997 any amounts payable under paragraph (d)i) and
(d)ii) will be paid to Sun International. After October 12, 1997
portions of these amounts become payable to the Company as it purchases
its share of the Non-PIK Completion Guarantee Notes.
(e) Fifth, to pay Sun International fee amounts of $80,000 on October 31,
1996, $1,350,000 on April 30, 1997 and every six months thereafter,
beginning October 31, 1997 an amount equal to the product of the
Multiplier and the weighted average of principal amount of PIK
Completion Guarantee Notes (including the applicable PIK Amounts)
outstanding during the applicable Semi-Annual Period.
*(f) Sixth, return of capital contributions made before September 29, 1995.
These capital contributions aggregated $6,715,000 (balance as of September
30, 1997 is approximately $898,000 and is to be repaid to the partners,
50% to the Company and 50% to Sun Cove Ltd., from repayments by the Tribe
to the Manager of amounts due in terms of the promissory note dated
September 29, 1995 between the Manager and the Tribe).
*(g) Seventh, payment of a Development Services Fee to Sun International
Management Limited ("SIML") equal to $8,280,000 constituting 3% of the
total development costs (less land acquisition costs) of the Mohegan Sun
plus $25,000.
<REVISION>
SIML has subcontracted with certain affiliates of the Company. The
fees payable by SIML to the affiliates of the Company are equal to
20.83% of the Development Services Fee plus $25,000 (total $1,749,724).
</REVISION>
(h) Eighth, payment of a monthly Management Services Fee (less the amounts
paid pursuant to paragraph (a) above) equal to the lesser of i) 1% of the
gross revenues of the Mohegan Sun or ii) 25% of the sum of the Excess Cash
(as defined in the Amended and Restated Partnership Agreement of the
Manager) of the Manager plus 25% of the organizational and administrative
fee and the marketing and casino operations fee. After deducting
operating expenses (which will be the following amounts: $2.0 million
if the Mohegan Sun's EBITDA (defined as the Mohegan Sun's operating income
plus depreciation, amortization and other non-cash charges) is $200.0
million or less, $3.0 million if the Mohegan Sun's EBITDA is greater than
$200.0 million but less than $225.0 million, and $4.0 million if the
Mohegan Sun's EBITDA is greater than $225.0 million) the remaining amounts
will be paid in equal amounts to SIML and the Company.
*(i) Ninth, payment of a fee to Sun International of $5,520,000 constituting
2% of the total development costs (less land acquisition costs) of the
Mohegan Sun.
(j) Tenth, distribution of amount equal to the state and federal income tax
liability of the Manager as if it were an individual paying federal income
tax and the higher of Michigan or Connecticut taxes. This amount will be
paid 50% to Sun Cove Ltd. and 50% to the Company.
14
(k) Eleventh, all remaining fees and Excess Cash distributed 50% to Sun
Cove Ltd., 45% to the Company and 5% to a former partner.
The previous items reflect the Amended and Restated Omnibus Financing
Agreement. The Company believes that the amendments are not adverse to the
economic interests of the holders of the Notes.
The Company has an obligation to purchase from Sun International $7.5 million
of the aggregate principal amount of the outstanding Non-PIK Completion
Guarantee Notes in three equal annual installments. During September 1997,
the Company purchased $2.5 million Non-PIK Completion Guarantee Notes, the
first of the three installments. When the Authority pays the Company any
amounts relating to the Non-PIK Completion Guarantee Notes (other than current
interest) such amounts that relate to the Deferred Interest Amounts acquired
by the Manager pursuant to Paragraph (d)ii) above shall be immediately paid
over to the Manager.
Payments by the Authority on the Subordinated Notes, Non-PIK Completion
- -----------------------------------------------------------------------
Guarantee Notes and PIK Completion Guarantee Notes (collectively the "Authority
- -------------------------------------------------------------------------------
Subordinated Notes")
- --------------------
Interest accrues on the Authority Subordinated Notes semi-annually. Interest
is deferred (and compounds semi-annually) until the Authority purchases or
offers to purchase at least 50% of its $175 million, 13 1/2% Authority Senior
Secured Notes due 2002 (the "Authority Senior Secured Notes") and certain fixed
charge coverage ratios are met. The Authority is required to offer annually
to purchase the Authority Senior Secured Notes with the sum of (i) 50% of its
Excess Cash Flow (defined as an amount equal to the cash flow of the Authority
for any given period, less (a) management fees for such period, (b) interest
expense and principal payments on indebtedness of the Authority for such
period, (c) amounts set aside in the Cash Maintenance Account (as defined in
the indenture for the Authority Senior Secured Notes) for such period, (d)
amounts for the payment of federal and state taxes for such period, and (e)
certain other amounts (not to exceed $6.8 million) for such fiscal year),
(ii) 100% of the amount of Deferred Subordinated Interest (as defined in the
Indenture for the Authority Senior Notes) for such fiscal year and (iii) accrued
and unpaid interest, if any, to the date of closing of such Excess Cash
Purchase Offer (as defined in the indenture for the Authority Senior Secured
Notes). If the holders of the Authority Senior Secured Notes do not accept the
offer, then such amount of the Excess Cash must be offered to purchase the
Authority Subordinated Notes. In the event that the Company receives an offer
to purchase the Authority Subordinated Notes, the Indenture requires the Company
to accept such offer in the same proportion as Sun International. The Authority
may make an optional redemption of the Authority Subordinated Notes; however,
such redemption, except as detailed above, may be made only after the Authority
Senior Secured Notes have been paid in full.
Results of Operations
- ---------------------
Discussion of the period from July 1, 1997 to September 30, 1997
- ----------------------------------------------------------------
Interest income. Interest income of $1,084,271 for the quarter ended
September 30, 1997 was attributable to accrued interest on the Subordinated
Notes of $944,145 and interest earned on cash and cash equivalents and temporary
investments of $140,126.
15
Subordinated notes fee income - Trading Cove Associates. For the three
months ended September 30, 1997 the Company had no subordinated notes fee
income - Trading Cove Associates.
Interest expense. Interest expense of $2,071,875 for the quarter ended
September 30, 1997 resulted from accrued and unpaid, interest on the Notes.
Amortization on deferred financing costs. Amortization on deferred financing
costs for the three months ended September 30, 1997 of $131,246 resulted from
amortization of costs associated with the issuance of the Notes.
General and administrative expenses. General and administrative expenses
for the quarter ended September 30, 1997 was $45,242 which was primarily
attributable to investment management, legal and accounting fees.
Equity in income of Trading Cove Associates. Equity in income of Trading
Cove Associates for the three months ended September 30, 1997 was $2,084,514.
As a result of the foregoing factors, the Company experienced net income of
$920,422 for the three months ended September 30, 1997.
Discussion of the period from January 1, 1997 to September 30, 1997
- -------------------------------------------------------------------
Interest income. Interest income of $3,331,981 for the period ended
September 30, 1997 was attributable to accrued interest on the Subordinated
Notes of $2,742,556 and interest earned on cash and cash equivalents and
temporary investments of $589,425.
Subordinated notes fee income - Trading Cove Associates. Subordinated notes
fee income - Trading Cove Associates of $1,285,039 for the nine months ended
September 30, 1997 represents Subordinated Notes Fee Amounts received as
detailed under point "c" of the table set forth above under "Overview of
Current and Future Cash Flows".
Interest expense. Interest expense of $6,222,125 for the period ended
September 30, 1997 resulted from paid, and accrued and unpaid, interest on
the Notes. On May 15, 1997 $4,311,396 was paid as interest on the Notes.
The next interest payment date is November 15, 1997.
Amortization on deferred financing costs. Amortization on deferred financing
costs for the nine months ended September 30, 1997 of $343,974 resulted from
amortization of costs associated with the issuance of the Notes.
General and administrative expenses. General and administrative expenses
for the period ended September 30, 1997 was $90,176 which was primarily
attributable to investment management, legal and accounting fees.
16
Equity in income of Trading Cove Associates. Equity in income of Trading
Cove Associates for the nine months ended September 30, 1997 was $1,224,549.
As a result of the foregoing factors, the Company experienced a net loss of
$814,706 for the nine months ended September 30, 1997.
The Company was formed on September 30, 1996 and accordingly there are no
comparative results of operations for the corresponding quarter ending September
30, 1996 and for the corresponding nine months ending September 30, 1996.
Liquidity and Capital Resources
- -------------------------------
The initial capital of the Company consists of the partnership interests in
the Manager contributed by Slavik Suites, Inc. and LMW Investments, Inc. in
forming the Company. In connection with the offering of the Notes, the Company
used approximately $25.1 million to purchase $19.2 million in principal amount
of Subordinated Notes plus accrued and unpaid interest and Subordinated Notes
Fee Amounts. In addition, the Manager distributed approximately $850,000 in
principal amount of Subordinated Notes to the Company. During September 1997
the Company purchased $2.5 million Non-PIK Completion Guarantee Notes plus
accrued and unpaid interest and Non-PIK Completion Guarantee Fee Amounts
(total cost approximately $2.8 million).
At this time the Company anticipates that no further investment is required
in the Manager by the Company.
Current Assets decreased from $16,737,416 to $15,891,823 at September 30,
1997. The decrease was primarily the result of the interest payment on the
Notes of $4,311,396 on May 15, 1997 and the purchase of the Non-PIK Completion
Guarantee Notes during September, 1997.
The Company has three primary sources of revenues: Distributions on its
partnership interest in the Manager and debt service payments on the
Subordinated Notes and Non-PIK Completion Guarantee Notes. The Company
anticipates regular payments from the Manager based on the results of the
Manager and management fee payment by the Authority.
Current Liabilities increased from $1,273,614 to $3,171,743 at September 30,
1997. The increase was primarily attributable to the increase in accrued and
unpaid interest on the Notes.
The Company is required to purchase from Sun International on each October
12, 1998 and October 12, 1999 $2.5 million of the outstanding first funded
principal amount of Non-PIK Completion Guarantee Notes owned by Sun
International. The purchase price which is to be paid by the Company to Sun
International will be equal to the outstanding principal balance of the Non-PIK
Completion Guarantee Notes to be purchased plus any amounts due thereon under
points (d)i) and (d)ii) of the table set forth above under "Overview of
Current and Future Cash Flows". As of September 30, 1997, $32.5 million
principal was outstanding as Non-PIK Completion Guarantee Notes.
17
The Company is required to make a mandatory redemption on November 15, 1997
of Notes using 100% of Company Excess Cash, held by the Company in excess of
$10 million, as of September 30, 1997. Company Excess Cash as of September
30, 1997 totalled $3,979,590. On November 15, 1997 $3,529,000 principal amount
of Notes will be redeemed at the redemption price of 112.750%.
The Company believes that it will fund its current operating expenses, debt
service requirements and capital needs from cash flows from the Manager,
payments under the Subordinated Notes (to the extent interest payments on the
Subordinated Notes is payable in cash and to the extent of principal payments
on the Subordinated Notes), payments under the Non-PIK Completion Guarantee
Notes (to the extent interest payments on the Non-PIK Completion Guarantee
Notes is payable in cash and to the extent of principal payments on the Non-PIK
Completion Guarantee Notes) and from amounts in the Cash Collateral Account.
Based upon the Company's anticipated future operations, management believes
these sources will be sufficient to meet the Company's anticipated requirements
for future operating expenses and future scheduled payments of principal of and
interest on the Notes. No assurance, however, can be given that the operating
cash flow will be sufficient for that purpose. The Mohegan Sun has only
recently begun operations and does not have a long operating history.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: November 25, 1997 By: /s/Len Wolman
Len Wolman, Chief Executive Officer
Date: November 25, 1997 By: /s/Del Lauria
Del Lauria, Chief Financial Officer
