UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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: 3/31/98
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: 333-17795
WATERFORD GAMING, L.L.C.
------------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-1465402
----------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 .
WATERFORD GAMING, L.L.C.
INDEX TO FORM 10-Q/A
Page
Number
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Report of Independent Accountants 1
Financial Information 2
Condensed Balance Sheets of Waterford Gaming, L.L.C. as of
March 31, 1998 (unaudited)and December 31, 1997 3
Condensed Statements of Operations of Waterford Gaming, L.L.C.
for the three months ended March 31, 1998 (unaudited) and March
31, 1997 (unaudited) 4
Condensed Statements of Changes in Members' Deficiency of
Waterford Gaming, L.L.C. for the three months ended March 31, 1998
(unaudited) and March 31, 1997 (unaudited) 5
Condensed Statements of Cash Flows of Waterford Gaming, L.L.C.
for the three months ended March 31, 1998 (unaudited) and
March 31, 1997 (unaudited) 6
Notes to Condensed Financial Statements for Waterford
Gaming, L.L.C. 7-9
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
Signatures - Waterford Gaming, L.L.C. 20
Report of Independent Accountants
---------------------------------
To the Members of Waterford Gaming, L.L.C.:
We have reviewed the condensed balance sheet of Waterford Gaming, L.L.C. (the
"Company") as of March 31, 1998, and the related condensed statements of
operations for the three months ended March 31, 1998 and 1997, and the related
condensed statements of changes in members' deficiency and cash flows for the
three months ended March 31, 1998 and 1997. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of December 31, 1997, and the related
statements of operations, changes in member's equity (deficiency) and cash
flows for the year then ended (not presented herein); and in our report
dated March 6, 1998, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the condensed
balance sheet as of December 31, 1997, is fairly stated, in all material
respects, in relation to the balance sheet from which is has been derived.
Coopers & Lybrand, L.L.P.
Hartford, Connecticut
May 8, 1998
1
PART I -- FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
The amended unaudited condensed financial information as of March 31, 1998,
and for the three months ended March 31, 1998, included in this report was
reviewed by Coopers & Lybrand, L.L.P., independent public accountants, in
accordance with the professional standards and procedures established for
such reviews by the American Institute of Certified Public Accountants.
2
WATERFORD GAMING, L.L.C.
CONDENSED BALANCE SHEETS
March 31, 1998 (Unaudited) and December 31, 1997
__________
ASSETS
March 31, December 31,
1998 1997
----------- ------------
Current assets:
Cash $ 694,382 $ 232,759
Cash in escrow --- 5,000,000
Temporary investments 4,440,997 4,383,379
Due from Trading Cove Associates 1,813,759 293,923
Other assets 31,643 70,206
----------- -----------
Total current assets 6,980,781 9,980,267
----------- -----------
Trading Cove Associates - equity investment 9,716,354 10,384,292
Beneficial interest - Leisure Resort
Technology, Inc. 4,852,904 ---
15% subordinated notes receivable 28,757,102 27,742,146
Completion guarantee subordinated
note receivable 2,598,958 2,548,162
Deferred financing costs, net of accumulated
amortization of $633,594 and $518,076
at March 31, 1998 and December 31, 1997,
respectively 2,843,016 2,702,744
----------- -----------
Total assets $55,749,115 $53,357,611
=========== ===========
LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities:
Accrued expenses $ 349,505 $ 78,328
Accrued interest on senior notes
payable 2,962,103 1,002,715
----------- -----------
Total current liabilities 3,311,608 1,081,043
12-3/4% senior notes payable 61,471,000 61,471,000
----------- -----------
Total liabilities 64,782,608 62,552,043
----------- -----------
Members' deficiency (9,033,493) (9,194,432)
----------- -----------
Total liabilities and members'
deficiency $55,749,115 $53,357,611
=========== ===========
The accompanying notes are an integral part of the financial statements.
3
WATERFORD GAMING, L.L.C.
CONDENSED STATEMENTS OF OPERATIONS
for the three months ended March 31, 1998 and March 31, 1997
(Unaudited)
__________
For the three For the three
months ended months ended
March 31, 1998 March 31, 1997
-------------- --------------
Revenue:
Interest and dividend income $ 1,143,105 $ 1,096,412
Subordinated notes fee income -
Trading Cove Associates --- 442,340
Completion guarantee note fee
income - Trading Cove Associates 21,250 ---
Management services income -
Trading Cove Associates 1,813,759 ---
----------- -----------
Total revenue 2,978,114 1,538,752
----------- -----------
Expenses:
Interest expense 1,959,388 2,071,875
General and administrative 94,704 61,170
Amortization on beneficial interest -
Leisure Resort Technology, Inc. 204,307 ---
Amortization on deferred financing
costs 115,518 101,688
----------- -----------
Total expenses 2,373,917 2,234,733
----------- -----------
604,197 (695,981)
Equity in loss of Trading Cove
Associates (443,258) (405,400)
----------- -----------
Net income (loss) $ 160,939 $(1,101,381)
=========== ===========
The accompanying notes are an integral part of the financial statements.
4
<TABLE>
WATERFORD GAMING, L.L.C.
CONDENSED STATEMENTS OF CHANGES IN MEMBERS' DEFICIENCY
for the three months ended March 31, 1998 and March 31, 1997
(Unaudited)
__________
For the three months ended For the three months ended
March 31, 1998 March 31, 1997
LMW Total LMW Total
Slavik Investments, Members' Slavik Investments, Members'
Suites, Inc. Inc. Deficiency Suites, Inc. Inc. Deficiency
------------ ------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1 $(6,154,626) $(3,039,806) $(9,194,432) $(5,412,165) $(2,687,138) $(8,099,303)
Net income (loss) 109,111 51,828 160,939 (746,700) (354,681) (1,101,381)
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31 $(6,045,515) $(2,987,978) $(9,033,493) $(6,158,865) $(3,041,819) $(9,200,684)
=========== ============ =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
5
</TABLE>
WATERFORD GAMING, L.L.C.
CONDENSED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1998 and March 31, 1997
(Unaudited)
___________
For the three For the three
months ended months ended
March 31, 1998 March 31, 1997
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ 160,939 $(1,101,381)
------------ -----------
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Amortization 319,825 101,688
Equity in loss of Trading Cove
Associates 443,258 405,400
Changes in operating assets
and liabilities:
Accrued interest receivable --- 29,386
Accrued interest on temporary
investments --- (1,107)
Accrued interest receivable -
15% subordinated notes
receivable (1,014,956) ---
Accrued interest receivable -
completion guarantee
subordinated note
receivable (51,221) ---
Due from Trading Cove
Associates (1,519,836) (442,340)
Other assets 38,563 ---
Accrued expenses 271,177 (11,222)
Accrued interest on senior
notes payable 1,959,388 2,071,875
----------- -----------
Total adjustments 446,198 2,153,680
----------- -----------
Net cash provided by
operating activities 607,137 1,052,299
----------- -----------
Cash flows from investing activities:
Beneficial interest - Leisure Resort
Technology, Inc. (5,057,211) ---
Release of cash in escrow 5,000,000 ---
Distributions from Trading Cove
Associates 224,680 ---
Purchases and sales of temporary
investments - net (57,618) (195,868)
Return on investment in completion
guarantee subordinated note receivable 425 ---
Return on investment in 15% subordinated
notes receivable --- 1,050,000
Due from Trading Cove Associates --- (907,660)
----------- -----------
Net cash provided by
(used in) investing
activities 110,276 (53,528)
----------- -----------
Cash flows from financing activities:
Deferred financing costs (255,790) ---
----------- -----------
Net cash used in
financing activities (255,790) ---
----------- -----------
Net increase in cash 461,623 998,771
Cash at beginning of quarter 232,759 841,512
----------- -----------
Cash at end of quarter $ 694,382 $ 1,840,283
=========== ===========
Supplemental disclosure of cash
flow information:
Cash paid during the
quarter for interest $ --- $ ---
=========== ===========
The accompanying notes are an integral part of the financial statements.
6
WATERFORD GAMING, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
___________
1. Basis of Presentation:
The unaudited condensed interim financial statements have been
prepared in accordance with the policies described in the Company's
1997 audited financial statements and should be read in conjunction
with the Company's 1997 audited financial statements within the
Company's Annual Report for the fiscal year ended December 31, 1997 on
Form 10-K as filed with the Securities and Exchange Commission (the
"Commission") File No. 333-17795 on March 30, 1998. The condensed
Balance Sheet at December 31, 1997, contained herein, was derived from
audited financial statements, but does not include all disclosures
contained in the Form 10-K and required by generally accepted
accounting principles.
The unaudited condensed interim financial statements include normal
and recurring adjustments which are, in the opinion of management,
necessary to present a fair statement of financial position as of
March 31, 1998, and, the results of operations, the statement of
members' deficiency and cash flows for the three months ended March
31, 1998. Results of operations for the period are not necessarily
indicative of the results to be expected for the full year. The Company
with its wholly-owned subsidiary Waterford Gaming Finance Corp.
("Finance") has issued 12-3/4% senior notes payable which mature
November 15, 2003 (the "Senior Notes").
2. Trading Cove Associates - Equity Investment:
As of March 31, 1998 and March 31, 1997, the following summary
information relates to Trading Cove Associates ("TCA"). Total
revenues and net loss are for the three months ended March 31, 1998
and March 31, 1997:
March 31, March 31,
1998 1997
------------- -------------
Total assets $ 9,206,938 $ 9,483,784
Total liabilities (4,688,650) (2,909,125)
------------ ------------
Partners' capital $ 4,518,288 $ 6,574,659
============ ============
Total revenue $ 12,628,335 $ 5,275,782
============ ============
Net loss $ (120,250) $ (44,533)
============ ============
Company's interest:
Trading Cove Associates -
equity investment, beginning
of the quarter $ 10,384,292 $ 12,682,469
Distributions (224,680) ---
------------ ------------
10,159,612 12,682,469
------------ ------------
Loss from Trading Cove Associates (60,125) (22,267)
Amortization of interests
purchased (383,133) (383,133)
------------ ------------
Equity in loss of Trading Cove
Associates (443,258) (405,400)
------------ ------------
Trading Cove Associates -
equity investment $ 9,716,354 $ 12,277,069
============ ============
7
3. Beneficial Interest - Leisure Resort Technology, Inc.
On January 6, 1998, the Company paid $5,000,000 to Leisure Resort
Technology, Inc. ("Leisure") whereby Leisure gave up its beneficial
interest in 5% of certain fees and excess cash flows, as defined, of TCA
and any other claims it may have had against the Company, TCA and TCA's
partners and former partners. On August 6, 1997, Leisure, a former
partner of TCA, had filed a lawsuit against TCA, the Company and its
owners, Sun Cove Limited ("Sun Cove") and former partner of TCA, RJH
Development Corp., claiming breach of contract, breach of fiduciary
duties and other matters in connection with the development of the
Mohegan Sun Casino ("Mohegan Sun") by TCA. The Company agreed to
acquire Leisure's contractual rights and settle all matters. The
Company no longer has the obligation to pay to Leisure 5% of the
Organizational and Administrative Fee, as defined in the Organizational
and Administrative Services Agreement, and 5% of TCA's Excess Cash as
defined in TCA's partnership agreement.
The $5,000,000 cost is amortized on a straight-line basis over the
remaining term of TCA's Management Agreement, as defined. Accumulated
amortization at March 31, 1998 amounts to $204,307.
4. 15% Subordinated Notes Receivable:
On November 8, 1996, the Company purchased a 15% subordinated note
receivable from the Mohegan Tribal Gaming Authority (the "Authority")
which matures November 15, 2003, in the principal amount of $19,150,000
from Sun International Hotels Limited ("Sun International"). The
Company also purchased the related accrued interest, deferred interest
and subordinated notes fee amounts, as of November 8, 1996, totaling
$5,922,543. In addition, on November 8, 1996, the Company received a
distribution from TCA of an additional 15% subordinated note receivable
from the Authority in the principal amount of $850,000, together with
accrued interest of $148,406. As of December 31, 1997 and December 31,
1996, $0 and $1,957,660, respectively, related to subordinated notes
fee amounts owed by TCA on the 15% subordinated notes. During the
quarter ended March 31, 1997, the Company received $1,050,000 and
accrued $1,350,000 totaling $2,400,000 in subordinated notes fee
payments from TCA. These subordinated note fee payments were netted
against the $1,957,660, resulting in recognition of $442,340 in
subordinated notes fee income during the quarter ended March 31, 1997.
At March 31, 1998 and December 31, 1997, the 15% subordinated notes
receivable included accrued interest receivable of $8,757,102 and
$7,742,146, respectively.
5. Completion Guarantee Subordinated Note Receivable:
On September 22, 1997, the Company purchased a completion guarantee
subordinated note receivable from the Authority which matures November
15, 2003, in the principal amount of $2,500,000 from Sun International.
The Company also purchased the related accrued interest and deferred
interest amounts which had not been paid by TCA totaling $106,875 and
completion guarantee note fee amounts totaling $191,250. As of
December 31, 1997, $425 related to completion guarantee note fee
amounts owed by TCA on the completion guarantee subordinated note.
During the quarter ended March 31, 1998, the Company received $21,675
in completion guarantee note fee payments from TCA. These completion
guarantee note fee payments were netted against the $425, resulting in
recognition of $21,250 in completion guarantee note fee income during
the quarter ended March 31, 1998.
At March 31, 1998 and December 31, 1997, the completion guarantee
subordinated note receivable includes accrued interest receivable
of $98,958 and $47,737, respectively, and completion guarantee note fee
amounts of $0 and $425, respectively.
8
6. 12-3/4% Senior Notes Payable:
The Senior Notes payable at March 31, 1998 and December 31, 1997
consist of $61,471,000 aggregate principal amount of the Senior Notes
issued on November 8, 1996 by the Company and Finance which mature
November 15, 2003. The Senior Notes bear interest at a rate of 12-3/4%
per annum, payable semi-annually in arrears on May 15 and November 15
of each year, which commenced on May 15, 1997. The Senior Notes will
be redeemable at the option of the Company in whole or in part at any
time on or after November 15, 1999. Accrued interest payable on the
Senior Notes totaled $2,962,103 and $1,002,715 as of March 31, 1998 and
December 31, 1997, respectively.
The Senior Notes are collateralized by the Company's Notes receivable
(Notes 4 and 5), cash and temporary investments. The indenture, between
the Company and Waterford Gaming Finance Corp., the Issuers, and Fleet
National Bank, as Trustee, relating to $65,000,000 12-3/4% Senior Notes
due November 15, 2003 (the "Indenture") prohibits the Company and
Finance from incurring any other indebtedness other than the Senior
Notes.
The Company is required to make a mandatory redemption of Senior Notes
on November 15 and May 15 of each year, which commenced on November 15,
1997, using 100% of Company Excess Cash (as defined in the Indenture)
held by the Company in excess of $10,000,000, as of the preceding
September 30 and March 31. There was no Company Excess Cash as of
March 31, 1998.
As a result of the proposed expansion project at the Mohegan Sun a
Waiver and Acknowledgment (the "Waiver") was delivered by the holders
of the Senior Notes and accepted by the Company, under the Indenture
during April 1998. The following is a summary of the material terms of
the Waiver and is qualified in its entirety by the actual terms of the
Waiver, which has been filed as an exhibit to the Registrant's Quarterly
Report, for the quarter ended March 31, 1998 on Form 10-Q, Commission File
No. 333-17795, as accepted by the Commission on May 15, 1998. In
consideration of the receipt of 1.5% (one hundred and fifty basis
points) of the principal amount of Senior Notes beneficially owned by
the holders of the Senior Notes (the "Fee") the holders acknowledged,
declared and agreed as follows:
1. The holders of the Senior Notes are familiar with i) the
Indenture, ii) the Relinquishment Agreement, as defined, iii) the
Letter, as defined, iv) the Development Agreement, as defined, v)
the Side Letter relating to various waivers, dated February 7,
1998 between the Authority and TCA (the "Waiver Side Letter"), and
together with the Relinquishment Agreement, as defined, the
Letter, as defined, and the Development Agreement, as defined,
(the "Transaction Agreements") and vi) the excerpt (the "Excerpt")
from the Memorandum, as defined.
2. The Transaction Agreements and the Excerpt and the transactions
contemplated thereby do not terminate, amend or waive any
provision of an Operative Document in a manner adverse to the
economic interest of the Holders (as defined in the Indenture), or
otherwise violate or conflict with any provision of the Indenture.
3. The payment of the Fee does not violate or conflict with any
provisions of the Indenture.
4. The Company may pay up to $5,000,000 to fund certain development
expenses.
5. Payment of the Fee is subject to receipt of regulatory approvals
of the Transaction Agreements.
9
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's condensed financial statements
and the notes thereto included elsewhere herein.
Certain Forward Looking Statements
- ----------------------------------
Certain information included in this Form 10-Q/A and other materials filed or
to be filed by the Company with the Commission (as well as information
included in oral statements or other written statements made or to be made
by the Company) contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements include
information relating to the Mohegan Sun including plans for future
expansion and other business development activities, 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 Company.
Development and Operational Activities
- ---------------------------------------
The operation of the Company or its predecessors in its role as a managing
general partner of TCA has been to assist the Mohegan Tribe of Indians of
Connecticut (the "Tribe") and the Authority, an instrumentality of the
Tribe, in obtaining federal recognition, negotiate the tribal-state compact
with the State of Connecticut, obtain financing for the development of the
Mohegan Sun located on certain Tribal land in Uncasville, Connecticut,
negotiate the Amended and Restated Gaming Facility Management Agreement
(the "Management Agreement") and participate in the design and development
of the Mohegan Sun which commenced operations on October 12, 1996. Since
the opening of the Mohegan Sun, TCA has overseen the Mohegan Sun's day-to-day
operations.
On February 7, 1998, TCA, the Tribe and the Authority finalized contract
negotiations and, subject to receipt of regulatory approvals, are prepared
to move forward with an estimated $450 million expansion project at the
Mohegan Sun.
Under the terms of the new agreement, TCA will continue to manage the
Mohegan Sun under the existing Management Agreement until December 31,
1999. On January 1, 2000, the Management Agreement will terminate and the
Tribe will assume day-to-day management of the Mohegan Sun. As part of
this "Relinquishment Agreement" and to compensate TCA for giving up its
rights under the current agreements, the Tribe has agreed to pay to TCA 5%
of gross revenues, generated from the Mohegan Sun and from the planned
expansion, beginning January 1, 2000 and ending December 31, 2014. The
effective date under the Relinquishment Agreement is the later of (a) the
date the Authority receives all required approvals or (b) the date the
Authority's $175 million, 13-1/2% senior secured notes due 2002 (the
"Authority Senior Secured Notes") are refinanced or repaid.
10
TCA has also negotiated a second agreement with the Tribe and the Authority
which will make TCA the exclusive developer of the planned expansion of the
property. Under this "Development Agreement", TCA will oversee the
planning, design, and construction of the expansion of the Mohegan Sun.
TCA will be paid a development fee of $14 million under the terms of the
Development Agreement. The effective date under the Development Agreement
is the first day of the first calendar month following the later of (a) the
date the Authority receives all required approvals or (b) closing of the
anticipated refinancing of certain of the Authority's existing
indebtedness, together with construction financing.
All of the terms of the Relinquishment Agreement and the Development
Agreement are subject to the receipt of regulatory approvals. The parties
are awaiting receipt of approvals with respect to the Relinquishment
Agreement. On February 27, 1998 the Development Agreement was approved by
the Bureau of Indian Affairs.
Certain Risk Factors
- --------------------
Lack of Operations; Dependance on the Mohegan Sun
- --------------------------------------------------
The Company does not conduct any business operations, and is prohibited
by the Indenture, from conducting any business operations, other
than in connection with its role as a managing general partner of TCA and
activities incidental to the ownership of the Subordinated Notes, as
defined, and Completion Guarantee Subordinated Notes, as defined,
(collectively the "Notes") and the issuance of the Senior Notes. The
Company has no material business or assets other than its interests in TCA,
the Notes and temporary investments. The Company's primary source of
revenues is from the payments from TCA and payments under the Notes that it
holds. Although the Authority has engaged the management services of TCA,
whose partners have substantial experience in the development and
management of resorts and gaming facilities, there can be no assurance that
the Mohegan Sun will continue to generate sufficient revenues for the
Authority to be profitable or to service its debt obligations (including
its obligations under the Notes) or pay management fees so that the Company
will be able to meet its obligations. The future operating results of the
Mohegan Sun will depend, in part, on matters over which the Authority and
TCA have no control including, without limitation, general economic
conditions, effects of competition, political and regulatory factors and
the actual number of gaming customers and the amount wagered.
While the Company expects its future operating cash flows will be
sufficient to cover its obligations and expenses, including interest costs,
the Company cannot give any assurance that it will be able to do so.
11
Overview of Current and Future Cash Flows
- -----------------------------------------
The Company expects to fund its operating, debt service and
capital needs from cash flows from the Company's share of payments from
TCA, the Subordinated Notes, as defined, (to the extent interest and
Subordinated Notes Fee Amounts, as defined, are payable in cash on the
Subordinated Notes, as defined, and to the extent of principal payments on
the Subordinated Notes, as defined), Non-PIK Completion Guarantee Notes, as
defined, (to the extent interest and 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 to meet the Company's anticipated requirements
for future operating expenses and future scheduled payments of principal of
and interest on the Senior Notes. No assurance, however, can be given that
the operating cash flow wil be sufficient for that purpose.
Sources of Revenues
- -------------------
The Company has two primary sources of revenues: payments from TCA and
payments under the Notes that it holds.
Distributions on the Company's partnership interest in TCA
- -----------------------------------------------------------
TCA's primary source of revenue is management fees under the Management
Agreement (the "Management Fees"). The Management Fees are paid monthly
and 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 Net Revenues in Net Revenues in
Revenues up to Tier I 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
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 Fees).
12
In addition, TCA 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.
Pursuant to the Amended and Restated Omnibus Financing Agreement, as agreed
to by TCA, the Company and Sun International, dated September 10, 1997
(effective as of September 29, 1995) (the "Omnibus Financing Agreement"),
upon receipt of the Management Fees, TCA is required to make a number of
different types of payments to its subcontractors. The subcontracts are
primarily with TCA'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 (the "NIGC") in determining whether or
not to approve a management contract is whether TCA is providing a portion
of the capital required. Accordingly, TCA agreed to provide or cause to be
provided $40 million of capital in the form of the Subordinated Notes, as
defined. However, at the time that the subordinated loan was made, the
partners of TCA, including the Company's predecessors-in-interest, did not
participate in the loan in accordance with their economic interests in TCA.
Therefore, the partners of TCA agreed that Sun International, who
subscribed for almost all of the Subordinated Notes, would be entitled to
fees 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 March 31, 1998 the Authority had outstanding the following
Authority Subordinated Notes, as defined.
1. 15% subordinated notes principal amount $40,000,000 due November
2003 (the "Subordinated Notes"). The rate of the interest payable by
the Authority on the Subordinated Notes is 15% per annum.
2. Completion guarantee subordinated notes principal amounts $50,000,000
due November 2003 (the "Completion Guarantee Subordinated Notes"). The
rate of interest payable by the Authority on the Completion Guarantee
Subordinated Notes is the prime rate per annum announced by Chemical Bank
from "time to time" plus 1% (the "Base Rate"). The Base Rate is set and
revised at intervals of six months. At March 31, 1998, the Base Rate was
9.50% per annum.
For purposes of points (c), (d) and (e) below the Company, Sun
International and TCA have agreed that the Completion Guarantee
Subordinated Notes 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").
13
The following table sets forth the priority of the distribution from TCA of
the Management Fees 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 of the Authority of
the Management Services Fee will be paid by TCA for expenses.
*(b) Second, to return capital contributions made by the partners of TCA
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. These capital contributions were deemed
returned at the consummation of the offering of the Senior Notes
upon the distribution by TCA of the $1.7 million in principal
amount of Subordinated Notes together with accrued interest and a
cash distribution totaling $275,000, 50% to Sun Cove 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
purchased 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 "Completion
Guarantee Note 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 TCA shall be immediately paid over to
TCA.
Up until October 12, 1997 any amounts paid under paragraph (d) were
paid to Sun International. After October 12, 1997 portions of
these amounts are payable to the Company as it purchases its share
of the Non-PIK Completion Guarantee Notes. 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 TCA shall be immediately paid over
to TCA.
14
During September 1997 the Company purchased from Sun International
$2.5 million principal amount of the outstanding first funded
Authority's completion guarantee subordinated notes due November
2003 and the Company is required to purchase from Sun International
on each October 12, 1998 and October 12, 1999 $2.5 million
principal amount of the outstanding first funded Authority's
completion guarantee subordinated notes due November 2003, at the
purchase price equal to the outstanding principal balance of the
Authority completion guarantee subordinated note due November 2003,
plus the related accrued interest and deferred interest amounts
which have not been paid by TCA and Completion Guarantee Note Fee
Amounts.
(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 March 31, 1998 was $0 and as of December 31, 1997 was
approximately $449,000 and has been repaid to the partners, 50% to
the Company and 50% to Sun Cove, from repayments by the Tribe
to TCA of amounts due in terms of the promissory note dated
September 29, 1995 between TCA 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. 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). At March 31, 1998
and March 31, 1997, $8,305,000 and $0, respectively, had been
paid by TCA as Development Services Fee.
(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 TCA) of TCA 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 net income plus depreciation, amortization,
management fee expense, interest expense and other non-cash charges
less interest income) is $200.0 million or less, $3.0 million if
the Mohegan's 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 distributed in equal amounts to SIML and the Company.
The Company's directors and officers are not compensated by the
Company, but will receive compensation as part of the operating
expenses of TCA as detailed above.
*(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 TCA 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 and 50% to the Company.
(k) Eleventh, all remaining fees and Excess Cash distributed 50% to Sun
Cove and 50% to the Company.
15
On February 7, 1998, a Memorandum of Understanding (the "Memorandum") was
agreed to by the Company, Sun Cove, Sun International and TCA. The
Memorandum provides for the following:
(i) There will be no change in the existing relationship between Sun
Cove and the Company until January 1, 2000.
(ii) If the Relinquishment Agreement becomes effective, during the 7-
year period beginning January 1, 2000, the Company will not be
entitled to receive any fees or cash flows from TCA, with the
exception of (a) the existing agreement regarding annual
operating expenses of TCA which shall not exceed $2,000,000 and
(b) the Company's right to receive $2,000,000 to pay such amount
to Leisure in any year until TCA has first paid Sun Cove
consideration in the amount of $5,000,000 in such year.
(iii) In terms of the Development Agreement TCA will be paid a
development fee of $14 million. TCA will subcontract with SIML
who in turn will subcontract with certain affiliates of the
Company to provide certain of the services pursuant to the
Development Agreement.
For the quarter ended March 31, 1998, the Company received $33,787 from TCA
and $1,813,759 was due from TCA, which represents the Company's share in
terms of the Omnibus Financing Agreement of approximately $12,594,000 in
net Management Fees earned by TCA from the Authority pursuant to the terms
of the Management Agreement for the same period. The actual amount of
Management Fees earned by TCA for any annual period ending September 30,
are subject to year-end adjustment. For the three month period ended March
31, 1997, the Company received $1,050,000 in cash distributions from TCA
and $1,350,000 was due from TCA, which represents the Company's share of
approximately $5,214,000 in net management fees earned by TCA from the
Authority pursuant to the terms of the Management Agreement for the same
period.
For the quarter ended March 31, 1998 the Company also received $224,680 in
cash distributions from TCA which represents the Company's share of
repayments by the Tribe to TCA of amounts due in terms of the promissory
note dated September 29, 1995 between TCA and the Tribe.
The Company anticipates regular payments from TCA based on the results of
the Authority and Management Fees payment by the Authority.
16
Payments by the Authority on the Subordinated Notes, Non-PIK Completion
- -----------------------------------------------------------------------
Guarantee Notes and PIK Completion Guarantee Notes (collectively the
- --------------------------------------------------------------------
"Authority Subordinated Notes")
- -------------------------------
Interest is calculated semi-annually on the Authority Subordinated Notes.
Interest is deferred (and compounds semi-annually) until the Authority
purchases or offers to purchase at least 50% of its 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 period),
(ii) 100% of the amount of Deferred Subordinated Interest (as defined in
the indenture for the Authority Senior Secured Notes) for such period 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 Company's Authority
Subordinated Notes, the Indenture requires the Company to accept such offer
in the same proportion as Sun International. On March 12, 1998 the
Authority made such an offer with Excess Cash of $29,050,805 to the holders
of the Authority Subordinated Notes. Sun International and the Company did
not accept the offer. For the quarters ended March 31, 1998 and March 31,
1997 the Company did not receive any cash payments on the Authority
Subordinated Notes from the Authority.
On February 7, 1998, the Company, Sun International, the Authority and the
Tribe agreed to a letter of understanding (the "Letter"), regarding the
repurchase of the Authority Subordinated Notes. The Letter provides that
until January 1, 2000, neither the Authority nor the Tribe shall exercise
any option it may have to redeem the Authority Subordinated Notes provided
that nothing contained in the Letter shall limit or amend the rights of the
holders of the Authority Subordinated Notes to require the Authority to
redeem or repurchase the Authority Subordinated Notes - pursuant to the
Note Purchase Agreement dated as of September 29, 1995 between the
Authority and Sun International.
17
Results of Operations
- ---------------------
Comparison of operating results for the quarters ended March 31, 1998
- ---------------------------------------------------------------------
and March 31, 1997
- ------------------
Total revenue for the quarter ended March 31, 1998 was $2,978,114 compared
with $1,538,752 for the quarter ended March 31, 1997. The increase was
attributable to an increase in interest and divident income of $46,693, a
decrease in subordinated notes fee income - Trading Cove Associates, as
detailed under point (c) of the table set forth above under "Overview of
Current and Future Cash Flows", of $442,340, an increase in completion
guarantee notes fee income - Trading Cove Associates, as detailed under
point (d) of the table set forth above under "Overview of Current and
Future Cash Flows", of $21,250, and an increase in management services
income - Trading Cove Associates, as detailed under point (h) of the table
set forth above under "Overview of Current and Future Cash Flows", of
$1,813,759.
Total expenses for the three months ended March 31, 1998 were $2,373,917
compared with $2,234,733 for the three months ended March 31, 1997.
Interest expense decreased by $112,487, general and administrative costs
increased by $33,534, amortization on beneficial interest - Leisure Resort
Technology, Inc. increased by $204,307 and amortization on deferred financing
costs increased by $13,830.
Equity in loss of Trading Cove Associates for the three months ended March
31, 1998 was $(443,258) compared with $(405,400) for the three months ended
March 31, 1997.
As a result of the foregoing factors the Company experienced net income of
$160,939 for the quarter ended March 31, 1998 compared with a net loss of
$(1,101,381) for the quarter ended March 31, 1997.
18
Liquidity and Capital Resources
- -------------------------------
The initial capital of the Company consists of the partnership interests in
TCA contributed by Slavik Suites, Inc. and LMW Investments, Inc. in forming
the Company. In connection with the offering of the Senior Notes, the
Company used approximately $25.1 million to purchase from Sun International
$19.2 million in principal amount of Subordinated Notes plus accrued and
unpaid interest and Subordinated Notes Fee Amounts. In addition, TCA
distributed approximately $850,000 in principal amount of Subordinated
Notes to the Company. During September 1997 the Company purchased from Sun
International $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).
For the quarters ended March 31, 1998 and March 31, 1997 cash provided by
operating activities (as shown in the Condensed Statements of Cash Flows)
was $607,137 and $1,052,299, respectively.
Current Assets decreased from $9,980,267 to $6,980,781 at March 31, 1998.
The decrease was primarily caused by funding beneficial interest - Leisure
Resort Technology, Inc. out of cash in escrow.
Current Liabilities increased from $1,081,043 to $3,311,608 at March 31,
1998. The increase was primarily attributable to the increase in accrued
and unpaid interest on the Senior Notes.
For the quarters ended March 31, 1998 and March 31, 1997 cash provided by
(used in) investing activities (as shown in the Condensed Statements of
Cash Flows) was $110,276 and $(53,528), respectively.
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 March 31, 1998,
$32.5 million principal was outstanding as Non-PIK Completion Guarantee
Notes.
The Company anticipates that up to $5,000,000 investment in TCA may be
required as detailed above under point 4 of the Waiver as described in
Note 6 to the Condensed Financial Statements included in Item 1.
For the quarters ended March 31, 1998 and March 31, 1997 cash used in
financing activities (as shown in the Condensed Statements of Cash Flows)
was $(255,790) and $0, respectively.
The Company is required to make a mandatory redemption on November 15 and
May 15 of each year, which commenced on November 15, 1997, of Senior Notes
using 100% of Company Excess Cash, as defined in the Indenture, held by the
Company in excess of $10 million, as of the preceding September 30 and
March 31. There was no Company Excess Cash as of March 31,1998.
The Company has two primary sources of revenues: payments from TCA and
payments under the Notes that it holds. The Company anticipates regular
payments from TCA based on the results of the Authority and Management Fees
payment by the Authority.
19
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: June 23, 1998 By: /s/Len Wolman
Len Wolman, Chief Executive Officer
Date: June 23, 1998 By: /s/Del Lauria
Del Lauria, Chief Financial Officer
20
