UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 December 31, 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 333-17795
WATERFORD GAMING, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 06-1465402
(State or other jurisdiction of (IRS 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes X No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not applicable.
WATERFORD GAMING, L.L.C.
INDEX TO FORM 10-K
PART I. PAGE
Item 1. Business 1
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk 33
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III.
Item 10. Directors and Executive Officers of the Registrant 34
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management 36
Item 13. Certain Relationships and Related Transactions 36
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 38
PART I
ITEM 1. BUSINESS
A. GENERAL
Waterford Gaming, L.L.C. (the "Company") is a special purpose company,
formed solely for the purpose of holding its partnership in Trading Cove
Associates ("TCA"), a Connecticut general partnership and the manager
(until January 1, 2000) and developer of the Mohegan Sun Casino (the
"Mohegan Sun"). The Company also invested in certain financial instruments
issued by the Mohegan Tribal Gaming Authority (the "Authority"). The
Company is a Delaware limited liability company formed on September 30,
1996. Waterford Gaming Finance Corp. ("Finance"), a Delaware corporation,
is a wholly owned subsidiary of the Company. The principal executive
offices of the Company and Finance are located at 914 Hartford Turnpike,
Waterford, Connecticut 06385 and their telephone number is (860) 442-4559.
The Limited Liability Company Agreement of the Company (the "Agreement") is
effective until September 30, 2020 and may be terminated by unanimous
decision of the members or upon the occurrence of events as stated in the
Agreement. The Agreement provides for the property, affairs and business
of the Company to be managed by a four-member Board of Directors which
consists of two directors appointed by Slavik Suites, Inc. ("Slavik") and
two directors appointed by LMW Investments, Inc. ("LMW") (the "Board of
Directors"). A quorum for the Board of Directors requires all four
members. LMW and Slavik initially contributed capital to the Company
consisting of all of their respective interests in TCA. Prior to the
offering of the Company's and Finance's 12-3/4% senior notes due November
15, 2003 of which $65,000,000 in aggregate principal amount was issued on
November 8, 1996 (the "$65 Million Senior Notes"), Slavik and LMW were
partners of TCA. In connection with the formation of the Company, Slavik
and LMW each contributed to the Company their interests in TCA in exchange
for a 66-2/3% and 33-1/3% ownership interest, respectively, of the Company.
Upon consummation of the offering of the $65 Million Senior Notes, (i)
$6,666,667 of the proceeds were distributed directly to Slavik for the
purpose of redeeming certain ownership interests in Slavik, and (ii)
$3,333,333 of the proceeds were distributed to LMW, which in turn loaned
such proceeds to Len and Mark Wolman, as individuals, who used such funds
to purchase certain interests in Slavik. The Company used $10.6 million of
the proceeds from the offering of the $65 Million Senior Notes to purchase
RJH Development Corp.'s ownership interest in TCA. As a result of these
transactions (collectively the "Reorganization"), each of Slavik and LMW
owned 67.7967% and 32.2033% of the Company, respectively. The Company is a
managing general partner of TCA. As a result of the Reorganization, the
only two partners of TCA are the Company and Sun Cove Limited ("Sun Cove").
1
In connection with the Company's and Finance's issuance on March 17, 1999 of
$125 Million 9-1/2% senior notes payable which mature March 15, 2010 (the
"$125 Million Senior Notes"), each of Slavik and LMW have contributed their
respective interests in the Company concurrently to a Delaware limited
liability company, Waterford Group, L.L.C. (the "Waterford Group").
Waterford Group is now the sole member of the Company. Slavik and LMW own
Waterford Group in the same respective interest as they had in the Company
and are generally as follows:
Slavik Suites, Inc. 67.7967%
LMW Investments, Inc. 32.2033%
---------
100.0000%
=========
Upon consummation of the offering of the $125 Million Senior Notes, (i) the
$65 Million Senior Notes were redeemed, (ii) a distribution of $37,050,000
was made by the Company to its sole member Waterford Group and (iii) $2.0
million was paid to a former partner of TCA, Leisure Resort Technology,
Inc. ("Leisure"), in satisfaction of a contractual obligation.
Additional capital contributions may be made to the Company by its member.
If it is determined that the Company requires additional funds, such funds
may be loaned to the Company by its member pursuant to the terms set forth
in the Agreement; however, the indenture, between the Company and Finance,
as the Issuers, and State Street Bank and Trust Company, as Trustee,
relating to $125 Million Senior Notes (the "Indenture"), prohibits the
Company from incurring additional indebtedness. The Agreement also
provides that any disputes which arise under the Agreement and which remain
unresolved after 30 days will be settled through arbitration.
LMW, one of the two members of Waterford Group, is a development firm based
in southeastern Connecticut. LMW is owned by Len Wolman and Mark Wolman.
The other member of Waterford Group, Slavik, is based in Detroit, Michigan.
The Directors of Slavik are Stephan F. Slavik, Sr., Del J. Lauria and Len
Wolman.
The $125 Million Senior Notes bear interest at a rate of 9-1/2% per annum,
payable semi-annually in arrears on March 15 and September 15 which
commenced on September 15, 1999.
The principal amount of the $125 Million Senior Notes is payable on March
15, 2010. The Company and Finance may elect to redeem the $125 Million
Senior Notes at any time on or after March 15, 2004 at a redemption price
equal to a percentage (105.182% after March 14, 2004, and declining to
104.318% after March 14, 2005, 103.455% after March 14, 2006, 102.591%
after March 14, 2007, 101.727% after March 14, 2008, 100.864% after March
14, 2009, and to 100% after March 14, 2010) of the principal amount thereof
plus accrued interest. The $125 Million Senior Notes provide that upon the
occurrence of a Change of Control (as defined), the holders thereof will
have the option to require the redemption of the $125 Million Senior Notes
at a redemption price equal to 101% of the principal amount thereof plus
accrued interest.
2
If the Company and Finance have any Company Excess Cash, as defined, they
must redeem the $125 Million Senior Notes (on a semi-annual basis on March
15 and September 15) equal to a percentage (109.500% after March 15, 1999
and declining to 108.636% after March 14, 2000, 107.773% after March 14,
2001, 106.909% after March 14, 2002, 106.045% after March 14, 2003,
105.182% after March 14, 2004, 104.318% after March 14, 2005, 103.455%
after March 14, 2006, 102.591% after March 14, 2007, 101.727% after March
14, 2008, 100.864% after March 14, 2009, and to 100.000% after March 14,
2010). In some circumstances, if either the Company or its partner in TCA
exercises the option to buy or sell partnership interests in TCA, the
Company and Finance must redeem the $125 Million Senior Notes.
The Indenture relating to the $125 Million Senior Notes contains certain
affirmative and negative covenants customarily contained in agreements of
this type, including without limitation, covenants that restrict, subject
to specified exceptions the Company's and Finance's ability to (i) borrow
money, (ii) pay dividends on stock or make certain other restricted
payments, (iii) use assets as security in other transactions, (iv) make
investments, (v) sell other assets or merge with other companies and (vi)
engage in any business except as currently conducted or contemplated or
amend their relationship with TCA. The Indenture also provides for
customary events of default and the establishment of a restricted
investment fund with a trustee for interest reserves.
The Company has one primary source of revenue: payments from TCA.
Trading Cove Associates
- -----------------------
TCA was organized on July 27, 1993. The primary purpose 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 and until January 1, 2000, TCA had overseen the Mohegan
Sun's day-to-day operations. The TCA partnership will terminate on
December 31, 2040, or earlier, in accordance with the terms of the
partnership agreement. The Company has a 50% voting and profits interest
in TCA. The remaining 50% interest is owned by Sun Cove, an affiliate of
Sun International Hotels Limited ("Sun International"). Sun International
is a publicly traded international resort and gaming company which develops
premier resort and gaming properties throughout the world.
3
Trading Cove Associates - Material Agreements
- ---------------------------------------------
Management Agreement
- --------------------
The Management Agreement between TCA and the Tribe was entered into on
August 30, 1995 and was approved by the National Indian Gaming Commission
(the "NIGC") on September 29, 1995. The Tribe had assigned its rights and
obligations in this agreement to the Authority. The Authority and TCA had
consented to this assignment.
Until January 1, 2000, TCA was the exclusive manager of the Mohegan Sun.
Under the Management Agreement, the Tribe had granted to TCA the exclusive
right and obligation to develop, manage, operate and maintain the Mohegan
Sun and all other related facilities that are owned by the Tribe or any of
its instrumentalities, including the Authority and to train members of the
Tribe and others in the management of the Mohegan Sun.
Until January 1, 2000 TCA's primary source of revenue was management fees
under the Management Agreement (the "Management Fees"). The Management
Fees were paid monthly and were calculated in three tiers based upon net
revenues 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
4
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).
In addition, TCA was required to fund $1.2 million per year ($100,000 per
month) from its Management Fees into a capital replacement reserve.
On February 7, 1998, TCA, the Tribe and the Authority finalized contract
negotiations and are moving forward with a significant expansion project at
the Mohegan Sun (the "Project"). As a result, TCA and the Authority have
agreed to terminate the Management Agreement effective January 1, 2000.
Under the terms of an agreement (the "Relinquishment Agreement") TCA
continued to manage the Mohegan Sun under the Management Agreement until
January 1, 2000. On December 31, 1999 the Management Agreement terminated
and the Tribe assumed day-to-day management of the Mohegan Sun. Under this
Relinquishment Agreement to compensate TCA for terminating its management
rights, the Authority has agreed to pay to TCA 5% of revenues, as defined,
(the "Relinquishment Fee") generated by the Mohegan Sun during the 15-year
period commencing on January 1, 2000. Gross revenues include revenues
generated by the existing operations and by the planned expansion, and
exclude revenues generated by any other expansion of the Mohegan Sun and
bingo revenues.
Relinquishment Agreement
- ------------------------
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". "Revenues" are defined as gross gaming
revenues (other than Class II gaming revenue, i.e. bingo) and all other
facility revenues (including, without limitation, 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 lessees, licensees and concessionaires operating in
the facility but not the gross receipts of such lessees, licensees and
concessionaires). Senior relinquishment payments will be payable quarterly
in arrears commencing on April 25, 2000 for the quarter ended March 31,
2000, and the junior relinquishment payments will be payable semi-annually
in arrears commencing on July 25, 2000 for the six months ended June 30,
2000.
5
The Relinquishment Agreement provides that each of the senior and junior
relinquishment payments are subordinated in right of payment to payment of
senior secured obligations including the Authority's bank credit facility,
and that the junior relinquishment payments are further subordinated to
payment of all other senior obligations including the Authority's 8-1/8%
Senior Notes due 2006. The Relinquishment Agreement also provides that all
relinquishment payments are subordinated in right of payment to an annual
minimum priority distribution to the Tribe from the operations of the
Mohegan Sun. The minimum priority distribution currently is $14.0 million
and will be adjusted annually to reflect the cumulative increase in the
consumer price index.
Under the Relinquishment Agreement, the Authority makes certain covenants
for the benefit of TCA, including the following:
(1) Payments to the 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 the Mohegan Sun. If any portion of the
Mohegan Sun's facilities is 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 the Mohegan Sun as currently operated.
6
Under the Relinquishment Agreement, the Authority and TCA agreed to
cooperate with each other to effect an orderly transition of the operations
of the Mohegan Sun to the Authority. Each of the parties also agreed that
it will not solicit any employee of the other party or any affiliate of the
other party for five years.
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 the Mohegan Sun. The Authority has agreed,
however, that it will only use the word "Sun" in conjunction with the
Mohegan Sun and together with "Mohegan" or "Mohegan Tribe".
With certain limitations set forth in the Relinquishment Agreement, both
the Tribe and the Authority have waived immunity from unconsented suit for
certain enforcement rights of TCA arising under the Relinquishment
Agreement.
Development Agreement
- ---------------------
TCA and the Authority entered into a development services agreement on
February 7, 1998. Under this "Development Agreement", TCA agreed to
oversee the design, construction, furnishing, equipping and staffing of the
Project for a $14.0 million development fee.
On February 9, 1998 the Development Services Agreement Phase II was entered
into between TCA and Sun International Management Limited ("SIML").
Pursuant to the Development Services Agreement Phase II, TCA subcontracted
with SIML and SIML agreed to perform those services assigned to SIML by TCA
in order to facilitate TCA's fulfillment of its duties and obligations to
the Authority under the Development Agreement. TCA shall pay to SIML a
fee, as subcontractor (the "Development Services Fee Phase II") equal to 3%
of the development costs of the Project, less all costs incurred by TCA in
connection with the Project. The Development Services Fee Phase II shall
be paid in installments due on December 31, 1999 and 2000 and on the
Completion Date, as defined in the Development Agreement, with a final
payment being made when the actual development costs of the Project are
known. The fee is to be paid from available cash flow of TCA, if any,
subordinate to certain other fees as described below under the heading
"Omnibus Termination Agreement".
SIML has further subcontracted with Wolman Construction LLC
("Construction") (the "Local Construction Services Agreement") to provide
certain of those services assigned to SIML by TCA. SIML shall pay 20.83%
of the Development Services Fee Phase II as and when SIML receives payment
from TCA. Construction has subcontracted with The Slavik Company for
14.30% of its fee.
7
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 furnishings budgets, preliminary program evaluation,
design development and the approval of final detailed plans and
specifications prepared by the architect. 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.
The Development Agreement provides that the design and construction of the
Project must comply with all federal and Connecticut statutes and
regulations that otherwise would apply if the Project were located outside
the jurisdictional boundaries of the Tribe's land.
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 Project 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.
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 Project. 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 Project.
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 Project. In addition to the staffing of
the operations of the Project, the Development 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.
The Authority will purchase equipment, furniture and furnishings required
to operate the expanded facilities from vendors selected by TCA or lease
such equipment, furniture and furnishings on terms arranged by TCA and
approved by the Authority.
8
The Authority will pay the development fee to TCA quarterly beginning on
January 15, 2000 until the completion date of the Project based on
incremental completion of the Project as of each payment date. On January
19, 2000 the Authority paid the first quarterly development fee of
$1,372,000 to TCA in accordance with the terms of the Development
Agreement.
The Development Agreement terminates after the earlier of completion of the
Project or 10 years. 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 purposes 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.
The Development Agreement became effective April 1, 1999.
Omnibus Termination Agreement
- -----------------------------
On March 18, 1999, the Omnibus Termination Agreement (the "Omnibus
Termination Agreement") was entered into by TCA, Sun International, the
Company, SIML, LMW, Sun Cove, Slavik and Construction; which (i) terminated
the memorandum of understanding dated February 7, 1998; and (ii) effective
January 1, 2000 terminated a) the Amended and Restated Omnibus Financing
Agreement, as defined; b) completion guarantee and investment banking and
financing arrangement fee agreement (the "Financing Arrangement
Agreement"); c) the management services agreement; d) the organizational
and administrative services agreement; e) the marketing services agreement;
and f) a letter agreement relating to expenses dated October 19, 1996.
In consideration for the termination of such agreements, TCA will use its
cash to pay the following obligations in the priority set forth below:
(a) First, to pay all unpaid amounts which may be due under the
terminated letter agreement and to pay certain affiliates of the
Company and to Sun Cove a percentage of an annual fee of $2.0
million less the actual expenses incurred by TCA. Such annual
fee shall be payable in equal quarterly installments beginning
March 31, 2000 and ending December 31, 2014.
9
(b) Second, to return all capital contributions made by the partners
of TCA after September 29, 1995. TCA anticipates making monthly
capital calls to fund expenses related to the development of the
Project, and these capital calls will be repaid, based on cash
flow, in the quarter following the quarter in which the capital
call was made.
(c) Third, to pay any accrued amounts for obligations performed prior
to January 1, 2000 under the Financing Arrangement Agreement.
The contingent obligation at December 31, 1999 was $2,977,932.
(d) Fourth, to make the payments set forth in the agreement relating
to Development Services Agreement Phase II and the Local
Construction Services Agreement. The contingent obligation at
December 31, 1999 was approximately $4,300,000.
(e) Fifth, to pay Sun International an annual fee of $5.0 million
payable in equal quarterly installments of $1.25 million
beginning March 31, 2000 and ending December 31, 2006.
(f) Sixth, to pay any accrued amounts for obligations performed with
respect to periods prior to January 1, 2000 under the management
services agreement, the organizational and administrative
services agreement and the marketing services agreement. The
contingent obligation at December 31, 1999 was $46,920,954.
(g) Seventh, for the period beginning March 31, 2000 and ending
December 31, 2014, to pay each of SIML and the Company twenty-
five percent (25%) of the relinquishment payments.
(h) Eighth, to distribute all excess cash.
Notwithstanding the foregoing, on the date TCA receives any funds from Sun
International or the Company pursuant to the last sentence of Section 3 of
the Financing Arrangement Agreement, TCA shall immediately distribute such
amounts equally to its partners. On December 30, 1999 TCA received
$10,536,543 from SIHL and the Company, pursuant to the last sentence of
Section 3 of the Financing Arrangement Agreement, and TCA concurrently
distributed $10,536,543 to its partners. The Company received $5,268,272.
In addition, TCA shall not make any distributions pursuant to the Omnibus
Termination Agreement until it has annually distributed to its partners pro
rata, the amounts related to its partners tax obligations as described in
Section 3.03a(1) of the Partnership Agreement less twice the amount of all
other funds paid or distributed to the Company during such year pursuant to
the Omnibus Termination Agreement.
10
To the extent TCA does not have adequate cash to make the payments pursuant
to the Omnibus Termination Agreement, such amount due shall be deferred
without the accrual of interest until TCA has sufficient cash to pay them.
Amended and Restated Omnibus Financing Agreement
- ------------------------------------------------
Pursuant to the terms of 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), upon receipt of
the Management Fees, TCA was required to make a number of different types
of payments to its subcontractors. The subcontracts were primarily with
TCA's partners or their affiliates. One of the considerations used by the
NIGC in determining whether or not to approve a management contract is
whether TCA has provided 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 were to compensate the
recipients for other subcontracted services provided by them to the Mohegan
Sun.
In terms of the Omnibus Termination Agreement the Omnibus Financing
Agreement was terminated effective January 1, 2000. As of December 29,
1999 and December 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 was 15% per annum. During 1996,
the Company purchased half of the Subordinated Notes owned by Sun
International and TCA distributed $850,000 principal amount of
Subordinated Notes to each of its partners. As a result of the above
transactions, the Company owned 50% of the principal amount of
Subordinated Notes.
2. Completion guarantee subordinated notes principal amount $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 was the prime rate per annum announced by
Chase Manhattan Bank from "time to time" plus 1% (the "Base Rate").
The Base Rate was set and revised at intervals of six months. At
December 30, 1999 the Base Rate was 9.25% per annum and at December
31, 1998, the Base Rate was 9% 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").
During 1997, 1998 and 1999 the Company purchased a total of $7,500,000
principal amount of the Non-Pik Completion Guarantee Notes from Sun
International.
11
On December 30, 1999, the Authority paid to the holders of the Subordinated
Notes, Non-Pik Completion Guarantee Notes and Pik Completion Guarantee
Notes (collectively the "Authority Subordinated Notes"), an amount to
satisfy all obligations of such Authority Subordinated Notes. The Company
received $44,403,517 from the Authority.
The following table sets forth the priority of the distribution from TCA of
the Management Fees to its partners or TCA's subcontractors:
(a) First, for each fiscal year of the Authority, up to $2,000,000 of
the Management Services Fee, as defined, was to be paid by TCA
for expenses. A portion of the Management Services Fee, as
defined, were used to pay a portion of the compensation of the
officers and directors of the Company.
(b) Second, to return capital contributions made by the partners of
TCA after September 29, 1995. These capital contributions
aggregated approximately $4,272,000. At December 31, 1999 the
full amount had been repaid to the partners, 50% to the Company
and 50% to Sun Cove.
(c) Third, to pay to the Company and Sun International every six
months, beginning October 31, 1997 an amount equal to the product
of (1) $2,300,000 and (2) a fraction, the numerator of which was
the weighted average principal amount of the Subordinated Notes
outstanding including all interest that was 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 was $40,000,000 (the "Subordinated
Notes Fee Amounts"). The Company and Sun International were
entitled to one half of the Subordinated Notes Fee Amounts. For
the years ended December 31, 1999 and 1998, $7,463,612 and
$6,458,506, respectively, had been paid by TCA in terms of this
third priority. The Subordinated Notes were redeemed by the
Authority on December 30, 1999. The contingent obligation due
under this third priority on December 31, 1999 was $1,385,564.
(d) Fourth, i) to pay every six months 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 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 was not permitted to pay interest thereon (the
"Deferred Interest Amounts"). This amount was paid semi-annually
pari passu with the amount under paragraph (d)i) above.
12
In addition, when the Authority paid Sun International and 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. On December 30, 1999 the Authority
paid $10,536,543 to Sun International and the Company that
related to the Deferred Interest Amounts acquired by TCA and
concurrently Sun International and the Company paid over the
$10,536,543 to TCA. TCA immediately distributed the $10,536,543
to its partners. The Company received $5,268,272.
During September 1997 and on October 12, 1998, and 1999 the
Company purchased from Sun International $2.5 million principal
amount of the outstanding first funded Non-Pik Completion
Guarantee Notes, at the purchase price equal to the outstanding
principal balance of the Non-Pik Completion Guarantee Notes
purchased, plus the related accrued interest and deferred
interest amounts which had not been paid by TCA and Completion
Guarantee Notes Fee Amounts (total purchase price $2,798,125 for
each transaction).
For the twelve months ended December 31, 1999 and 1998,
$8,612,500 ($1,656,250 to the Company and $6,956,250 to Sun
International) and $9,051,750 ($1,027,537 to the Company and
$8,024,213 to Sun International), respectively, had been paid by
TCA in terms of this fourth priority.
13
The Non-Pik Completion Guarantee Notes were redeemed by the
Authority on December 30, 1999. The contingent obligation due
under this fourth priority (Completion Guarantee Notes Fee
Amounts only) on December 31, 1999 was $934,375.
(e) Fifth, to pay Sun International every six months 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. For the
years ended December 31, 1999 and 1998, $3,782,082 and
$4,879,941, respectively, had been paid by TCA in terms of this
fifth priority.
The Pik Completion Guarantee Notes were redeemed by the Authority
on December 30, 1999. The contingent obligation due under this
fifth priority on December 31, 1999 was $657,993.
(f) Sixth, return of capital contributions made before September 29,
1995. These capital contributions aggregated $6,715,000
(unreturned balance as of December 31, 1999 and 1998 was $0).
(g) Seventh, payment of a Development Services Fee Phase I to 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 had subcontracted with certain affiliates of the
Company. The fees paid by SIML to the affiliates of the Company
were equal to 20.83% of the Development Services Fee Phase I plus
$25,000 (total $1,749,724). At December 31, 1999 and 1998,
$8,305,000 had been paid by TCA as Development Services Fee Phase I.
(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, as defined, and the
Marketing and Casino Operations Fee, as defined. After deducting
operating expenses which were 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)
was $200.0 million or less, $3.0 million if the Mohegan Sun's
EBITDA was greater than $200.0 million but less than $225.0
million and $4.0 million if the Mohegan Sun's EBITDA was greater
than $225.0 million the remaining amounts were distributed in
equal amounts to SIML and the Company. A portion of the
Management Service Fee was used to pay portion of the
compensation of the officers and directors of the Company.
14
For the twelve months ended December 31, 1999 and 1998,
$6,219,147 ($3,109,574 to SIML, $1,444,874 to affiliates of the
Company and $1,664,699 to the Company) and $8,771,643 ($4,385,822
to SIML, $801,508 to affiliates of the Company and $3,584,313 to
the Company), respectively, had been paid by TCA in terms of this
eighth priority.
The contingent obligation due under this eighth priority on
December 31, 1999 was $0.
(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. At December 31, 1999 and
1998, $5,520,000 had been paid by TCA in terms of this ninth
priority.
(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
state income taxes. This amount was paid 50% to Sun Cove and 50%
to the Company. For the twelve months ended December 31, 1999
and 1998, $2,381,541 and $2,029,090, respectively, had been paid
by TCA in terms of this tenth priority.
(k) Eleventh, payment of the Organizational and Administrative Fee to
the Company and the Marketing and Casino Operations Fee to SIML
which fees were paid in equal amounts to the Company and SIML.
These fees were each equal to 1.5% of the gross revenues of the
Mohegan Sun if the Mohegan Sun's fiscal year ending September 30
gross revenues equaled or exceeded $300 million and 2% of the
gross revenues of the Mohegan Sun if the Mohegan Sun's fiscal
year ending September 30 gross revenues equaled or exceeded $400
million. For the years ended December 31, 1999 and 1998,
$28,504,418 and $8,463,537, respectively, 50% to the Company and
50% to SIML, had been paid by TCA in terms of this eleventh
priority.
The contingent obligation due under this eleventh priority on
December 31, 1999 was $46,920,954.
15
(l) Twelfth, all excess cash distributed 50% to Sun Cove and 50% to
the Company. For the twelve months ended December 31, 1999 and
1998 $0 had been distributed by TCA in terms of this twelfth
priority.
The Mohegan Tribal Gaming Authority
- -----------------------------------
The Tribe is a federally recognized Indian tribe with a 390-acre
reservation located in southeastern Connecticut. The Tribe established the
Authority on July 15, 1995 with the exclusive power to conduct and regulate
gaming activities for the Tribe. Under the Indian Gaming Regulatory Act of
1988, as amended ("IGRA"), 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
(the "Management Board"), which consists of the nine members of the Tribal
Council (the governing body of the Tribe).
Under the terms of the Relinquishment Agreement on December 31, 1999 the
Management Agreement terminated and on January 1, 2000 the Tribe assumed
day-to-day management of the Mohegan Sun.
The Authority has established the Mohegan Tribal Gaming Commission (the
"Gaming Commission"), which is responsible for the regulation of the
Mohegan Sun. The Gaming Commission ensures the integrity of the gaming
operation through the promulgation and enforcement of appropriate
regulations. The Gaming Commission is responsible for performing
background investigations into gaming license applicants and for issuance
and revocation of gaming licenses. The Tribe and the Authority have
entered into a land lease ("Lease") pursuant to which the Tribe is leasing
to the Authority the land on which the Mohegan Sun is located (the "Site").
The Site is part of the Tribe's 390-acre reservation in southeastern
Connecticut, which was acquired and is held in trust for the Tribe by the
United States of America with the Tribe retaining perpetual rights to the
use of the Site.
The Mohegan Sun
- ---------------
The Mohegan Sun opened on October 12, 1996, as a gaming and entertainment
facility. The Mohegan Sun conveys an historical northeastern Indian theme
through architectural features and the use of natural design elements such
as timber, stone, and water. The Mohegan Sun is comprised of four
quadrants and reflects a seasonal theme - Winter, Spring, Summer and Fall -
emphasizing the importance of seasonal changes to Mohegan Tribal life. The
634,500 square foot facility includes approximately 176,500 square feet of
gaming space, approximately 3,026 slot machines, approximately 150 table
games (including blackjack, roulette, craps, baccarat, caribbean stud poker
and let it ride), approximately 42 poker tables, a high stakes bingo hall
and a 9,000 square foot simulcasting race book facility. Food and beverage
amenities include the 680-seat Seasons buffet, three full-service themed
gourmet restaurants, a 24-hour coffee shop, a New York-style delicatessen,
a 9-station food court featuring international and domestic cuisine and
multiple full and floor service bars for a total of approximately 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 Mohegan Sun, including
entertainment and casino marketing activities. Six small retail shops
covering 2,276 square feet of retail space provide shopping opportunities
ranging from Mohegan Sun souvenirs to clothing to cigars. For non-gaming
entertainment, the Mohegan Sun also offers an arcade-type recreation area
and a child care facility operated by New Horizons Kids Quest, Inc. The
Mohegan Sun has parking spaces for 7,500 guests and for 2,700 employees.
The Authority opened a 4,000-square foot, 16-pump service station and
convenience store in December of 1998.
16
The Mohegan Sun Expansion
- -------------------------
The Project 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 Authority's 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:
<TABLE>
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
--------- -------- ----- ------ ---------- ----- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
Under the Development Agreement, TCA will oversee the planning, design and
construction of the Project and will receive compensation of $14 million for
such services.
17
The Mohegan Sun - Competition
- -----------------------------
The gaming industry is highly competitive. The Mohegan Sun currently
competes primarily with the Foxwoods Resort Casino and, to a lesser extent,
with casinos in Atlantic City, New Jersey. Foxwoods is approximately 10
miles from the 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 under a separate compact with the State of
Connecticut. Foxwoods offers a number of amenities that the Mohegan Sun
does not offer, including hotel accommodations, extensive retail shopping
and more expansive non-gaming entertainment offerings. Foxwoods has been
in operation for seven years and may have greater financial resources than
the Authority or the Tribe.
Upon the completion of the expansion, the Authority intends to broaden the
Mohegan Sun's market beyond day-trip customers to include guests making
overnight or extended stays. This means that the Mohegan Sun will begin to
compete for customers with casinos in Atlantic City, New Jersey and, to a
lesser extent, gaming resorts such as those on the Gulf Coast of
Mississippi and in Nevada. Many of these casinos and other gaming resorts
have greater resources and greater name recognition than the Mohegan Sun.
Outside of Atlantic City, New Jersey, casino gaming in the northeastern
United States may be conducted only by federally recognized Indian tribes
operating under federal Indian gaming law. Currently, (1) the Oneida
Indian Nation operates Turning Stone Casino Resort in Verona, New York,
approximately 270 miles from the Mohegan Sun and (2) the St. Regis Mohawk
Tribe has initiatives to develop gaming facilities both on its reservation
in Hogansburg, New York, near the Canadian border and at the Monticello
raceway in the Catskills, located approximately 90 miles from New York
City. 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 and New York,
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 Authority's
operations.
18
The Mohegan Sun - Seasonality
- -----------------------------
The gaming industry in Connecticut is seasonal, with the heaviest gaming
activity at the Mohegan Sun occurring during the period from July through
October.
The Mohegan Sun - Employees and Labor Relations
- -----------------------------------------------
As of September 30, 1999, the Mohegan Sun employed approximately 5,050 full
time employees and 652 seasonal and part-time employees. In recruiting
personnel, the 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. Currently, none of the Mohegan Sun's employees are covered
by collective bargaining agreements.
The Mohegan Sun - Material Agreements
- -------------------------------------
The Mohegan Compact
- -------------------
The Tribe and the State of Connecticut agreed in April 1994 to resolve all
land disputes and differences and enter into a gaming compact to authorize
and regulate the Tribe's conduct of gaming on the Tribe's lands. This
agreement 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 (a) certain games of chance , (b) video
facsimiles of such authorized games of chance (i.e. slot machines),
(c) off-track pari-mutuel betting on animal races, (d) pari-mutuel
betting, through simulcasting, on animal races and (e) 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, insure 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 of Connecticut 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.
19
(3) Law enforcement matters relating to Class III gaming activities will
be 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 the State's regulation of the Tribe's gaming
operations and for the provision of law enforcement at the Tribe's
gaming facilities.
(7) Net revenues from the Tribe's gaming operations may be applied only
for the certain purposes related to Tribe 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 of Connecticut.
(9) Service of alcoholic beverages within the Tribe's gaming facilities is
subject to regulation by the State of Connecticut.
(10) The Tribe waived 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.
In addition, along with the Mohegan Compact, the Tribe and the State of
Connecticut entered into a memorandum of understanding providing for the
payment of a portion of the Authority's slot machine revenues to the State
of Connecticut. Commencing July 1, 1995, for each fiscal year such payment
to the State of Connecticut must 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) $80.0 million. These payments will not be required
if there is a change in the law to permit the operation of commercial
casino games by any other person in the State of Connecticut, other than
the Mashantucket Pequot Tribe and the Tribe. The Authority expensed $121.1
million and $102.3 million, respectively, for the slot win contribution to
the State of Connecticut for the years ended September 30, 1999 and 1998.
20
Town of Montville Agreement
- ---------------------------
On June 16, 1994, the Tribe and the Town of Montville ("Town") entered into
an agreement whereby the Tribe agreed to pay the Town, beginning one year
after the commencement of slot machine gaming activities, an annual payment
of $500,000 to minimize the impact to the Town resulting from the removal
of land from the Town's tax rolls into trust for the Tribe. The first,
second and third annual payments were remitted to the Town in October,
1997, 1998, and 1999, respectively. Additionally, the Tribe agreed to make
a one-time payment of $3,000,000 toward infrastructure improvements in 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 had paid approximately $2.1 million of
the $3.0 million obligation.
The information concerning Sun International, the Tribe and the Authority
has been derived from publicly filed information.
21
Item 2. PROPERTIES
The Company does not have an interest in real property.
Item 3. LEGAL PROCEEDINGS
As derived from publicly filed information, the Authority is a defendant in
certain litigations incurred in the normal course of business. In the
opinion of the Authority's management, based on the advise of counsel, the
aggregate liability, if any, arising from such litigation will not have a
material adverse effect on the Authority's financial condition or results
of operations.
On January 6, 1998, Leisure Resort Technology, Inc. ("Leisure") and
defendants Waterford Gaming, L.L.C., Trading Cove Associates, LMW
Investments, Inc., and Slavik Suites, Inc. settled a prior lawsuit brought
by Leisure. In connection with this settlement, Leisure and Trading Cove
Associates, Waterford Gaming, L.L.C., LMW Investments, Inc., and Slavik
Suites, Inc. entered into a settlement and release agreement. Pursuant to
this settlement and release agreement, Waterford Gaming, L.L.C. bought out
Leisure's beneficial interest in Trading Cove Associates.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure
filed a four count complaint naming as defendants Waterford Gaming, L.L.C.,
Trading Cove Associates, LMW Investments, Inc., Slavik Suites, Inc.,
Waterford Group, L.L.C., Len Wolman and Mark Wolman (collectively, the
"Defendants"). The matter is pending in the Judicial District of Middlesex
at Middletown, Connecticut. The suit alleges breach of fiduciary duties,
fraudulent non-disclosure, violation of Connecticut Statutes Section 42-
110a, et seq., and unjust enrichment in connection with the negotiation by
certain of the Defendants of the settlement and release agreement. The suit
seeks unspecified legal and equitable damages. A Motion to Strike and a
Motion for Summary Judgement, each with respect to all claims, have been filed
on behalf of all of the Defendants.
The Company believes that it has meritorious defenses and intends to
vigorously contest the claims in this action and to assert all available
defenses. At the present time, the Company is unable to express an opinion
on the likelihood of an unfavorable outcome or to give an estimate of the
amount or range of potential loss to the Company as a result of this
litigation due to the disputed issues of law and/or facts on which the
outcome of this litigation depends and due to the infancy of both the
action and discovery in the action.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders for a vote for
the fiscal year ended December 31, 1999.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
Not applicable.
22
Item 6. SELECTED FINANCIAL DATA
<TABLE>
For the Year Ended
------------------
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
OPERATING RESULTS
Interest and dividend
income $ 6,144,502 $ 4,873,323 $ 4,592,208
Subordinated notes fee
income-Trading Cove
Associates 3,731,806 3,229,253 2,732,530
Completion guarantee notes
fee income-Trading Cove
Associates 903,438 467,500 ---
Management services income-
Trading Cove Associates 1,664,699 3,584,313 ---
Organization and
administrative fee income-
Trading Cove Associates 14,252,209 4,231,768 ---
-------------- ------------- -------------
Total revenue 26,696,654 16,386,157 7,324,738
-------------- ------------- -------------
Total expenses (24,789,253) (9,576,278) (9,340,510)
Equity in income (loss)
of Trading Cove Associates 6,115,300 (482,869) 834,643
-------------- ------------- -------------
Net income (loss) $ 8,022,701 $ 6,327,010 $ (1,181,129)
============== ============= =============
OTHER DATA:
Interest expense $ 19,045,076 $ 7,837,552 $ 8,687,704
Net cash used in
operating activities --- --- 5,835,475
Net cash provided by
operating activities 21,753,116 2,561,515 ---
Net cash provided by
investing activities 18,920,350 1,020,625 9,043,282
Net cash used in
financing activities --- 1,031,555 3,816,560
Net cash provided by
financing activities 16,880,807 --- ---
YEAR-END STATUS:
Total current assets $ 72,724,437 $ 6,459,361 $ 9,980,267
Trading Cove Associates-
equity investment 9,041,568 8,662,198 10,384,292
Beneficial interest-Leisure
Resort Technology, Inc. 5,674,009 4,191,909 ---
Investment in 15%
subordinated notes
receivable --- 32,059,517 27,742,146
Investment in completion
guarantee subordinated
notes receivable --- 5,075,000 2,548,162
Deferred financing costs net
of accumulated amortization 3,781,051 3,339,780 2,702,744
Fixed assets net of
accumulated depreciation 44,036 --- ---
-------------- ------------- -------------
Total assets $ 91,265,101 $ 59,787,765 $ 53,357,611
============== ============= =============
Total current liabilities $ 3,576,539 $ 1,037,887 $ 1,081,043
12-3/4% senior notes
payable --- 61,471,000 61,471,000
9-1/2% senior notes
payable 122,159,000 --- ---
-------------- ------------- -------------
Total liabilities $ 125,735,539 $ 62,508,887 $ 62,552,043
============== ============= =============
</TABLE>
23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain Forward Looking Statements
- ----------------------------------
Certain information included in this Form 10-K and other materials filed or
to be filed by the Company with the Securities and Exchange 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, but are not limited to, information
relating to the Mohegan Sun including plans for future expansion and other
business development activities, financing sources, issues relating to the
Year 2000 and the effects of regulation (including gaming and tax
regulation) and competition. Any forward-looking statements included
herein do not purport to be predictions of future events or circumstances.
Forward-looking statements can be identified by, among other things, the
use of forward-looking terminology such as "believes", "expects", "may",
"will", "should", "seeks", "pro forma", "anticipates", "intends" or the
negative of any thereof or other variations thereon or comparable
technology. 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.
Certain Risk Factors
- --------------------
Lack of Operations; Dependence on the Mohegan Sun
The Company does not conduct any business operations other than in
connection with its role as a managing general partner of TCA and
activities incidental to the issuance of the $125 Million Senior Notes and
the making of restricted and temporary investments. The Company is
prohibited by the terms of the Indenture from engaging in any other
business activities. The Company intends to fund its operating, debt
service and capital needs from cash flows from TCA.
Until January 1, 2000 TCA had one primary source of revenue, Management
Fees under the Management Agreement. After January 1, 2000, TCA will no
longer be entitled to receive such Management Fees. Commencing on January
1, 2000, TCA will receive Relinquishment Fees based on a percentage of
Revenues generated by the Mohegan Sun and the expansion. 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, or to pay Relinquishment Fees. The Company is entirely
dependent upon the performance of the Mohegan Sun, which is subject to
matters over which the Authority, TCA and the Company have no control
including, without limitation, general economic conditions, effects of
competition, political, regulatory and other factors, and the actual number
of gaming customers and the amount wagered.
24
Although TCA is entitled to a $14.0 million development fee under the
Development Agreement, it has entered into a subcontract with SIML who has
subcontracted with affiliates of the Company to provide certain of the
services required by such agreement and is to pay such subcontractors a
development services fee and incur expenses equal to 3% of the total cost
of the expansion. Based upon the estimated cost of the expansion of $800
million, such fees and expenses are expected to be approximately $24
million. Such fees are only payable to the extent of available cash flow.
Thus, ultimately TCA may pay more in development services fees and expenses
to its subcontractors than it will receive under the Development Agreement.
Although the Authority has passed a resolution that the total costs of the
expansion cannot exceed $800 million, the actual costs of the expansion may
exceed such amounts. If the total costs of the expansion increase, then
the total development services fees and expenses paid by TCA will increase
proportionately, which reduces the cash flow distributable to the Company.
While the Company expects its future operating cash flows will be
sufficient to cover its expenses, including interest costs, the Company
cannot give any assurance that it will be able to do so.
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, and from the
Company's available cash. 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, future scheduled payments of principal and interest on the $125
Million Senior Notes and additional investments in TCA that may be required
in connection with the Project. No assurance, however, can be given that
the operating cash flow will be sufficient for that purpose.
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.
Sources of Revenues
- -------------------
The Company has one primary source of revenue: payments from TCA. The
Company anticipates regular payments from TCA based on the results of the
Mohegan Sun and Relinquishment Fees payments by the Authority.
25
Distributions on the Company's partnership interest in TCA
- ----------------------------------------------------------
For the year ended December 31, 1999, the Company received $21,879,716 from
TCA and $1,216,019 was due from TCA, which represents the Company's share
under the Amended and Restated Omnibus Financing Agreement of approximately
$59,521,000 in net Management Fees earned by TCA from the Authority
pursuant to the terms of the Management Agreement for the same period. For
the year ended December 31, 1998 the Company received $11,876,129 under the
Amended and Restated Omnibus Financing Agreement from TCA and $1,611,288
was due from TCA, which represents the Company's share of approximately
$53,683,000 in net Management Fees earned by TCA from the Authority
pursuant to the terms of the Management Agreement for the same period. For
the year ended December 31, 1997 the Company received $7,302,296 under the
Amended and Restated Omnibus Financing Agreement from TCA and $293,923 was
due from TCA, which represents the Company's share of approximately
$28,657,000 in net Management Fees earned by TCA from the Authority
pursuant to the terms of the Management Agreement for the same period.
For the years ended December 31, 1999, 1998, and 1997, the Company also
received $0, $224,680 and $524,254 , respectively, in cash distributions
from TCA which represented the Company's share of repayments by the Tribe
to TCA of amounts due under the terms of the promissory note dated
September 29, 1995 between TCA and the Tribe.
Payments on the Authority Subordinated Notes
- --------------------------------------------
On December 30, 1999, the Authority paid to the holders of the Authority
Subordinated Notes, an amount to satisfy all obligations of such Authority
Subordinated Notes. The Company received $44,403,517 from the Authority.
For the years ended December 31, 1998 and 1997 the Company did not receive
any cash payments on the Authority Subordinated Notes from the Authority.
Results of Operations
- ---------------------
Comparison of Operating Results for the Years Ended December 31,
- ----------------------------------------------------------------
1999 and 1998
- -------------
Total revenue for the twelve months ended December 31, 1999 was $26,696,654
compared with $16,386,157 for the twelve months ended December 31, 1998.
This increase was attributable to a substantial increase in gross revenues
and profitability of the Mohegan Sun which resulted in higher management
fees paid to TCA, an increase in subordinated notes fee income - Trading
Cove Associates, as detailed under point (c) of the table set forth in
Item 1 above under "Amended and Restated Omnibus Financing Agreement", of
$502,553, an increase in completion guarantee notes fee income - Trading
Cove Associates, as detailed under point (d) of the table set forth in Item
1 above under "Amended and Restated Omnibus Financing Agreement", of
$435,938, a decrease in management services income - Trading Cove
Associates, as detailed under point (h) of the table set forth in Item 1
above under "Amended and Restated Omnibus Financing Agreement", of
$1,919,614 and an increase in organization and administrative fee income -
Trading Cove Associates, as detailed under point (k) of the table set forth
in Item 1 above under "Amended and Restated Omnibus Financing Agreement",
of $10,020,441. In addition, interest and dividend income increased by
$1,271,179.
26
Total expenses for the year ended December 31, 1999 was $24,789,253
compared with $9,576,278 for the year ended December 31, 1998. Interest
expense increased by $11,207,524 and amortization on deferred financing
costs increased by $3,093,086 due to the redemption of the $65 Million
Senior Notes and the issuance of the $125 Million Senior Notes, general and
administrative costs increased by $637,399, (primarily attributable to an
increase in executive payroll and associated federal and state payroll
taxes of approximately $690,000, a decrease in accounting fees of
approximately $55,200 (during the twelve months ended December 31, 1999 and
1998 the Company paid accounting fees to an affiliate totaling
approximately $95,000 and $146,300, respectively), filing expense increased
by approximately $15,600, copying and printing expense increased by
approximately $2,000, trustee and disbursement agent fees increased by
approximately $3,600, dues and subscriptions increased by approximately
$1,600, by a decrease in legal fees of approximately $25,100 and by a
decrease in insurance expense of approximately $1,000), an increase in 12-
3/4% senior notes tender expense of $612,486, a decrease in amortization of
beneficial interest - Leisure Resort Technology, Inc. of $347,402, due to
the increase in the period over which the asset is amortized and by an
increase in depreciation of $9,882.
Equity in income (loss) of Trading Cove Associates for the twelve months
ended December 31, 1999 was $6,115,300 compared with $(482,869) for the
twelve months ended December 31, 1998, as a result of the increase in
income from Trading Cove Associates of $5,778,791 due to the timing of
payments pursuant to the Amended and Restated Omnibus Financing Agreement
and by a decrease in amortization of interests purchased of $819,378 due to
the increase in the period over which the interests purchased is amortized.
As a result of the foregoing factors, the Company experienced net income of
$8,022,701 for the year ended December 31, 1999 compared with net income of
$6,327,010 for the year ended December 31, 1998.
27
Comparison of operating results for the years ended December 31,
- ----------------------------------------------------------------
1998 and 1997
- -------------
Total revenue for the twelve months ended December 31, 1998, was
$16,386,157 compared with $7,324,738 for the twelve months ended December
31, 1997. This increase was primarily attributable to a substantial
increase in gross revenues and profitability of the Mohegan Sun which
resulted in higher Management Fees paid to TCA, an increase in subordinated
notes fee income - Trading Cove Associates, as detailed under point (c) of
the table set forth in Item 1 above under "Amended and Restated Omnibus
Financing Agreement", of $496,723, an increase in completion guarantee
notes fee income - Trading Cove Associates, as detailed under point (d) of
the table set forth in Item 1 above under "Amended and Restated Omnibus
Financing Agreement", of $467,500, an increase in management services
income - Trading Cove Associates, as detailed under point (h) of the table
set forth in Item 1 above under "Amended and Restated Omnibus Financing
Agreement", of $3,584,313 and an increase in organization and
administrative fee income - Trading Cove Associates, as detailed under
point (k) of the table set forth in Item 1 above under "Amended and
Restated Omnibus Financing Agreement", of $4,231,768. In addition,
interest and dividend income increased by $281,115.
Total expenses for the year ended December 31, 1998 were $9,576,278
compared with $9,340,510 for the year ended December 31, 1997. Interest
expense decreased by $850,152, as a result of the redemption of $3,529,000
principal amount of $65 Million Senior Notes on November 15, 1997, general
and administrative costs increased by $139,144 (primarily attributable to
an increase in accounting fees of approximately $60,300 (during the year
ended December 31, 1998 and 1997 the Company paid accounting fees to an
affiliate totaling $146,300 and $86,000, respectively, which was funded by
capital contributions of the members) an increase in legal fees of
approximately $42,700 and an increase in insurance expense of approximately
$32,600), amortization of beneficial interest - Leisure Resort Technology,
Inc. increased by $865,302 and amortization on deferred financing costs
increased by $81,474 due to additional deferred financing costs incurred.
Equity in income (loss) of Trading Cove Associates for the year ended
December 31, 1998 was $(482,869) compared with $834,643 for the year ended
December 31, 1997, as a result of the decrease in income from Trading Cove
Associates of $1,317,512 due to the timing of payments by TCA pursuant to
the Amended and Restated Omnibus Financing Agreement.
As a result of the foregoing factors the Company experienced net income of
$6,327,010 for the twelve months ended December 31, 1998 compared with a
net loss of $(1,181,129) for the twelve months ended December 31, 1997.
28
Liquidity and Capital Resources
- -------------------------------
The initial capital of the Company consists of the partnership interests in
TCA contributed by Slavik and LMW in forming the Company. In connection
with the offering of the $65 Million 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 and on October 12, 1998 and 1999, 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 each
transaction).
On January 6, 1998 the Company paid $5,000,000 to Leisure whereby Leisure
gave up its beneficial interest in 5% of the Organizational and
Administrative Fee and Excess Cash of TCA and any other claims it may have
had against the Company, TCA and TCA's partners and former partner.
In connection with the offering of the $125 Million Senior Notes, the
Company used approximately $72 million to repurchase its $65 Million Senior
Notes, distributed approximately $37 million to its new parent, Waterford
Group and paid the final $2 million to Leisure.
On December 30, 1999, the Authority paid to the holders of the Authority
Subordinated Notes, an amount to satisfy all obligations of such Authority
Subordinated Notes. The Company received $44,403,517 from the Authority.
On December 30, 1999, TCA distributed $10,536,543 to its partners. The
Company received $5,268,272.
On January 4, 2000 in accordance with the terms of the Indenture and the
Security and Control Agreement dated as of March 17, 1999 between the
Company and Finance and State Street Bank and Trust Company, $15,000,000
was transferred to restricted investments ("Interest Reserve Account").
On January 4, 2000 also in accordance with the terms of the Indenture, the
Company distributed $34,671,789 to its sole member Waterford Group and on
January 11, 2000 the Company distributed $2,557,545 to Waterford Group as a
tax distribution.
For the twelve months ended December 31, 1999 and 1998, cash provided by
operating activities (as shown in Statements of Cash Flows) was $21,753,116
and $2,561,515, respectively.
Current assets increased from $6,459,361 to $72,724,437 at December 31,
1999. The increase was caused primarily by the payment of fees and
distributions by TCA as a result of the profitable operations of the
Mohegan Sun, by the funding of the Interest Reserve Account that is
required by the $125 Million Senior Notes Indenture, by the repayment by
the Authority to the holders of the Authority Subordinated Notes an amount
to satisfy all obligations of such Authority Subordinated Notes and by the
distribution that the Company received from TCA on December 30, 1999.
29
Current liabilities increased from $1,037,887 to $3,576,539 at December 31,
1999. The increase was attributable to an increase in accrued expenses,
primarily attributable to the refinancing, of $124,308 and by an increase
in accrued interest on senior notes payable of $2,414,344.
For the years ended December 31, 1999 and 1998 cash provided by investing
activities (as shown in the Statements of Cash Flows) was $18,920,350 and
$1,020,625, respectively. The increase was caused primarily by the payment
to Leisure of $2,000,000 in March 1999, the increase in contributions to
TCA of $200,000 (to fund certain development expenses in connection with
the Project at the Mohegan Sun), an increase in distributions from TCA of
$4,696,705 in terms of the second, sixth and tenth priorities of the
Amended and Restated Omnibus Financing Agreement and by the distribution by
TCA to its partners on December 30, 1999, by the decrease in (purchases)
and sales of temporary investments-net of $292,519, by the increase in
(purchases) and sales of restricted investments-net of $11,807,092
(principally due to the funding of the Interest Reserve Account), by the
increase in cash utilized for the purchase of furniture and fixtures of
$21,505, by the increase in cash utilized for leasehold improvements of
$32,413 and by the redemption of the Authority Subordinated Notes by the
Authority on December 30, 1999.
The Company anticipates that up to $5,500,000 in additional investments in
TCA (as of December 31, 1999, $1,000,000 had been invested in TCA) may be
required by the Company in connection with the Project at the Mohegan Sun.
For the twelve months ended December 31, 1999 and 1998 cash provided by
(used in) financing activities (as shown in the Statements of Cash Flows)
was $16,880,807 and $(1,031,555), respectively. The increase was caused
primarily by the issuance of the $125 Million Senior Notes, and offset by
the increase in the redemption of the $65 Million Senior Notes of
$61,471,000, the increase in the cost of redemption of the $125 Million
Senior Notes of $2,841,000, the increase in deferred financing costs of
$2,857,321 (primarily due to the costs associated with the issuance of the
$125 Million Senior Notes) and by the increase in distributions to members
of $39,821,017.
The Company and Finance are required to make a mandatory redemption on
September 15 and March 15, of each year, which began September 15, 1999, of
$125 Million Senior Notes using any Company Excess Cash, as defined in the
Indenture, which the Company and Finance may have as of the preceding
August 1 and February 1. On August 1, 1999 the Company and Finance had
Company Excess Cash, as defined in the Indenture, available for mandatory
redemption of the $125 Million Senior Notes totaling approximately
$8,983,000, and accordingly on September 15, 1999 the Company and Finance
made a mandatory redemption of $125 Million Senior Notes in the principal
amount of $2,841,000 at the redemption price of 109.50%. On February 1,
2000 the Company and Finance had Company Excess Cash, as defined in the
Indenture, available for mandatory redemption of the $125 Million Senior Notes
totaling approximately $8,276,000, and accordingly on March 15, 2000 the
Company and Finance made a mandatory redemption of $125 Million Senior
Notes in the principal amount of $2,277,000 at the redemption price of
108.636%.
30
The Company expects to fund its operating, debt service and capital needs
from cash flows from the Company's share of payments from TCA, and from the
Company's available cash. 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, future scheduled payments of principal and interest on the $125
Million Senior Notes and additional investments in TCA that may be required
in connection with the Project. No assurance, however, can be given that
the operating cash flow will be sufficient for that purpose.
Year 2000 Issues
- ----------------
The Company, with a Year 2000 issues consultant, has addressed any Year
2000 compliance issues for TCA and itself. The Company's management at
this time believes that any issues relating to the Company's Year 2000
compliance will not materially interrupt and have not materially
interrupted its operations. The Company estimates the total cost to become
Year 2000 compliant to be approximately $20,000.
The failure to correct a material Year 2000 issue could result in an
interruption in, or a failure of, certain normal business activities or
operations. The Company has one primary source of revenue: payments from
TCA which is dependant on the level of revenues generated by the Mohegan
Sun.
As derived from publicly filed information the Authority discloses its Year
2000 readiness as follows:
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.
31
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 implemented a Year
2000 program to provide an independent analysis of the Authority's Year
2000 preparedness and the adequacy of the Authority's Year 2000 plans. The
program included taking an inventory of entities, identifying problems,
compliance planning, calculating time and cost estimates, generating
implementation strategies, attempting to correct the problems, and testing
the solutions. The consultant examined the methodology used to approach
risks in the facilities' embedded systems and in products in the
Authority's supply chain. While the Authority's efforts are designed to be
successful because of the complexity of the Year 2000 issues and the
interdependence of organizations using computer systems, there can be no
assurance that the Authority's efforts, or those of a third party with whom
the Authority interacts, will be satisfactorily completed in a timely
fashion. This could result in a material adverse effect on future
operations.
Status
Through December 31, 1999, the Authority was in conformance with the
Gartner Group Year 2000 best practices model. Upon completion of the
fourth and final assessment in August of 1999, the Authority received a
rating of 4.0, which represents operational sustainability. The
Authority's mission critical system applications that run financial,
payroll and casino operating systems were remediated in April 1999. The
Authority received compliance correspondence from 95% of its mission
critical vendors and is complete with embedded system testing. These
embedded systems include slot machines, heating and cooling machinery and
equipment and related infrastructure. Concurrently, contingency and
recovery plans were developed for critical entities to eliminate any
disruptions to operations. As of February 14, 2000 there was no adverse
material impact on the Authority's financial position, results of
operations or cash flow relating to the Year 2000 program.
32
Cost
The Authority has incurred approximately $1.5 million in costs to date
associated with the Year 2000 program as of December 31, 1999. The
Authority does not separately track costs, except for labor incurred by the
information systems group and outside consulting fees, incurred for the
Year 2000 program.
Due to the general uncertainty inherent in the Year 2000 issues, and in
particular uncertainty of the Year 2000 compliance of the Mohegan Sun, from
which the Company receives its revenues, the Company is unable to determine
at this time whether the consequences of Year 2000 failures will have a
material impact on its results of operations, liquidity or financial
condition.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in
interest rates, foreign exchange rates and equity prices. Changes in these
factors could cause fluctuations in earnings and cash flows.
For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt instrument, but not earnings or cash flows.
Therefore, interest rate risk and changes in the fair market value of fixed
rate debt should not have a significant impact on earnings or cash flows
until such debt is refinanced, if necessary. For variable rate debt,
changes in interest rates generally do not impact the fair market value of
the debt instrument, but do affect future earnings and cash flows. The
Company did not have any variable rate debt outstanding at December 31,
1999. The fair market value of the Company's long-term debt at December
31, 1999 is estimated to be approximately $120,300,000 based on the quoted
market price for the same issue.
The Company is exposed to market risks from fluctuations in interest rates
and the effects of those fluctuations on market values of the Company's
cash equivalents and restricted investments. Cash equivalents generally
consist of overnight investments while the restricted investments are
generally comprised of an investment in a Federal Home Loan Mortgage Corp.
Discount Note. These investments are not significantly exposed to interest
rate risk, except to the extent that changes in interest rates will
ultimately affect the amount of interest income earned and cash flow from
these investments.
The Company does not currently have any derivative financial instruments in
place to manage interest costs, but that does not mean that the Company
will not use them as a means to manage interest rate risk in the future.
The Company does not use foreign currency exchange forward contracts or
commodity contracts and does not have foreign currency exposure in its
operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on Page 41
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables set forth certain information with respect to persons
who are members of the Board of Directors of the Company or who are
executive officers of the Company.
Name Age Position
Len Wolman 45 Chairman of the Board and Chief
Executive Officer
Alan Angel 43 Chief Financial Officer
Del J. Lauria 51 Director and Secretary
Stephan F. Slavik, Sr. 79 Director
Mark Wolman 42 Director
Len Wolman. Mr. Wolman has been the Chairman of the Board of Directors and
the Chief Executive of the Company since its formation. Since 1986, Mr.
Wolman has been the Chairman of the Board of Directors and the Chief
Executive Officer of the Waterford Hotel Group, Inc. Under Mr. Wolman,
Waterford Hotel Group, Inc. has grown from one hotel management contract to
25 properties in nine states. Mr. Wolman was actively involved in the
development, construction and operation of the Mohegan Sun and is actively
involved in the development and construction of the expansion to the
Mohegan Sun. Mr. Wolman was instrumental in the formation of the
relationship of TCA and the Tribe and had been actively working with the
Tribe in connection with obtaining federal recognition, acquiring the site
for the Mohegan Sun and obtaining the financing to construct the Mohegan
Sun. Mr. Wolman has served as President and Chief Executive Officer of
Finance since its inception. Mr. Wolman is a Director of Slavik Suites,
Inc., one of Waterford Group's members. Mr. Wolman is the brother of Mark
Wolman. Mr. Wolman's wife and Mr. Angel's wife are sisters.
Alan Angel. Mr. Angel became Chief Financial Officer of the Company in
January, 1999. Since 1997, Mr. Angel has been the Chief Financial Officer
of Mystic Suites, L.L.C. Mystic Suites, L.L.C is a commercial development
firm based in eastern Connecticut which currently holds an ownership
interest in a number of hotels managed by the Waterford Hotel Group, Inc.
Prior to joining Mystic Suites, L.L.C., Mr. Angel resided in South Africa
and served as Chief Financial Officer of Rowan & Angel cc. Mr. Angel is a
certified public accountant and a chartered accountant. Mr. Angel has over
20 years of accounting experience. Mr. Angel's wife and Mr. Len Wolman's
wife are sisters.
Del J. Lauria. Mr. Lauria became a Director of the Company, Chief
Financial Officer and Secretary upon its formation. Mr. Lauria was
succeeded as Chief Financial Officer in January 1999 by Mr. Alan Angel.
Mr. Lauria is also an Officer and Director of the Waterford Hotel Group,
Inc. and is Executive Vice President and Director of Slavik Suites, Inc.,
one of Waterford Group's members. Mr. Lauria first joined the Slavik
Organization in 1980 as the Chief Financial Officer of its real estate
property management division. The Slavik Organization is an affiliated
group of full service real estate companies first established in Michigan
in the early 1950s. Mr. Lauria rapidly advanced at the Slavik Organization
and currently holds various key managerial positions within the enterprise.
Prior to joining the Slavik Organization, Mr. Lauria was associated with
the accounting firm now know as Deloitte & Touche and is a certified public
accountant. Mr. Lauria has served as Treasurer and Secretary of Finance
since its inception.
34
Stephan F. Slavik, Sr. Mr. Slavik became a Director of the Company upon
its formation. Mr. Slavik is the President of Slavik Suites, Inc. and the
Chief Operating Officer and surviving founder of the Slavik Organization.
Over his ongoing career, Mr. Slavik has developed or constructed more than
6,000 single family homes, in excess of 15,000 multiple-family housing
units and various other real estate developments such as hotels, office
buildings, light industrial, golf courses and has subdivided thousands of
lots. Mr. Slavik is also an Officer and Director in the Waterford Hotel
Group, Inc.
Mark Wolman. Mr. Wolman became a Director of the Company upon its
formation. Mr. Wolman is the president of Wolman Homes, Inc. d/b/a Wolman
Construction. Wolman Homes, Inc. is a commercial development and
construction firm based in eastern Connecticut. Mr. Wolman has been
working with the Mohegan Tribe since 1992 and had been instrumental in
assisting the Mohegan Tribe in obtaining a number of governmental approvals
in connection with the development and construction of the Mohegan Sun.
Mr. Wolman is the brother of Len Wolman.
Item 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Directors of
the Company.
Name Year Ended Salary
------ ------------ --------
Len Wolman (1) 1999 $165,000
1998 ---
1997 ---
Del Lauria 1999 $165,000
1998 ---
1997 ---
Stephan F. Slavik, Sr. 1999 $165,000
1998 ---
1997 ---
Mark Wolman 1999 $165,000
1998 ---
1997 ---
The Company's Directors have also received compensation as part of the
operating expenses and Management Services Fee of TCA as detailed under
points (a) and (h) of the table set forth above under "Amended and Restated
Omnibus Financing Agreement". The Company does not have a compensation
committee, and all compensation decisions are made by the Board of
Directors.
(1) As detailed in Item 13, Len Wolman has an employment contract with the
Company. For the years ended 1999, 1998 and 1997 no compensation was
paid to Len Wolman pursuant to the employment contract.
35
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's sole member is Waterford Group, L.L.C.
The following table sets forth the beneficial ownership interest in
Waterford Group, L.L.C.
Name of % Ownership
Beneficial Owner in the Company
- ---------------- --------------
LMW Investments, Inc. (1) 32.2033%
Slavik Suites, Inc. (2) 67.7967%
---------
100.0000%
=========
(1) LMW Investments, Inc. is owned 50% by Mr. Len Wolman and 50% by Mr.
Mark Wolman. The address for LMW Investments, Inc. is 914 Hartford
Turnpike, P.O. Box 715, Waterford, Connecticut 06385.
(2) Messrs. Len and Mark Wolman each own approximately 11.9% of the
outstanding shares of Slavik Suites, Inc. The address for Slavik
Suites, Inc. is 32605 West 12 Mile Road, Suite 350, Farmington Hills,
Michigan 48334.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Len Wolman is a managing partner of TCA.
Pursuant to the Development Agreement Phase I dated as of September 29,
1995, between TCA and SIML, TCA shall pay SIML a Development Services Fee
Phase I. Pursuant to a subcontract, Construction received 20.83% of the
Development Services Fee Phase I plus $25,000 (total approximately $1.75
million). Construction is owned 50% by Len Wolman (the Company's Chief
Executive Officer and Chairman of the Board of Directors) and 50% by Mark
Wolman (a member of the Company's Board of Directors). Pursuant to a
subcontract, Construction paid The Slavik Company $250,000 of Construction's
$1.75 million. Del J. Lauria (the Company's Secretary and member of the
Company's Board of Directors) and Stephan F. Slavik, Sr. (a member of the
Company's Board of Directors) have a financial interest in The Slavik
Company.
On February 9, 1998 the Development Services Agreement Phase II was entered
into between TCA and SIML. Pursuant to the Development Services Agreement
Phase II, TCA subcontracted with SIML and SIML agreed to perform those
services assigned to SIML by TCA in order to facilitate TCA's fulfillment
of its duties and obligations to the Authority under the Development
Agreement. TCA shall pay to SIML a fee, as subcontractor (the "Development
Services Fee Phase II") equal to 3% of the development costs of the
Project, less all costs incurred by TCA in connection with the Project.
The Development Services Fee Phase II shall be paid in installments due on
December 31, 1999 and 2000 and on the Completion Date, as defined in the
Development Agreement, with a final payment being made when the actual
development costs of the Project are known. SIML has further subcontracted
with Construction who has subcontracted with The Slavik Company. The fee
payable by SIML to Construction as and when SIML receives payment from TCA
is 20.83% of the Development Services Fee Phase II. Construction has
agreed to pay The Slavik Company 14.30% of the amount that Construction
receives from SIML that relates to its share of the Development Services
Fee Phase II.
36
The Company paid amounts to an affiliate for accounting services totaling
$95,200, $146,300 and $86,000, respectively, during the years ended
December 31, 1999, 1998 and 1997.
On September 28, 1998, the Company entered into an employment agreement
with Len Wolman. The employment agreement provides for a base annual
salary of $250,000 reduced by any amounts Mr. Wolman receives as a salary
from TCA for such period. Pursuant to such employment agreement, the
Company shall pay to Mr. Wolman an amount equal to 0.05% of the revenues of
the Mohegan Sun including the expansion to the extent Mr. Wolman has not
received such amounts from TCA. On and after January 1, 2004, the Company
shall pay to Mr. Wolman incentive compensation based on the revenues of the
Mohegan Sun, including the expansion, as a percentage (ranging from .00% to
.10%) to be determined using a formula attached to the employment agreement
which compares actual revenues to predetermined revenue targets.
In 1999 and 1998, approximately $756,000 and $690,000, respectively, was
paid to the principals and affiliates of the Company as part of TCA's
operating expenses, including the payment of Mr. Len Wolman's salary and
bonus. In addition, for the years ended December 31, 1999 and 1998,
$6,219,147 ($3,109,573 to SIML, $1,444,875 to the Directors of the Company
and $1,664,699 to the Company) and $8,771,643 ($4,385,822 to SIML, $280,212
to the Directors of the Company, $521,296 to affiliates of the Company and
$3,584,313 to the Company), respectively, had been paid by TCA in monthly
management services fees.
For the year ended December 31, 1999, the Company paid to the Directors of
the Company $660,000 as salaries for various services provided to the
Company.
Waterford Group, Slavik and the other principals of Waterford Group have
interests in and may acquire interests in hotels in southeastern
Connecticut which have or may have arrangements with the Mohegan Sun to
reserve and provide hotel rooms to patrons of the Mohegan Sun.
37
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit No. Description
3.1 Certificate of Formation, as amended, of Waterford
Gaming, LLC (i)
3.2 Certificate of Incorporation of Waterford Gaming
Finance Corp. (i)
3.3 Bylaws of Waterford Gaming Finance Corp. (i)
4.1 Indenture, dated as of November 8, 1996, between
Waterford Gaming, L.L.C. and Waterford Gaming
Finance Corp., the issuers, and Fleet National
Bank, as trustee, relating to $65,000,000 12-3/4%
Senior Notes due 2003. (i)
4.1.1 First Supplemental Indenture, dated as of March 4,
1999, among Waterford Gaming, L.L.C. and Waterford
Gaming Finance, Corp., as issuers, and State
Street Bank and Trust Company, as trustee,
relating to $65,000,000 12-3/4% Senior Notes Due
2003. (vi)
4.2 Indenture, dated as of March 17, 1999, among
Waterford Gaming, L.L.C. and Waterford Gaming
Finance Corp., as issuers, and State Street Bank
and Trust Company, as trustee, relating to
$125,000,000 9-1/2% Senior Notes due 2010. (vi)
4.3 Security and Control Agreement, dated as of March
17, 1999, among Waterford Gaming, L.L.C. and
Waterford Gaming Finance Corp., as pledgors and
State Street Bank and Trust Company, as securities
intermediary. (vi)
4.4 Specimen Form of 9-1/2% Senior Notes due 2010
(included in Exhibit 4.2). (vi)
10.1 Omnibus Financing Agreement, dated as of September
21, 1995, between Trading Cove Associates and Sun
International Hotels Limited. (i)
10.2 First Amendment to the Omnibus Financing
Agreement, dated as of October 19, 1996, among
Trading Cove Associates, Sun International Hotels
Limited and Waterford Gaming, L.L.C. (i)
10.2.1 Amended and Restated Omnibus Financing Agreement
dated September 10, 1997 (ii)
10.2.2 Omnibus Termination Agreement, dated as of March
18, 1999, among Sun International Hotels Limited,
Trading Cove Associates, Waterford Gaming, L.L.C.,
Sun International Management Limited, LMW
Investments, Inc., Sun Cove Limited, Slavik
Suites, Inc., and Wolman Construction, L.L.C. (vi)
10.3 Amended and Restated Partnership Agreement of
Trading Cove Associates, dated as of September 21,
1994, among Sun Cove Limited, RJH Development
Corp., Leisure Resort Technology, Inc., Slavik
Suites, Inc., and LMW Investments, Inc. (i)
38
10.4 First Amendment to Amended and Restated
Partnership Agreement of Trading Cove Associates,
dated as of October 22, 1996, among Sun Cove
Limited, Slavik Suites, Inc., RJH Development
Corp., LMW Investments, Inc. and Waterford Gaming,
L.L.C. (i)
10.5 Purchase Agreement, dated as of March 10, 1999,
among Waterford Gaming, L.L.C., Waterford Gaming
Finance Corp., Bear, Stearns & Co., Inc., Merrill
Lynch, Pierce, Fenner and Smith Inc. and Salomon
Smith Barney. (vi)
10.5.1 Agreement with Respect to Redemption or Repurchase
of Subordinated Notes, dated September 10,
1997 (ii)
10.6 Amended and Restated Limited Liability Company
Agreement of Waterford Gaming, L.L.C., dated as of
March 17, 1999 by Waterford Group, L.L.C. (vi)
10.7 Note Purchase Agreement, dated as of October 19,
1996, among Sun International Hotels Limited,
Waterford Gaming, L.L.C. and Trading Cove
Associates. (i)
10.8 Note Purchase Agreement, dated as of September 29,
1995, between the Mohegan Tribal Gaming Authority
and Sun International Hotels Limited relating to
the Subordinated Notes. (i)
10.9 Management Agreement, dated as of July 28, 1994,
between the Mohegan Tribe of Indians of
Connecticut and Trading Cove Associates. (i)
10.10 Management Services Agreement, dated September 10,
1997. (ii)
10.11 Development Services Agreement, dated September
10, 1997. (ii)
10.12 Subdevelopment Services Agreement, dated September
10, 1997. (ii)
10.13 Completion Guarantee and Investment Banking and
Financing Arrangement Fee Agreement, dated
September 10, 1997. (ii)
10.14 Settlement and Release Agreement, dated January 6,
1998, by and among Leisure Resort Technology,
Inc., Lee R. Tyrol, Trading Cove Associates,
Slavik Suites, Inc., LMW Investments, Inc., RJH
Development Corp., Waterford Gaming, L.L.C. and
Sun Cove Limited. (iii)
39
10.15 Waiver and Acknowledgment of Noteholder. (iv)
10.16 Relinquishment Agreement, dated February 7, 1998,
between the Mohegan Tribal Gaming Authority and
Trading Cove Associates. (v)
10.17 Development Services Agreement, dated February 7,
1998, between the Mohegan Tribal Gaming Authority
and Trading Cove Associates. (v)
10.18 Agreement, dated September 28, 1998, by and among,
Waterford Gaming, L.L.C., Slavik Suites, Inc., LMW
Investments, Inc., Len Wolman, Mark Wolman,
Stephan F. Slavik, Sr. and Del J. Lauria (Len
Wolman's Employment Agreement). (v)
10.19 Agreement Relating to Development Services, dated
as of February 9, 1998, between Trading Cove
Associates and Sun International Management
Limited. (vi)
10.20 Local Construction Services Agreement, dated as of
February 9, 1998 between Sun International
Management Limited and Wolman Construction,
L.L.C. (vi)
10.21 Escrow Deposit Agreement, dated as of the 3rd day
of March 1999, by and among the Mohegan Tribal
Gaming Authority and First Union National Bank, as
Defeasance Agent. (vi)
21.1 Subsidiaries of Waterford Gaming,
L.L.C. (i)
21.2 Subsidiaries of Waterford Gaming Finance Corp. (i)
27 Financial Data Schedule (vii)
(i) Incorporated by reference to the Registrant's
Registration Statement on Form S-4, Securities and Exchange
Commission (the "Commission") File No. 333-17795, declared effective
on May 15, 1997.
(ii) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1997, Commission File
No. 333-17795, as accepted by the Commission on November 14, 1997.
(iii) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, Commission File
No. 333-17795, as accepted by the Commission on March 30, 1998.
(iv) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1998, Commission File No.
333-17795, as accepted by the Commission on May 14, 1998.
40
(v) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 1998, Commission File
No. 333-17795, as accepted by the Commission on November 13, 1998.
(vi) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1999, Commission File No.
333-17795 as accepted by the Commission on May 17, 1999.
(vii) Included in Edgar filing only.
(b) Financial Statement Schedules
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants F-1
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 F-2
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-3
Statements of Changes in Member's Deficiency for the
years ended December 31, 1999, 1998 and 1997 F-4
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-5
Notes to Financial Statements F-6
41
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE MEMBER OF
WATERFORD GAMING, L.L.C.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in member's deficiency and of cash flows present
fairly, in all material respects, the financial position of Waterford
Gaming, L.L.C. (the "Company") at December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States which
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, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
March 9, 2000
F-1
WATERFORD GAMING, L.L.C.
BALANCE SHEETS
December 31, 1999 and 1998
----------
1999 1998
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 60,337,617 $ 2,783,344
Temporary investments --- 2,045,430
Restricted investments 11,807,092 ---
Due from Trading Cove Associates 492,907 1,611,288
Other assets 86,821 19,299
------------ ------------
Total current assets 72,724,437 6,459,361
------------ ------------
Trading Cove Associates -
equity investment 9,041,568 8,662,198
Beneficial interest - Leisure Resort
Technology, Inc. 5,674,009 4,191,909
Investment in 15% subordinated
notes receivable --- 32,059,517
Investment in completion guarantee
subordinated notes receivable --- 5,075,000
Deferred financing costs, net of
accumulated amortization of
$294,125 and $1,058,895
at December 31, 1999 and
1998, respectively 3,781,051 3,339,780
Fixed assets, net of accumulated
depreciation of $9,882 and $0
at December 31, 1999 and 1998,
respectively 44,036 ---
------------ ------------
Total assets $ 91,265,101 $ 59,787,765
============ ============
LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities
Accrued expenses $ 159,480 $ 35,172
Accrued interest on senior notes
payable 3,417,059 1,002,715
------------ ------------
Total current liabilities 3,576,539 1,037,887
------------ ------------
12-3/4% senior notes payable --- 61,471,000
9-1/2% senior notes payable 122,159,000 ---
------------ ------------
Total liabilities 125,735,539 62,508,887
------------ ------------
Members' deficiency (34,470,438) (2,721,122)
------------ ------------
Total liabilities and
members' deficiency $ 91,265,101 $ 59,787,765
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
<TABLE>
WATERFORD GAMING, L.L.C.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
---------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenue
Interest and dividend income $ 6,144,502 $ 4,873,323 $ 4,592,208
Subordinated notes fee income -
Trading Cove Associates 3,731,806 3,229,253 2,732,530
Completion guarantee notes fee
income-Trading Cove Associates 903,438 467,500 ---
Management services income -
Trading Cove Associates 1,664,699 3,584,313 ---
Organization and administrative fee
income - Trading Cove Associates 14,252,209 4,231,768 ---
----------- ----------- ------------
Total revenue 26,696,654 16,386,157 7,324,738
----------- ----------- ------------
Expenses
Interest expense 19,045,076 7,837,552 8,687,704
Salaries - related parties 660,000 --- ---
General and administrative 310,004 332,605 193,461
12-3/4% senior notes tender expense 612,486 --- ---
Amortization of beneficial interest -
Leisure Resort Technology, Inc. 517,900 865,302 ---
Amortization on deferred financing
costs 3,633,905 540,819 459,345
Depreciation 9,882 --- ---
----------- ----------- ------------
Total expenses 24,789,253 9,576,278 9,340,510
----------- ----------- ------------
1,907,401 6,809,879 (2,015,772)
Equity in income (loss) of Trading
Cove Associates 6,115,300 (482,869) 834,643
----------- ----------- ------------
Net income (loss) $ 8,022,701 $ 6,327,010 $ (1,181,129)
=========== =========== ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<TABLE>
WATERFORD GAMING, L.L.C.
STATEMENTS OF CHANGES IN MEMBERS' DEFICIENCY
For the Years Ended December 31, 1999, 1998 and 1997
------------
Slavik Suites,Inc. LMW Investments,Inc. Waterford Group, L.L.C. Total
------------------ -------------------- ----------------------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ (5,412,165) $ (2,687,138) $ (8,099,303)
Contributions 58,305 27,695 86,000
Net loss (800,766) (380,363) (1,181,129)
------------------ -------------------- ------------
Balance, December 31, 1997 (6,154,626) (3,039,806) (9,194,432)
Contributions 99,186 47,114 146,300
Net income 4,289,504 2,037,506 6,327,010
------------------ -------------------- ------------
Balance, December 31, 1998 (1,765,936) (955,186) (2,721,122)
Contributions, January 1-
March 17 33,220 15,780 49,000
Distributions, January 1-
March 17 (1,277,787) (606,945) (1,884,732)
Net loss, January 1-March 17 (5,043,441) (2,395,625) (7,439,066)
Transfer of interest 8,053,944 3,941,976 (11,995,920) ---
Distributions - March 17-
December 31 --- --- (37,936,285) (37,936,285)
Net income - March 17-
December 31 --- --- 15,461,767 15,461,767
------------------ -------------------- ----------------------- ------------
Balance, December 31, 1999 $ --- $ --- $ (34,470,438) $(34,470,438)
================== ==================== ======================= ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<TABLE>
WATERFORD GAMING, L.L.C.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
---------------
1999 1998 1997
----------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 8,022,701 $ 6,327,010 $ (1,181,129)
----------------- ----------------- ----------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Amortization 4,151,805 1,406,121 459,345
Depreciation 9,882 --- ---
Equity in (income) loss of Trading Cove
Associates (6,115,300) 482,869 (834,643)
Changes in operating assets
and liabilities
Accrued interest receivable -
15% subordinated notes receivable 12,059,517 (4,317,371) (3,733,909)
Accrued interest receivable - completion
guarantee subordinated notes receivable 75,000 (27,500) (47,500)
Due from Trading Cove Associates 1,118,381 (1,317,365) (293,923)
Other assets (67,522) 50,907 (11,145)
Accrued expenses 84,308 (43,156) 24,818
Accrued interest on senior
notes payable 2,414,344 --- (217,389)
---------------- ----------------- -----------------
Total adjustments
13,730,415 (3,765,495) (4,654,346)
---------------- ----------------- -----------------
Net cash provided by(used in)
operating activities 21,753,116 2,561,515 (5,835,475)
---------------- ----------------- -----------------
Cash flows from investing activities
Beneficial interest - Leisure Resort
Technology, Inc. (2,000,000) (5,057,211) ---
Cash in escrow --- --- (5,000,000)
Release of cash in escrow --- 5,000,000 ---
Contributions to Trading Cove Associates (600,000) (400,000) ---
Distributions from Trading Cove Associates 6,335,930 1,639,225 3,132,820
(Purchases) and sales of temporary
investments - net 2,045,430 2,337,949 11,453,464
(Purchases) and sales of restricted
investments - net (11,807,092) --- ---
Purchase of completion guarantee subordinated
note receivable (2,798,125) (2,798,125) (2,798,125)
Return on investment in completion guarantee
subordinated notes receivable 298,125 298,787 297,463
Redemption of completion guarantee subordinated
notes receivable 7,500,000 --- ---
Return on investment in 15% subordinated notes
receivable --- --- 1,957,660
Redemption of 15% subordinated notes receivable 20,000,000 --- ---
Fixed assets (53,918) --- ---
----------------- ----------------- ----------------
Net cash provided by
investing activities 18,920,350 1,020,625 9,043,282
----------------- ----------------- ----------------
Cash flows from financing activities
Redemption of 12-3/4% senior notes (61,471,000) --- (3,529,000)
Proceeds from 9-1/2% senior notes issuance 125,000,000 --- ---
Redemption of 9-1/2% senior notes (2,841,000) --- ---
Deferred financing costs (4,035,176) (1,177,855) (373,560)
Contributions by members 49,000 146,300 86,000
Distributions to members (39,821,017) --- ---
----------------- ----------------- ----------------
Net cash provided by
(used in) financing activities 16,880,807 (1,031,555) (3,816,560)
----------------- ----------------- ----------------
Net increase (decrease)in cash 57,554,273 2,550,585 (608,753)
Cash and cash equivalents at beginning of year 2,783,344 232,759 841,512
----------------- ----------------- ----------------
Cash and cash equivalents at end of year $ 60,337,617 $ 2,783,344 $ 232,759
================= ================= ================
Supplemental disclosure of cash
flow information:
Cash paid during the period
for interest $ 16,630,732 $ 7,837,552 $ 8,905,093
================= ================= ================
Supplemental disclosure of non-cash financing
activities:
Deferred financing costs funded through
accrued expenses $ 40,000 $ --- $ ---
================= ================= ================
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
WATERFORD GAMING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(i) ORGANIZATION, MEMBERSHIP AGREEMENT, CHANGE OF OWNERSHIP AND MEMBER
ALLOCATIONS:
Waterford Gaming, L.L.C. (the "Company"), a Delaware limited
liability company, was formed on September 30, 1996. The Company initially
acquired and owns an interest in Trading Cove Associates ("TCA") a
Connecticut general partnership, and invested in certain financial
instruments issued by the Mohegan Tribal Gaming Authority (the
"Authority").
The Company is governed by a board of managers pursuant to the
limited liability company agreement (the "Agreement").
In connection with the Company's and the Company's wholly-owned
subsidiary Waterford Gaming Finance Corp. ("Finance") issuance of $125
million 9-1/2% senior notes payable which mature March 15, 2010 (the "$125
Million Senior Notes"), each of Slavik Suites, Inc. ("Slavik") and LMW
Investments, Inc. ("LMW") have contributed their respective interests in
the Company as of March 17, 1999 to a Delaware Limited Liability Company,
Waterford Group, L.L.C. (the "Waterford Group"). Waterford Group is now
the sole member of the Company. Slavik and LMW own Waterford Group in the
same respective interest as they had in the Company and are generally as
follows:
Slavik Suites, Inc. 67.7967%
LMW Investments, Inc. 32.2033%
---------
100.0000%
=========
The Agreement is effective until September 30, 2020 and may be
terminated by unanimous decision of the member or any other event as stated
in the Agreement.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Method
The accrual method of accounting is used in the preparation of the
financial statements and the partnership income tax returns.
F-6
Temporary Investments
Temporary investments at December 31, 1998 are comprised of an
investment in the John Hancock US Government Cash Reserve Fund (the
"Fund"). The Fund invests in US dollar denominated securities issued by
the US Government, its agencies and instrumentalities. The Fund maintains
an average maturity of 90 days or less. The investment is reported at cost
plus accrued dividend, which equals market.
Restricted Investments
Restricted investments at December 31, 1999 are principally comprised
of an investment in a Federal Home Loan Mortgage Corp. Discount Note which
was purchased at a discount rate of 5.46% and matures March 14, 2000. The
investment represents a restricted investment fund that has been
established with a trustee in terms of the $125 Million Senior Notes
indenture and is reported at cost plus accrued interest, which approximates
market.
Trading Cove Associates - Equity Investment
The Trading Cove Associates - equity investment is accounted for
utilizing the equity method. Included in the investment is $10,600,000
which represents the purchase price paid to a corporation for their 12.5%
interest in TCA. This amount was initially amortized on a straight-line
basis over a 7-year term, which represents the term of the management
agreement between TCA and the Authority, through March 1999. As a result
of the Relinquishment Agreement, as defined, becoming effective the
remaining balance will be amortized over 189 months beginning April 1999.
Deferred Financing Costs
All costs incurred with the issuance of the Company's and Finance's
$125 Million Senior Notes, were capitalized and are amortized on a
straight-line basis over the 11-year term of the $125 Million Senior Notes.
Fixed Assets
Fixed Assets are stated at cost. Depreciation is charged against
income over the estimated life of the fixed assets. The estimated life is
five years for furniture and fixtures and leasehold improvements.
Income Taxes
The Company, as a limited liability company, files federal and state
partnership income tax returns which indicate each member's share of
taxable income or loss to be reported on each member's tax return. As a
result, no provision for federal and state income taxes has been made in
the accompanying financial statements.
F-7
Concentration of Credit Risk
The Company has one primary source of revenue: payments from TCA. The
Company anticipates regular payments from TCA based upon the
operating results of the Authority and the related management fees paid by
the Authority and relinquishment fees and development fees to be paid by
the Authority.
Financial instruments, which potentially subject the Company to a
concentration of credit risk, principally consist of cash in excess of the
financial institutions' insurance limits. The Company invests available
cash with high credit quality institutions.
Fair Value of Financial Instruments
Fair values generally represent estimates of amounts at which a
financial instrument could be exchanged between willing parties in a
current transaction other than forced liquidation. However, in many
instances, current exchange prices are not available for certain of the
Company's financial instruments, since no active market generally exists
for such financial instruments.
Fair value estimates are subjective and are dependent on a number of
significant assumptions, based on management's judgment regarding future
expected loss experience, current economic conditions, risk characteristics
of various financial instruments, and other factors. In addition,
technical pronouncements allow a wide range of valuation techniques,
therefore, comparisons between entities, however similar, may be difficult.
The fair value of the Company's long term debt at December 31, 1999 is
estimated to be approximately $120,300,000 based on the quoted market price
for the same issue.
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, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997
balances to conform to the 1999 presentation.
F-8
2. TRADING COVE ASSOCIATES - EQUITY INVESTMENT:
TCA was organized on July 27, 1993. The primary purpose 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 Casino
(the "Mohegan Sun") located on certain Tribal land in Uncasville,
Connecticut, negotiated the Amended and Restated Gaming Facility Management
Agreement (the "Management Agreement") and participated in the design,
development and construction of the Mohegan Sun, which commenced operations
on October 12, 1996. Since the opening of the Mohegan Sun, and until
January 1, 2000 TCA had overseen the Mohegan Sun's day-to-day operations.
TCA's primary source of revenue was management fees under the
Management Agreement (the "Management Fees"). The Management Fees were
paid monthly and were calculated at 40%-30% of net revenues of the Mohegan
Sun. In addition, TCA was required to fund $1.2 million per year ($100,000
per month) from its Management Fees into a capital replacement reserve.
TCA will terminate on December 31, 2040, or earlier, in accordance
with the terms of the partnership agreement. On November 8, 1996, certain
partners of TCA withdrew and, concurrently, consented to the admission of
the Company as a partner to TCA. Also, on November 8, 1996, the Company
acquired an additional interest (12.5%) in TCA from a corporation for
$10,600,000. The Company has a 50% voting and profits interest in TCA.
The remaining 50% interest is owned by Sun Cove Limited ("Sun Cove"), an
affiliate of Sun International Hotels Limited ("Sun International"). 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) established certain priorities for payments to TCA's
subcontractors out of available cash flow, if any. The subcontracts are
primarily with TCA's partners and their affiliates.
As of December 31, 1999, 1998 and 1997 the following summary
information relates to Trading Cove Associates. Total revenues and net
income are for the years ended December 31, 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Total assets $ 8,634,840 $ 8,720,632 $ 6,162,500
Total liabilities (1,741,019) (4,011,858) (1,074,602)
------------ ------------ -----------
Partners' capital $ 6,893,821 $ 4,708,774 $ 5,087,898
============ ============ ===========
Total revenues $ 72,179,041 $ 53,766,834 $28,935,534
============ ============ ===========
Net income $ 13,656,908 $ 2,099,326 $ 4,734,346
============ ============ ===========
F-9
1999 1998 1997
---- ---- ----
Company's interest:
Trading Cove Associates -
equity investment,
beginning of year $ 8,662,198 $ 10,384,292 $12,682,469
Contributions 600,000 400,000 0
Distributions (6,335,930) (1,639,225) (3,132,820)
------------ ------------ -----------
2,926,268 9,145,067 9,549,649
------------ ------------ -----------
Income from Trading
Cove Associates 6,828,454 1,049,663 2,367,173
Amortization of
interest purchased (713,154) (1,532,532) (1,532,530)
------------ ------------ -----------
Equity in income
(loss)of Trading
Cove Associates 6,115,300 (482,869) 834,643
------------ ------------ -----------
Trading Cove
Associates-equity
investment, end
of year $ 9,041,568 $ 8,662,198 $10,384,292
============ ============ ===========
On February 7, 1998, TCA, the Tribe and the Authority finalized
contract negotiations and are moving forward with a significant expansion
project at the Mohegan Sun (the "Project").
Under the terms of an agreement (the "Relinquishment Agreement"), TCA
continued to manage the Mohegan Sun under the Management Agreement until
January 1, 2000. On December 31, 1999 the Management Agreement terminated
and the Tribe assumed day-to-day management of the Mohegan Sun. As part
of the Relinquishment Agreement and to compensate TCA for giving up its
rights under the then 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 on January 1, 2000 and ending on December 31,
2014. The relinquishment payments will be divided into senior
relinquishment payments and junior relinquishment payments, each of which
will be 2.5% of revenues, as defined. Senior relinquishment payments will
be payable quarterly in arrears commencing on April 25, 2000 for the
quarter ended March 31, 2000 and the junior relinquishment payments will
be payable semi-annually in arrears commencing on July 25, 2000 for the
six months ended June 30, 2000.
F-10
TCA has also negotiated a second agreement with the Tribe and the
Authority (the "Development Agreement"), which has made TCA the exclusive
developer of the Project. Under the Development Agreement, TCA will
oversee the planning, design, and construction of the Project. TCA will
be paid a development fee of $14 million under the terms of the
Development Agreement. The Development Agreement became effective April
1, 1999. The development fee will be paid as follows: on January 15, 2000
and thereafter within fifteen (15) days following the end of each calendar
quarter until the Project is completed, the Authority shall pay TCA a
percentage of the development fee equal to the completed percentage of the
Project as of December 31, 1999 and on the incremental completed
percentage at the end of each successive calendar quarter. On January 19,
2000 TCA received a development fee payment from the Authority in the
amount of $1,372,000.
On March 18, 1999, the Omnibus Termination Agreement (the "Omnibus
Termination Agreement") was entered into by TCA, Sun International, the
Company, Sun International Management Limited ("SIML"), LMW, Sun Cove,
Slavik and Wolman Construction, L.L.C.; which (i) terminated the
memorandum of understanding dated February 7, 1998; and (ii) effective
January 1, 2000 will terminate a) the Amended and Restated Omnibus
Financing Agreement; b) completion guarantee and investment banking and
financing arrangement fee agreement (the "Financing Arrangement
Agreement"); c) the management services agreement; d) the organizational
and administrative services agreement; e) the marketing services
agreement; and f) a letter agreement relating to expenses dated October
19, 1996.
In consideration for the termination of such agreements, TCA will use
its cash to pay the following obligations in the priority set forth below:
(a) First, to pay all unpaid amounts which may be due under the
terminated letter agreement and to pay certain affiliates of the
Company and to Sun Cove a percentage of an annual fee of $2.0
million less the actual expenses incurred by TCA. Such annual
fee shall be payable in equal quarterly installments beginning
March 31, 2000 and ending December 31, 2014.
F-11
(b) Second, to return all capital contributions made by the partners
of TCA after September 29, 1995.
(c) Third, to pay any accrued amounts for obligations performed
prior to January 1, 2000 under the Financing Arrangement
Agreement. The contingent obligation at December 31, 1999 was
$2,977,932.
(d) Fourth, to make the payments set forth in the agreement relating
to development services and the local construction services
agreement. The contingent obligation at December 31, 1999 was
approximately $4,300,000.
(e) Fifth, to pay Sun International an annual fee of $5.0 million
payable in equal quarterly installments of $1.25 million
beginning March 31, 2000 and ending December 31, 2006.
(f) Sixth, to pay any accrued amounts for obligations performed with
respect to periods prior to January 1, 2000 under the management
services agreement, the organizational and administrative
services agreement and the marketing services agreement. The
contingent obligation at December 31, 1999 was $46,920,954.
(g) Seventh, for the period beginning March 31, 2000 and ending
December 31, 2004, to pay each of SIML and the Company twenty-
five percent (25%) of the relinquishment payments.
(h) Eighth, to distribute all excess cash.
Notwithstanding the foregoing, on the date TCA receives any funds from
Sun International or the Company pursuant to the last sentence of Section
3 of the Financing Arrangement Agreement, TCA shall immediately distribute
such amounts equally to its partners. On December 30, 1999 TCA received
$10,536,543 from Sun International and the Company, pursuant to the last
sentence of Section 3 of the Financing Arrangement Agreement, and TCA
concurrently distributed $10,536,543 to its partners. The Company received
$5,268,272.
In addition, TCA shall not make any distributions pursuant to the
Omnibus Termination Agreement until it has annually distributed to its
partners pro rata, the amounts related to its partners tax obligations as
described in Section 3.03a(1) of the Partnership Agreement less twice the
amount of all other funds paid or distributed to the Company during such
year pursuant to the Omnibus Termination Agreement.
To the extent TCA does not have adequate cash to make the payments
pursuant to the Omnibus Termination Agreement, such amounts due shall be
deferred without the accrual of interest until TCA has sufficient cash to
pay them.
F-12
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 partner. On August 6, 1997, Leisure, a former partner
of TCA, had filed a lawsuit against TCA, Sun Cove, former partner of TCA
RJH Development Corp. and the Company and its owners, claiming breach of
contract, breach of fiduciary duties and other matters in connection with
the development of the 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 Company is now entitled to such cash flow.
If, at any time, TCA or any of its partners, affiliates, related entities,
or any related person enters into an agreement with the Tribe, or any of
its affiliates or any other related party, pursuant to which TCA's
management or operation of, or any involvement of any kind with the
enterprises is amended, restated, extended or renewed, or if a new
agreement or related arrangement is entered into between TCA and the
Tribe, the Company shall pay an additional $2,000,000 to Leisure on the
earliest to occur of (i) the retirement of the Company's and Finance's $65
million 12-3/4% senior notes payable (the "$65 Million Senior Notes"),
(ii) any renewal, extension, refinancing or refunding of, or amendment,
modification or supplement to, the $65 Million Senior Notes, and (iii)
November 30, 2003. On March 17, 1999, the $65 Million Senior Notes were
retired and on March 18, 1999, the Company paid $2,000,000 to Leisure.
The Leisure payments plus associated costs were amortized on a
straight-line basis over the remaining term of TCA's Management Agreement
through March 17, 1999. As a result of the Relinquishment Agreement
becoming effective, the remaining balance will be amortized over 189
months beginning March 18, 1999. The Leisure payments plus associated
costs total $7,057,211. Accumulated amortization at December 31, 1999 and
1998 amounts to $1,383,202 and $865,302, respectively.
4. NOTES RECEIVABLE:
On December 30, 1999, the Authority paid to the holders of the
Authority's 15% subordinated notes and completion guarantee notes an
amount to satisfy all obligations of such subordinated notes. The Company
received $44,403,517 from the Authority.
F-13
15% Subordinated Notes Receivable
On November 8, 1996, the Company purchased a 15% subordinated note
receivable issued by the Authority which matures November 15, 2003, in the
principal amount of $19,150,000 from 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, 1996 the total amount due included $1,957,660 that related to
subordinated notes fee amounts that were owed by TCA on the 15% subordinated
notes. During the year ended December 31, 1997, the Company received
$4,690,190 in subordinated notes fee payments from TCA. These subordinated
notes fee payments were netted against the $1,957,660, which resulted in
recognition of $2,732,530 in subordinated notes fee income during the year
ended December 31, 1997. During the years ended December 31, 1999 and 1998,
the Company received $3,731,806 and $3,229,253, respectively, in subordinated
notes fee payment from TCA.
The 15% subordinated notes receivable from the Authority bore interest
at 15% per annum.
At December 31, 1999 and 1998, the 15% subordinated notes receivable
included accrued interest receivable of $0 and $12,059,517, respectively.
Completion Guarantee Subordinated Notes Receivable
On September 22, 1997, on October 12, 1998 and on October 12, 1999,
the Company purchased completion guarantee subordinated notes receivable
issued by the Authority which mature November 15, 2003, in
the aggregate principal amount of $7,500,000 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 as of September
22, 1997 and October 12, 1998 and $98,438 as of October 12, 1999 and
completion guarantee note fee amounts totaling $191,250 as of September
22, 1997 and October 12, 1998 and $199,687 as of October 12, 1999. As of
December 31, 1997, $425 related to completion guarantee note fee amounts
that were owed by TCA on the completion guarantee subordinated note.
During the year ended December 31, 1999, the Company received $903,438 in
completion guarantee note fee payments from TCA. During the year ended
December 31, 1998, the Company received $659,175 in completion guarantee
note fee payments from TCA. These completion guarantee note fee payments
were netted against the $191,675 resulting in recognition of $467,500 in
completion guarantee note fee income during the year ended December 31,
1998.
F-14
At December 31, 1999 and 1998, the completion guarantee subordinated note
receivable includes accrued interest receivable of $0 and $75,000,
respectively.
The rate of interest payable by the Authority on the completion guarantee
subordinated notes was the prime rate per annum announced by Chase
Manhattan Bank from "time to time" plus 1% (the "Base Rate"). The Base
Rate was set and revised at intervals of six months. At December 30, 1999,
the Base Rate was 9.25% per annum and at December 31, 1998, the Base Rate was
9.0% per annum.
At December 31, 1998 the carrying value of the notes receivable, plus
accrued interest, plus fee amounts, are stated at cost, which the Company
believes approximates market.
5. $65 MILLION 12-3/4% SENIOR NOTES PAYABLE:
The $65 Million Senior Notes payable at December 31, 1999 and 1998,
consist of $0 and $61,471,000, respectively, aggregate principal amount of
the $65 Million Senior Notes issued on November 8, 1996 by the Company and
Finance.
The $65 Million Senior Notes were redeemed as part of the Company's
and Finance's $125 Million Senior Notes offering which was completed on
March 17, 1999.
6. $125 MILLION 9-1/2% SENIOR NOTES PAYABLE:
On March 17, 1999, the Company and Finance, issued $125 Million Senior
Notes. Payment of the principal of, and interest on, the $125 Million
Senior Notes is subordinate in right of payment to all of their existing
and future secured debts.
Interest is payable semi-annually in arrears on March 15 and September
15 at a rate of 9-1/2% per annum which commenced on September 15, 1999.
The principal amount of the $125 Million Senior Notes is payable on
March 15, 2010. The Company and Finance may elect to redeem the $125
Million Senior Notes at any time on or after March 15, 2004 at a
redemption price equal to a percentage (105.182% after March 14, 2004 and
declining to 104.318% after March 14, 2005, 103.455% after March 14, 2006,
102.591% after March 14, 2007, 101.727% after March 14, 2008, 100.864%
after March 14, 2009, and to 100% after March 14, 2010) of the principal
amount thereof plus accrued interest. The $125 Million Senior Notes
provide that upon the occurrence of a Change of Control (as defined), the
holders thereof will have the option to require the redemption of the $125
Million Senior Notes at a redemption price equal to 101% of the principal
amount thereof plus accrued interest.
F-15
If the Company and Finance have any Company Excess Cash, as defined, they
must redeem the $125 Million Senior Notes (on a semi-annual basis on March
15 and September 15) equal to a percentage (109.500% after March 15, 1999
and declining to 108.636% after March 14, 2000, 107.773% after March 14,
2001, 106.909% after March 14, 2002, 106.045% after March 14, 2003,
105.182% after March 14, 2004, 104.318% after March 14, 2005, 103.455%
after March 14, 2006, 102.591% after March 14, 2007, 101.727% after March
14, 2008, 100.864% after March 14, 2009, and to 100.000% after March 14,
2010). On August 1, 1999 the Company and Finance had Company Excess Cash
as defined in the Indenture available for mandatory redemption of the $125
Million Senior Notes totaling approximately $8,983,000, and accordingly on
September 15, 1999 the Company and Finance made a mandatory redemption of
$125 Million Senior Notes in the principal amount of $2,841,000 at the
redemption price of 109.50%. In some circumstances, if either the Company
or its partner in TCA exercises the option to buy or sell partnership
interests in TCA, the Company and Finance must redeem the $125 Million
Senior Notes.
The indenture relating to the $125 Million Senior Notes (the
"Indenture") contains certain affirmative and negative covenants
customarily contained in agreements of this type, including without
limitation, covenants that restrict, subject to specified exceptions
the Company's and Finance's ability to (i) borrow money, (ii) pay
dividends on stock or make certain other restricted payments, (iii) use
assets as security in other transactions, (iv) make investments, (v) sell
other assets or merge with other companies and (vi) engage in any business
except as currently conducted or contemplated or amend their relationship
with TCA. The Indenture also provides for customary events of default and
the establishment of a restricted investment fund with a trustee for
interest reserves.
7. RECONCILIATION OF FINANCIAL STATEMENT AND TAX INFORMATION
The following is a reconciliation of net income (loss) for financial
statement purposes to net income (loss) for federal income tax purposes
for the years ended December 31, 1999, 1998 and 1997.
F-16
<TABLE>
For the For the For the
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Financial Statement
net income (loss) $ 8,022,701 $ 6,327,010 $ (1,181,129)
Financial statement
equity in (income) loss
of Trading Cove Associates
over tax basis equity in
(income) loss of Trading
Cove Associates 176,879 131,018 (212,768)
Other (6,603) 39,999 113,906
------------------ ----------------- -----------------
Federal income tax basis
net income (loss) $ 8,192,977 $ 6,498,027 $ (1,279,991)
================== ================= =================
</TABLE>
F-17
<TABLE>
The following is a reconciliation of members' deficiency for financial
statement purposes to members' deficiency for federal income tax purposes as of December 31, 1999, 1998 and 1997.
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Financial statement members'
deficiency $(34,470,438) $ (2,721,122) $ (9,194,432)
Adjustment for cumulative
difference between tax basis
of Trading Cove Associates-
equity investment and GAAP
basis of Trading Cove
Associates-equity investment 296,637 132,082 209,065
Current year financial
statement net loss over
(under) federal income tax
basis net income (loss) 170,276 171,017 (98,862)
------------ ------------ ------------
Federal income tax basis
members' deficiency $(34,003,525) $ (2,418,023) $ (9,084,229)
============ ============ ============
</TABLE>
F-18
8. RELATED PARTY AGREEMENTS AND TRANSACTIONS:
Pursuant to the Development Services Agreement Phase I, dated as of
September 29, 1995 between TCA and SIML, TCA shall pay SIML a fee ("the
Development Services Fee Phase I") equal to $8,280,000 (3% of the total
development costs of the Mohegan Sun, exclusive of land acquisition costs)
plus $25,000 for expense reimbursement. Pursuant to a subcontract, Wolman
Construction, L.L.C. ("Construction") will receive 20.83% of the
Development Services Fee Phase I plus $25,000 (total approximately $1.75
million). Construction is owned 50% by Len Wolman (the Company's Chief
Executive Officer and Chairman of the Board of Directors) and 50% by Mark
Wolman (a member of the Company's Board of Directors). Pursuant to a
subcontract, Construction will pay The Slavik Company $250,000 of
Construction's approximately $1.75 million. Del J. Lauria (the Company's
Secretary and a member of the Company's Board of Directors) and Stephan F.
Slavik, Sr. (a member of the Company's Board of Directors) have a
financial interest in The Slavik Company. For the years ended December
31, 1999, 1998 and 1997, Construction received $0, $1,749,724 and
$368,560, respectively, and The Slavik Company received $0, $250,000 and
$61,440, respectively, of their share of the Development Services Fee
Phase I on a cumulative basis.
On February 9, 1998 the Development Services Agreement Phase II was
entered into between TCA and SIML. Pursuant to the Development Services
Agreement Phase II, TCA subcontracted with SIML and SIML agreed to perform
those services assigned to SIML by TCA in order to facilitate TCA's
fulfillment of its duties and obligations to the Authority under the
Development Agreement. TCA shall pay to SIML a fee, as subcontractor (the
"Development Services Fee Phase II") equal to 3% of the development costs
of the Project, less all costs incurred by TCA in connection with the
Project. The Development Services Fee Phase II shall be paid in
installments due on December 31, 1999 and 2000 and on the Completion Date,
as defined in the Development Agreement, with a final payment being made
when the actual development costs of the Project are known. The payment
of the Development Services Fee Phase II will be made from available cash
flow if any, in accordance with the Omnibus Termination Agreement.
SIML has further subcontracted with certain affiliates of the Company
to provide certain of those services assigned to SIML by TCA. SIML shall
pay to those affiliates of the Company approximately 20% of the
Development Services Fee Phase II as and when SIML receives payment if
any, from TCA.
The Company paid amounts to an affiliate for accounting services
totaling $95,200, $146,300 and $86,000, respectively, during the years
ended December 31, 1999, 1998 and 1997. On September 28, 1998, the
Company entered into an employment agreement with Len Wolman. The
employment agreement provides for a base annual salary of $250,000 reduced
by any amounts Mr. Wolman receives as a salary from TCA for such period.
Pursuant to such employment agreement, the Company shall pay to Mr. Wolman
an amount equal to 0.05% of the revenues of the Mohegan Sun including the
expansion to the extent Mr. Wolman has not received such amounts from TCA.
On and after January 1, 2004, the Company shall pay to Mr. Wolman
incentive compensation based on the revenues of the Mohegan Sun, including
the expansion, as a percentage (ranging from .00% to .10%) to be
determined using a formula attached to the employment agreement which
compares actual revenues to predetermined revenue targets. No payments
were made pursuant to the employment agreement during 1999 and 1998.
F-19
In 1999 and 1998, approximately $756,000 and $690,000, respectively,
was paid to the principals and affiliates of the Company as part of TCA's
operating expenses, including the payment of Mr. Len Wolman's salary and
bonus. In addition, for the years ended December 31, 1999 and 1998,
$6,219,147 ($3,109,573 to SIML, $1,444,875 to the Directors of the Company
and $1,664,699 to the Company) and $8,771,643 ($4,385,822 to SIML,
$280,212 to the Directors of the Company, $521,296 to affiliates of the
Company and $3,584,313 to the Company), respectively, had been incurred by
TCA in monthly management services fees.
For the year ended December 31, 1999, the Company paid the Directors of
the Company $660,000 as salaries for various services provided to the
Company.
Waterford Group, Slavik and the other principals of Waterford Group
have interests in and may acquire interests in hotels in southeastern
Connecticut which have or may have arrangements with the Mohegan Sun to
reserve and provide hotel rooms to patrons of the Mohegan Sun.
9. SUBSEQUENT EVENTS:
On January 4, 2000 in accordance with the terms of the Indenture and
the Security and Control Agreement dated as of March 17, 1999 between the
Company and Finance and State Street Bank and Trust Company, $15,000,000
was transferred to restricted investments (Interest Reserve Account).
On January 4, 2000, also in accordance with the terms of the
Indenture, the Company distributed $34,671,789 to its sole member
Waterford Group.
F-20
On January 6, 1998, Leisure Resort Technology, Inc. ("Leisure") and
defendants Waterford Gaming, L.L.C., Trading Cove Associates, LMW
Investments, Inc., and Slavik Suites, Inc. settled a prior lawsuit brought
by Leisure. In connection with this settlement, Leisure and Trading Cove
Associates, Waterford Gaming, L.L.C., LMW Investments, Inc., and Slavik
Suites, Inc. entered into a settlement and release agreement. Pursuant to
this settlement and release agreement, Waterford Gaming, L.L.C. bought out
Leisure's beneficial interest in Trading Cove Associates.
By complaint dated January 7, 2000, as amended February 4, 2000,
Leisure filed a four count complaint naming as defendants Waterford
Gaming, L.L.C., Trading Cove Associates, LMW Investments, Inc., Slavik
Suites, Inc., Waterford Group, L.L.C., Len Wolman and Mark Wolman
(collectively, the "Defendants"). The matter is pending in the Judicial
District of Middlesex at Middletown, Connecticut. The suit alleges breach
of fiduciary duties, fraudulent non-disclosure, violation of Connecticut
Statutes Section 42-110a, et seq., and unjust enrichment in connection
with the negotiation by certain of the Defendants of the settlement and
release agreement. The suit seeks unspecified legal and equitable damages.
A Motion to Strike and a Motion for Summary Judgement, each with respect to
all claims, have been filed on behalf of all of the Defendants.
The Company believes that it has meritorious defenses and intends to
vigorously contest the claims in this action and to assert all
available defenses. At the present time, the Company is unable to express
an opinion on the likelihood of an unfavorable outcome or to give an
estimate of the amount or range of potential loss to the Company as a
result of this litigation due to the disputed issues of law and/or facts
on which the outcome of this litigation depends and due to the infancy of
both the action and discovery in the action.
On January 11, 2000, the Company made a tax distribution to its member
in accordance with the terms of the Indenture totaling $2,557,545.
On February 1, 2000 the Company and Finance had Company Excess Cash,
as defined in the Indenture, available for mandatory redemption of the $125
Million Senior Notes totaling approximately $8,276,000 and accordingly the
Company and Finance will make a mandatory redemption of $125 Million
Senior Notes in the principal amount of $2,277,000 at the redemption price
of 108.636% on March 15, 2000.
F-21
(c) Reports on Form 8-K
(i) Form 8-K filed on December 21, 1999
Item 5.
The Mohegan Tribal Gaming Authority (the "Authority") has filed its
1999 annual report on Form 10-K for the fiscal year ended September
30, 1999, a copy of which has been filed as an exhibit to this report
and is incorporated by reference to the Authority's electronic filing
of such report on Form 10-K, Securities and Exchange Commission file
reference no. 033-80655.
Date of Report: December 20, 1999
(ii) Form 8-K filed on February 15, 2000
Item 5.
The Mohegan Tribal Gaming Authority (the "Authority") has filed its
quarterly report of Form 10-Q for the quarter ended December 31, 1999,
a copy of which has been filed as an exhibit to this report and is
incorporated by reference to the Authority's electronic filing of such
report on Form 10-Q, Securities and Exchange Commission file reference
no. 033-80655.
Date of Report: February 14, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
WATERFORD GAMING, L.L.C.
/s/ Len Wolman Chairman of the Board of Directors,
- -------------- Chief Executive Officer
Len Wolman
Date: March 27, 2000
/s/ Alan Angel Chief Financial Officer
- --------------
Alan Angel
Date: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of
the registrant and in capacities indicated on March 27, 2000.
SIGNATURE TITLE
/s/ Len Wolman Chairman of the Board of Directors,
- -------------- Chief Executive Officer
Len Wolman
/s/ Del J. Lauria Member of the Board of Directors,
- ----------------- Secretary
Del J. Lauria
/s/ Mark Wolman Member of the Board of Directors
- ---------------
Mark Wolman
/s/ Stephan F. Slavik, Sr. Member of the Board of Directors
- --------------------------
Stephan F. Slavik, Sr.
42
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Waterford Gaming, L.L.C.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 60,337,617
<SECURITIES> 0
<RECEIVABLES> 492,907
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,724,437
<PP&E> 53,918
<DEPRECIATION> (9,882)
<TOTAL-ASSETS> 91,265,101
<CURRENT-LIABILITIES> 3,576,539
<BONDS> 122,159,000
0
0
<COMMON> 0
<OTHER-SE> (34,470,438)
<TOTAL-LIABILITY-AND-EQUITY> 91,265,101
<SALES> 0
<TOTAL-REVENUES> 26,696,654
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,744,177
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,045,076
<INCOME-PRETAX> 8,022,701
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,022,701
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,022,701
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
