UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: 03/31/2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-17795
WATERFORD GAMING, L.L.C.
------------------------
(Exact name of Registrant as specified in its charter)
Delaware 06-1465402
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
914 Hartford Turnpike, P.O. Box 715
Waterford, CT 06385
------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 442-4559
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
WATERFORD GAMING, L.L.C.
INDEX TO FORM 10-Q
Page
Number
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Report of Independent Accountants 1
Financial Information 2
Condensed Balance Sheets of Waterford Gaming, L.L.C. as of
March 31, 2000 (unaudited) and December 31, 1999 3
Condensed Statements of Operations of Waterford Gaming, L.L.C.
for the three months ended March 31, 2000 (unaudited) and
March 31, 1999 (unaudited) 4
Condensed Statements of Changes in Members' Deficiency of
Waterford Gaming, L.L.C. for the three months ended
March 31, 2000 (unaudited) and March 31, 1999 (unaudited) 5
Condensed Statements of Cash Flows of Waterford Gaming, L.L.C.
for the three months ended March 31, 2000 (unaudited) and
March 31, 1999 (unaudited) 6
Notes to Condensed Financial Statements for Waterford
Gaming, L.L.C. 7
ITEM 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 3 -- Quantitative and Qualitative Disclosures about
Market Risk 24
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 25
Item 2 -- Changes in Securities 25
Item 3 -- Defaults upon Senior Securities 25
Item 4 -- Submission of Matters to a Vote of Security Holders 25
Item 5 -- Other Information 25
Item 6 -- Exhibits and Reports on Form 8-K 26
Signatures - Waterford Gaming, L.L.C. 29
Report of Independent Accountants
---------------------------------
To the Member of Waterford Gaming, L.L.C.:
We have reviewed the accompanying condensed balance sheet of Waterford
Gaming, L.L.C. (the "Company") as of March 31, 2000, and the related
condensed statements of operations, and changes in member's deficiency and of
cash flows for the three months ended March 31, 2000 and 1999. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States.
We previously audited, in accordance with auditing standards generally accepted
in the United States, the balance sheet as of December 31, 1999, and the
related statements of operations and changes in member's deficiency and of
cash flows for the year then ended (not presented herein); and in our report
dated March 9, 2000, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of December 31, 1999, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
PricewaterhouseCoopers, LLP
May 8, 2000
1
PART I -- FINANCIAL INFORMATION
---------------------
Item 1 -- Financial Statements
--------------------
The unaudited condensed financial information as of March 31, 2000 and
1999, and for the three months ended March 31, 2000 and 1999, included in
this report was reviewed by PricewaterhouseCoopers, LLP, independent public
accountants, in accordance with the professional standards and procedures
established for such reviews by the American Institute of Certified Public
Accountants.
2
Waterford Gaming, L.L.C.
Condensed Balance Sheets
March 31, 2000 (Unaudited) and December 31, 1999
-------------------------
March 31, December 31,
2000 1999
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 2,057,540 $ 60,337,617
Restricted investments 26,479,492 11,807,092
Due from Trading Cove Associates 358,407 492,907
Other assets 64,101 86,821
------------ ------------
Total current assets 28,959,540 72,724,437
------------ ------------
Trading Cove Associates-equity
investment 9,070,154 9,041,568
Beneficial interest-Leisure Resort
Technology, Inc. 5,580,806 5,674,009
Deferred financing costs, net of
accumulated amortization of
$386,750 and $294,125 at March
31, 2000 and December 31, 1999,
respectively 3,688,426 3,781,051
Fixed assets, net of accumulated
depreciation of $12,577 and
$9,882 at March 31, 2000 and
December 31, 1999, respectively 41,341 44,036
------------ ------------
Total assets $ 47,340,267 $ 91,265,101
============ ============
LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities
Accrued expenses $ 342,797 $ 159,480
Accrued interest on senior notes
payable 506,168 3,417,059
------------ ------------
Total current liabilities 848,965 3,576,539
------------ ------------
9-1/2% senior notes payable 119,882,000 122,159,000
------------ ------------
Total liabilities 120,730,965 125,735,539
------------ ------------
Members' deficiency (73,390,698) (34,470,438)
------------ ------------
Total liabilities and members'
deficiency $ 47,340,267 $ 91,265,101
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
Waterford Gaming, L.L.C.
Condensed Statements of Operations
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
-----------
2000 1999
----------- -----------
Revenue
Interest and dividend income $ 503,730 $ 1,359,582
Subordinated notes fee income-
Trading Cove Associates 692,782 ---
Completion guarantee notes fee
income-Trading Cove Associates 215,625 ---
Management services income-
Trading Cove Associates --- 665,355
Organization and administrative fee
income-Trading Cove Associates --- 5,639,486
----------- -----------
Total revenue 1,412,137 7,664,423
----------- -----------
Expenses
Interest expense 3,088,304 9,981,386
Salaries-related parties 161,447 ---
General and administrative 216,487 179,869
12-3/4% senior notes tender expense --- 648,486
Amortization of beneficial interest-
Leisure Resort Technology, Inc. 93,203 233,113
Amortization on deferred financing
costs 92,625 3,355,575
Depreciation 2,695 1,273
----------- -----------
Total expenses 3,654,761 14,399,702
----------- -----------
(2,242,624) (6,735,279)
Equity in income of
Trading Cove Associates 551,698 208,610
----------- -----------
Net loss $(1,690,926) $(6,526,669)
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
4
Waterford Gaming, L.L.C.
Condensed Statements of Changes in Members' Deficiency
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
-----------
For the Three Months Ended March 31, 2000
Waterford Group, L.L.C. Total
----------------------- -------------
Balance, January 1, 2000 $ (34,470,438) $ (34,470,438)
Contributions --- ---
Distributions (37,229,334) (37,229,334)
Net loss (1,690,926) (1,690,926)
----------------------- -------------
Balance, March 31, 2000 $ (73,390,698) $ (73,390,698)
======================= =============
<TABLE>
For the Three Months Ended March 31, 1999
Slavik Suites Inc. LMW Investments Inc. Waterford Group, L.L.C. Total
------------------ -------------------- ----------------------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1999 $ (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 (5,067,483) (2,407,045) (7,474,528)
Transfer of interest 8,077,986 3,953,396 $ (12,031,382) 0
Distributions, March 17-
March 31 --- --- (37,050,000) (37,050,000)
Net income, March 17-March 31 --- --- 947,859 947,859
------------------ -------------------- ----------------------- ------------
Balance, March 31, 1999 $ --- $ --- $ (48,133,523) $(48,133,523)
================== ==================== ======================= ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
Waterford Gaming, L.L.C.
Condensed Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
-----------
2000 1999
------------ ------------
Cash flows from operating activities
Net loss $ (1,690,926) $ (6,526,669)
------------ ------------
Adjustments to reconcile net loss
to net cash used in operating
activities
Amortization 185,828 3,588,688
Depreciation 2,695 1,273
Equity in income of Trading
Cove Associates (551,698) (208,610)
Changes in operating assets
and liabilities
Increase in accrued interest
receivable-15% subordinated
notes receivable --- (1,172,909)
Increase in accrued interest
receivable-completion
guarantee subordinated notes
receivable --- (112,500)
Decrease (increase) in due
from Trading Cove Associates 134,500 (1,223,712)
Decrease (increase) in other
assets 22,720 (40,466)
Increase in accrued expenses 183,317 160,504
Decrease in accrued interest
on senior notes payable (2,910,891) (507,923)
------------ ------------
Total adjustments (2,933,529) 484,345
------------ ------------
Net cash used in
operating activities (4,624,455) (6,042,324)
------------ ------------
Cash flows from investing activities
Beneficial interest-Leisure
Resort Technology, Inc. --- (2,000,000)
Contributions to Trading Cove
Associates (300,000) (200,000)
Distributions from Trading Cove
Associates 823,112 667,659
(Purchases) and sales of
temporary investments-net --- (9,840,419)
(Purchases) and sales of
restricted investments-net (14,672,400) ---
Fixed assets --- (49,000)
------------- ------------
Net cash used in
investing activities (14,149,288) (11,421,760)
------------- ------------
Cash flows from financing activities
Redemption of 12-3/4% senior
notes --- (61,471,000)
Proceeds from 9-1/2% senior notes
issuance --- 125,000,000
Redemption of 9-1/2% senior notes (2,277,000) ---
Deferred financing costs --- (3,729,741)
Contributions by members --- 49,000
Distributions to members (37,229,334) (38,934,732)
------------- ------------
Net cash (used in)
provided by
financing activities (39,506,334) 20,913,527
------------- ------------
Net (decrease) increase in cash (58,280,077) 3,449,443
Cash and cash equivalents at
beginning of quarter 60,337,617 2,783,344
------------- ------------
Cash and cash equivalents at
end of quarter $ 2,057,540 $ 6,232,787
============= ============
Supplemental disclosure of cash
flow information:
Cash paid during the quarter
for interest $ 5,999,195 $ 10,489,309
============= ============
Supplemental disclosure of
non-cash financing activities:
Deferred financing costs
funded through accrued expenses $ 40,000 $ 440,061
============= ============
The accompanying notes are an integral part of these condensed financial
statements.
6
WATERFORD GAMING, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
-----------
1. Basis of Presentation:
The unaudited condensed interim financial statements have been
prepared in accordance with the policies described in Waterford
Gaming, L.L.C.'s (the "Company") 1999 audited financial statements and
should be read in conjunction with the Company's 1999 audited
financial statements within the Company's Annual Report for the fiscal
year ended December 31, 1999 on Form 10-K as filed with the Securities
and Exchange Commission (the "Commission") File No. 333-17795 on March
27, 2000. The condensed balance sheet at December 31, 1999, contained
herein, was derived from audited financial statements, but does not
include all disclosures contained in the Form 10-K and required by
generally accepted accounting principles.
The unaudited condensed interim financial statements include normal
and recurring adjustments which are, in the opinion of management,
necessary to present a fair statement of financial position as of
March 31, 2000, and the results of operations, the statements of
member's deficiency and cash flows for the three months ended March
31, 2000. Results of operations for the period are not necessarily
indicative of the results to be expected for the full year. In March
1999, the Company with its wholly-owned subsidiary Waterford Gaming
Finance Corp. ("Finance") has issued $125 million 9-1/2% senior notes
payable which mature March 15, 2010 (the "$125 Million Senior Notes")
in connection with the redemption of the Company's and Finance's $65
million 12-3/4% senior notes (the "$65 Million Senior Notes").
2. Trading Cove Associates - Equity Investment:
As of March 31, 2000 and 1999, the following summary information
relates to Trading Cove Associates ("TCA"). Total revenues and net
income are for the three months ended March 31, 2000 and 1999:
March 31, March 31,
2000 1999
------------- ------------
Total assets $ 12,810,747 $ 10,761,020
Total liabilities (5,639,741) 5,804,077
------------- ------------
Partners' capital $ 7,171,006 $ 4,956,943
============= ============
Total revenue $ 8,328,152 $ 15,397,856
============= ============
Net income $ 1,323,409 $ 1,183,486
============= ============
Company's interest:
Trading Cove Associates -
equity investment, beginning
of period $ 9,041,568 $ 8,662,198
Contributions 300,000 200,000
Distributions (823,112) (667,659)
------------- ------------
8,518,456 8,194,539
------------- ------------
Income from Trading Cove
Associates 661,705 591,743
Amortization of interests
purchased (110,007) (383,133)
------------- ------------
Equity in income of
Trading Cove Associates 551,698 208,610
------------- ------------
Trading Cove Associates -
equity investment $ 9,070,154 $ 8,403,149
============= ============
7
3. Beneficial Interest - Leisure Resort Technology, Inc:
On January 6, 1998, the Company paid $5,000,000 to Leisure Resort
Technology, Inc. ("Leisure") whereby Leisure gave up its beneficial
interest in 5% of certain fees and excess cash flows, as defined, of TCA
and any other claims it may have had against the Company, TCA and TCA's
partners and former partner. On August 6, 1997, Leisure, a former partner
of TCA, had filed a lawsuit against TCA, Sun Cove Limited ("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 Casino (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. On March 17, 1999, the $65 Million
Senior Notes were retired and on March 18, 1999, the Company paid an
additional $2,000,000 to Leisure pursuant to the settlement and release
agreement.
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 which
began March 18, 1999. Accumulated amortization at March 31, 2000 and 1999
amounts to $1,476,405 and $1,098,415, respectively.
4. $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.
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 100.00% after March 14,
2010). On August 1, 1999 the Company and Finance had Company Excess Cash,
as defined, 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, available for mandatory redemption of the $125 Million
Senior Notes totaling approximately $8,276,000 and accordingly 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% on March
15, 2000. 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.
The fair value of the Company's long term debt at March 31, 2000 and
December 31, 1999 is estimated to be approximately $115,100,000 and
$120,300,000, respectively, based on the quoted market price for the same
issue.
8
5. Change of Ownership:
In connection with the Company's and Finance's issuance of $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"). The 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.
6. Certain Relationships and Related Transactions
Len Wolman, the Company's Chairman of the Board of Directors and Chief
Executive Officer, is a managing partner of TCA.
On February 9, 1998 the Agreement Relating to Development Services (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 Mohegan Tribal Gaming
Authority (the "Authority") an instrumentality of the Mohegan Tribe of
Indians of Connecticut (the "Tribe") under the Development Agreement, as
defined. 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, as defined, less all costs incurred by TCA in connection with the
Project, as defined. 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 Wolman Construction, L.L.C. ("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. On
April 26, 2000 TCA paid $3,095,000 as partial payment Development Services
Fee Phase II. Construction received $644,688 and Construction paid The
Slavik Company $92,190 on April 26, 2000.
The Company paid amounts to an affiliate for accounting services totaling
$0 and $95,200, respectively, during the quarters ended March 31, 2000 and
1999.
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. For the
quarters ended March 31, 2000 and 1999 the Company incurred $161,447 and
$0, respectively, as an expense pursuant to Len Wolman's employment
agreement.
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
Item 2 -- Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's condensed financial statements
and the notes thereto included elsewhere herein.
Certain Forward Looking Statements
- ----------------------------------
Certain information included in this Form 10-Q and other materials filed or
to be filed by the Company with the Commission (as well as information
included in oral statements or other written statements made or to be made
by the Company) contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements include,
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.
The information concerning Sun International Hotels Limited ("Sun
International"), the Tribe and the Authority has been derived from publicly
filed information.
Development and Operational Activities
- --------------------------------------
The Company is a special purpose company formed solely for the purpose of
holding its partnership in TCA.
Trading Cove Associates
- -----------------------
TCA was organized on July 27, 1993. The primary purpose of TCA has been to
assist the Tribe and the Authority in obtaining federal recognition,
negotiate the tribal-state compact with the State of Connecticut, obtain
financing for the development of the Mohegan Sun 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.
10
Trading Cove Associates - Material Agreements
- ---------------------------------------------
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
terminated 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 rights under
the Management Agreement and the Hotel/Resort Management Agreement, the
Authority has agreed to pay to TCA 5% of Revenues, as defined, (the
"Relinquishment Fees") generated by the Mohegan Sun during the 15-year
period commencing on January 1, 2000.
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). Revenues exclude revenues generated by any other
expansion of the Mohegan Sun. 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, assuming sufficient funds are available after
satisfaction of the Tribe's senior obligations.
For the quarter ended March 31, 2000 the Relinquishment Fees earned was
$4,947,458 and on April 25, 2000 TCA received $4,947,458 as a senior
relinquishment payment.
11
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 (the "Development Fee").
The Authority will pay the Development Fee to TCA quarterly beginning on
January 15, 2000 until the Completion Date, as defined in the Development
Agreement, of the Project based on incremental completion of the Project as
of each payment date. On January 19, 2000 and on April 20, 2000 the
Authority paid the quarterly Development Fee of $1,372,000 and $896,000,
respectively, to TCA in accordance with the terms of the Development
Agreement.
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 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 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.
Management Agreement
- --------------------
The Management Agreement between TCA and the Tribe was entered into on
August 30, 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 received a management fee from the Authority
pursuant to the Management Agreement (the "Management Fees"). The
Management Fees were paid monthly (the final payment was received by TCA
from the Authority on January 25, 2000) 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
12
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. The
capital replacement reserve is the property of the Authority.
Certain Risk Factors
- --------------------
Lack of Operations; Dependance 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 and from cash flows
(dividend and interest) from restricted and temporary investments.
TCA has two current sources of revenue and cash flows, Relinquishment Fees
and Development Fee. 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 and
Development Fee. 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.
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 TCA is to pay such subcontractors a
Development Services Fee Phase II 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 Development Services Fee Phase II and
expenses are expected to be approximately $24 million. Such Development
Services Fee Phase II are only payable to the extent of available cash
flow. Thus, ultimately TCA may pay more in Development Services Fee Phase
II 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 Fee Phase II 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.
13
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.
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 and Development Fee payments by the
Authority.
Distribution on the Company's Partnership Interest in TCA
- ---------------------------------------------------------
TCA's major sources of revenues for 2000 are Relinquishment Fees and
Development Fee which are both payable by the Authority.
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 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 (primarily cash from payments from the Authority for Relinquishment
Fees and Development Fee) to pay the following obligations in the priority
set forth below:
14
(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. For the quarter
ended March 31, 2000 $471,050 ($235,525 to Sun Cove and $235,525
to affiliates of the Company) had been incurred by TCA in terms
of this first priority. The accrued contingent obligation at
March 31, 2000 was $0.
(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. Since January 1, 2000 these capital contributions
aggregated $600,000. $200,000 has been repaid to the partners of
TCA, 50% to the Company and 50% to Sun Cove.
As of March 31, 2000, $400,000 in capital contributions remained
outstanding.
(c) Third, to pay any accrued amounts for obligations performed prior
to January 1, 2000 under the Financing Arrangement Agreement.
For the quarter ended March 31, 2000 $2,977,932 ($2,069,525 to
Sun International and $908,407 to the Company) had been incurred
by TCA in terms of this third priority. The accrued contingent
obligation at March 31, 2000 was $0.
(d) Fourth, to make the payments set forth in the agreement relating
to Development Services Agreement Phase II and the Local
Construction Services Agreement. For the quarter ended March 31,
2000 $3,095,000 ($2,450,312 to SIML, $552,498 to Construction and
$92,190 to the Slavik Company) had been incurred by TCA in terms
of this fourth priority. The accrued contingent obligation at
March 31, 2000 was approximately $1,238,000.
(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. The
accrued contingent obligation at March 31, 2000 was $1.25
million.
(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
accrued contingent obligation at March 31, 2000 was approximately
$46,921,000.
(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. The accrued
contingent obligation at March 31, 2000 was approximately
$2,474,000.
(h) Eighth, to distribute all excess cash.
15
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 amount due shall be deferred
without the accrual of interest until TCA has sufficient cash to pay them.
Until January 1, 2000 TCA's primary source of revenue was Management Fees.
Amended and Restated Omnibus Financing Agreement
- ------------------------------------------------
In terms of the Omnibus Termination Agreement, the Amended and Restated
Omnibus Financing Agreement (the "Omnibus Financing Agreement") was
terminated effective January 1, 2000.
Pursuant to the 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 National Indian Gaming Commission (the
"NIGC") in determining whether or not to approve a management contract is
whether TCA was providing a portion of the capital required. Accordingly,
TCA agreed to provide or cause to be provided $40 million of capital in the
form of the Subordinated Notes, as defined. However, at the time that the
subordinated loan was made, the partners of TCA, including the Company's
predecessors-in-interest, did not participate in the loan in accordance
with their economic interests in TCA. Therefore, the partners of TCA
agreed that Sun International, who subscribed for almost all of the
Subordinated Notes, as defined, would be entitled to fees for agreeing to
participate in the Mohegan Sun project. Other fees payable are to
compensate the recipients for other subcontracted services provided by them
to the Mohegan Sun.
16
As of March 31, 1999, 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
March 31, 1999 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").
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 paid by TCA for expenses. A
portion of the Management Services Fee, as defined, was used to pay
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
$3,400,000 and were repaid to the partners, 50% to the Company and 50%
to Sun Cove. As of March 31, 1999, no capital contributions remained
outstanding.
(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 is the weighted
average principal amount of Subordinated Notes outstanding including
all interest that is not paid in cash by the Authority on any interest
payment date, May 15 and November 15, during the applicable Semi-
Annual Period (defined as the six month periods ending, respectively,
on April 30 and October 31) and the denominator of which is
$40,000,000 (the "Subordinated Notes Fee Amounts"). The Company and
Sun International were entitled to one half of the Subordinated Notes
Fee Amounts. For the quarter ended March 31, 1999, $0 had been paid
by TCA in terms of this third priority.
(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 is not permitted to pay
interest thereon (the "Deferred Interest Amounts"). This amount will
be paid semi-annually pari passu with the amount under paragraph (d)
i) above. When the Authority can pay such interest, payment under
this paragraph (d) ii) shall be reduced accordingly.
17
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.
When the Authority paid the Company and Sun International any amounts
relating to the Non-Pik Completion Guarantee Notes (other than current
interest), such amounts that relate to the Deferred Interest Amounts
acquired by TCA shall be immediately paid over to TCA. On December
30, 1999 TCA received a total of $10,536,543 from Sun International
and the Company and TCA concurrently distributed $10,536,543 to its
partners. The Company received $5,268,272.
For the quarter ended March 31, 1999, $0 had been paid by TCA in terms
of this fourth priority.
(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 quarter ended March 31, 1999,
$0 had been paid by TCA in terms of this fifth priority.
(f) Sixth, return of capital contributions made before September 29, 1995.
These capital contributions aggregated $6,715,000 (unreturned balance
as of March 31, 1999 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
payable 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 March 31, 1999 $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 the 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 Services Fee was used to pay the compensation of the
officers and directors of the Company.
For the quarter ended March 31, 1999, $1,330,710 ($665,355 to SIML and
$665,355 to the Company) had been paid by TCA in terms of this eighth
priority.
18
(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 March 31, 1999, $5,520,000 had been
paid by TCA in terms of this ninth priority.
(j) Tenth, distribution of an 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
quarter ended March 31, 1999, $935,317 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 quarter ended
March 31, 1999, $11,278,973, 50% to the Company and 50% to SIML, had
been paid by TCA in terms of this eleventh priority.
(l) Twelfth, all excess cash distributed 50% to Sun Cove and 50% to the
Company.
19
Results of Operations
- ---------------------
Comparison of Operating Results for the Quarters Ended March 31, 2000 and
- -------------------------------------------------------------------------
1999
- ----
Total revenue for the three months ended March 31, 2000 was $1,412,137
compared with $7,664,423 for the three months ended March 31, 1999. This
decrease was primarily attributable to the termination of the Management
Agreement and the commencement of the Relinquishment Agreement and by the
termination of the Omnibus Financing Agreement and the commencement of the
Omnibus Termination Agreement on January 1, 2000. Subordinated notes fee
income-Trading Cove Associates increased by $692,782, completion guarantee
notes fee income-Trading Cove Associates increased by $215,625, management
services income-Trading Cove Associates decreased by $665,355 and
organizational and administrative fee income-Trading Cove Associates
decreased by $5,639,486 as a result of the termination of the Management
Agreement and the commencement of the Relinquishment Agreement and by the
termination of the Omnibus Financing Agreement and the commencement of the
Omnibus Termination Agreement on January 1, 2000 as detailed above under
"Trading Cove Associates-Material Agreements" and "Omnibus Termination
Agreement" and "Amended and Restated Omnibus Financing Agreement". In
addition, interest and dividend income decreased by $855,852 primarily
attributable to the repayment on December 30, 1999 by the Authority of the
Authority Subordinated Notes.
Total expenses for the quarter ended March 31, 2000 was $3,654,761 compared
with $14,399,702 for the quarter ended March 31, 1999. Interest expense
decreased by $6,893,082 and amortization on deferred financing costs
decreased by $3,262,950 due to the redemption of the $65 Million Senior
Notes and the issuance of the $125 Million Senior Notes, salaries-related
parties increased by $161,447 due to Len Wolman's employment agreement,
general and administrative costs increased by $36,618 (primarily
attributable to an increase in legal and other expenses related to the
defense of the Leisure litigation, as detailed under Part II Other
Information: Item 1 Legal Proceedings, totaling approximately $170,000, by
a decrease in Commission filing expense of approximately $15,600, by a
decrease in trustee and disbursement agent fees of approximately $6,200, by
a decrease in legal fees of approximately $25,500, by a decrease in
accounting fees of approximately $93,500 (during the quarters ended March
31, 2000 and 1999 the Company paid accounting fees to an affiliate totaling
$0 and $95,000, respectively) and by an increase in federal and state
payroll taxes of $7,000), 12-3/4% senior notes tender expense decreased by
$648,486 due to the redemption of the $65 Million Senior Notes, a decrease
in amortization of beneficial interest-Leisure Resort Technology, Inc. of
$139,910 due to the increase in the period over which the asset is
amortized and by an increase in depreciation of approximately $1,400.
Equity in income of Trading Cove Associates for the quarter ended March 31,
2000 was $551,698 compared with $208,610 for the quarter ended March 31,
1999 as a result of the increase in income from Trading Cove Associates of
approximately $70,000 due to the timing of payments pursuant to the Omnibus
Termination Agreement and the Omnibus Financing Agreement and by a decrease
in amortization of interests purchased of approximately $273,000 due to the
increase in the period over which the interests purchased is amortized.
As a result of the foregoing factors, the Company experienced a net loss of
$1,690,926 for the three months ended March 31, 2000 compared with a net
loss of $6,526,669 for the three months ended March 31, 1999.
20
Comparison of Operating Results for the Quarters Ended March 31,
- ----------------------------------------------------------------
1999 and 1998
- -------------
Total revenue for the three months ended March 31, 1999 was $7,664,423
compared with $2,978,114 for the three months ended March 31, 1998. 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. Organizational and administrative fee income-
Trading Cove Associates, as detailed under point (k) of the table set forth
above under "Overview of Current and Future Cash Flows", increased by
$5,639,486, completion guarantee notes fee income-Trading Cove Associates,
as detailed under point (d) of the table set forth above under "Overview of
Current and Future Cash Flows", decreased by $21,250 and management
services income-Trading Cove Associates, as detailed under point (h) of the
table set forth above under "Overview of Current and Future Cash Flows",
decreased by $1,148,404. In addition, interest and dividend income
increased by $216,477.
Total expenses for the quarter ended March 31, 1999 was $14,399,702
compared with $2,373,917 for the quarter ended March 31, 1998. Interest
expense increased by $8,021,998 and amortization on deferred financing
costs increased by $3,240,057 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 $85,165, (primarily attributable to an
increase in accounting fees of approximately $95,000 (during the quarters
ended March 31, 1999 and 1998 the Company paid accounting fees to an
affiliate totaling approximately $95,000 and $0, respectively), an increase
in Commission filing expense of approximately $15,600 partially offset by a
decrease in legal fees of approximately $33,700), an increase in 12-3/4%
senior notes tender expense of $648,486, an increase in amortization of
beneficial interest-Leisure Resort Technology, Inc. of $28,806 and by an
increase in depreciation of $1,273.
Equity in income (loss) of Trading Cove Associates for the three months
ended March 31, 1999 was $208,610 compared with $(443,258) for the three
months ended March 31, 1998, as a result of the increase in income from
Trading Cove Associates of $651,868 due to the timing of payments pursuant
to the Omnibus Financing Agreement.
As a result of the foregoing factors, the Company experienced a net loss of
$(6,526,669) for the quarter ended March 31, 1999 compared with net income
of $160,939 for the quarter ended March 31, 1998.
21
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 and on April 13, 2000 the Company distributed $2,557,545
and $132,869, respectively, to Waterford Group as a tax distribution.
For the three months ended March 31, 2000 and 1999, net cash used in
operating activities (as shown in the Condensed Statements of Cash Flows)
was $4,624,455 and $6,042,324, respectively.
Current assets decreased from $72,724,437 at December 31, 1999 to
$28,959,540 at March 31, 2000. The decrease was caused primarily by the
distributions to the Company's sole member Waterford Group of approximately
$37,229,000, approximately $4,624,000 of cash used in operations, the
redemption of $125 Million Senior Notes in the principal amount of
$2,277,000, and offset by the payment of fees and distributions by TCA in
terms of the Omnibus Termination Agreement.
Current liabilities decreased from $3,576,539 at December 31, 1999 to
$848,965 at March 31, 2000. The decrease was primarily attributable to a
decrease in accrued interest on senior notes payable of approximately
$2,911,000 and offset by an increase in accrued expenses of approximately
$183,000 (primarily attributable to an increase in accrued legal and other
expenses related to the defense of the Leisure litigation of approximately
$147,000 and by the increase in the amount due under Len Wolman's
employment agreement of approximately $46,000).
22
For the quarters ended March 31, 2000 and 1999 net cash used in investing
activities ( as shown in the Condensed Statements of Cash Flows) was
$14,149,288 and $11,421,760, respectively. The increase was caused
primarily by the increase in (purchases) and sales of restricted
investments-net of $14,672,400 (principally due to the funding of the
Interest Reserve Account), the increase in contributions to TCA of $100,000
(to fund certain development expenses in connection with the project at the
Mohegan Sun), and offset by the decrease in the payment to Leisure of
2,000,000, an increase in distributions from TCA of approximately $155,000
and by the decrease in (purchases) and sales of temporary investments-net
of $9,840,419 primarily due to the redemption of the $65 Million Senior
Notes and the issuance of the $125 Million Senior Notes.
The Company anticipates that up to $4,200,000 in additional investments in
TCA (as of March 31, 2000, $1,300,000 had been invested in TCA) may be
required by the Company in connection with the Project at the Mohegan Sun.
For the three months ended March 31, 2000 and 1999 net cash (used in)
provided by financing activities (as shown in the Condensed Statements of
Cash Flows) was $(39,506,334) and $20,913,527, respectively. The net cash
used in financing activities in 2000 was primarily the result of the
redemption of $125 Million Senior Notes in the principal amount of
$2,277,000 and distributions to the Company's sole member of approximately
$37,229,000. The net cash provided by financing activities in 1999 was
primarily the result of the issuance of the $125 Million Senior Notes in
the principal amount of $125,000,000, contributions by members of $49,000,
and offset by the redemption of the $65 Million Senior Notes in the
principal amount of $61,471,000, deferred financing costs of $3,729,741
(primarily due to the costs associated with the issuance of the $125
Million Senior Notes) and by distributions to members of approximately
$38,935,000.
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%.
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.
23
Item 3. 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 March 31, 2000.
The fair market value of the Company's long-term debt at March 31, 2000 is
estimated to be approximately $115,100,000 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 investments in Federal Home Loan Mortgage Corp.
Discount Notes. 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.
24
Part II Other Information:
------------------
Item 1 -- 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 2 -- Changes in Securities:
----------------------
None
Item 3 -- Defaults Upon Senior Securities:
--------------------------------
None
Item 4 -- Submission of Matters to a Vote of Security Holders:
----------------------------------------------------
None
Item 5 -- Other Information:
------------------
None
25
Item 6 -- Exhibits 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)
26
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)
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)
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)
27
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.
(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) Reports on Form 8-K
-------------------
None
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: May 11, 2000 By: /s/Len Wolman
Len Wolman, Chief Executive Officer
Date: May 11, 2000 By: /s/Alan Angel
Alan Angel, Chief Financial Officer
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Waterford Gaming, L.L.C.
All amounts are unaudited.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,057,540
<SECURITIES> 26,479,492
<RECEIVABLES> 358,407
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,959,540
<PP&E> 53,918
<DEPRECIATION> (12,577)
<TOTAL-ASSETS> 47,340,267
<CURRENT-LIABILITIES> 848,965
<BONDS> 119,882,000
0
0
<COMMON> 0
<OTHER-SE> (73,390,698)
<TOTAL-LIABILITY-AND-EQUITY> 47,340,267
<SALES> 0
<TOTAL-REVENUES> 1,412,137
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 566,457
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,088,304
<INCOME-PRETAX> (1,690,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,690,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,690,926)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
