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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, 1997
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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
914 Hartford Turnpike, P.O. Box 715
Waterford, CT 06385
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(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
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(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 1-11
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III.
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 19-22
PART I
ITEM 1. BUSINESS
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A. GENERAL
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Waterford Gaming, L.L.C. (the "Company"), a Delaware limited liability
company, was formed on September 30, 1996. Waterford Gaming Finance Corp.
("Finance"), a Delaware corporation, is a wholly-owned subsidiary of the
Company. The Company owns an interest in Trading Cove Associates ("TCA"),
a Connecticut general partnership, and invests in certain financial
instruments issued by the Mohegan Tribal Gaming Authority (the "Authority").
The principal executive offices of the Company and Finance are located at 914
Hartford Turnpike, P.O. Box 715, 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 any other event 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. The member's
initial capital contribution to the Company consisted of all of the
interests in TCA owned by Slavik and LMW. Additional capital contributions
may be made to the Company by its members on a pro rata basis. If it is
determined that the Company requires additional funds, such funds may be
loaned to the Company by certain members pursuant to the terms set
forth in the Agreement; however, the indenture, between the Company and
Finance, the Issuers, and Fleet National Bank, as Trustee, relating to
$65,000,000 12-3/4% Senior Notes due November 15, 2003 (the "Indenture"),
prohibits the Company 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 the Company, is a development
firm based in southeastern Connecticut. LMW is owned by Len Wolman and
Mark Wolman. The other member of the Company, Slavik, is based in Detroit,
Michigan. The directors of Slavik are Stephan F. Slavik, Sr., Len Wolman
and Del J. Lauria. Prior to the offering of the 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 "Private 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 Private 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. In addition to its interest in TCA, Slavik is an owner of certain
hotel properties. The Company used $10.6 million of the proceeds from the
offering to purchase RJH Development Corp.'s ownership interest in TCA. As a
result of these transactions (collectively the "Reorganization"), each of
Slavik and LMW own 67.7967% and 32.2033% of the Company, respectively. The
Company is a managing general partner of TCA. In connection with the
Reorganization, TCA distributed $850,000 in principal amount of 15%
subordinated notes receivable from the Authority to the Company. As a result
of the Reorganization, the only two partners of TCA are the Company and Sun
Cove Ltd. ("Sun").
1
Trading Cove Associates
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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, negotiate the Amended and Restated Gaming Facility Management
Agreement (the "Management Agreement") and participate in the design and
development of the Mohegan Sun which commenced operations on October 12,
1996. Since the opening of the Mohegan Sun, TCA has overseen the Mohegan
Sun's day-to-day operations. The TCA partnership will terminate on December
31, 2040, or earlier, in accordance with the terms of the partnership
agreement. The Company now has a 50% voting and profits interest in TCA
(see "Legal Proceedings"). The remaining 50% interest is owned by Sun,
an affiliate of Sun International Hotels Limited ("Sun International"). Sun
International is a publicly traded international resort and gaming company,
which develops and manages premier resort and casino properties. Sun
International, through its subsidiaries, currently operates resort hotels and
casinos in The Bahamas, Atlantic City and the Indian Ocean.
Trading Cove Associates - Material Agreements
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Management Agreement
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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 has assigned its rights and
obligations in this agreement to the Authority. The Authority and TCA have
consented to this assignment. The term of the Management Agreement is
seven years and commenced on October 12, 1996, subject to a one time option
for a buyout by the Tribe effective on the last day of the 60th month
following the first full month of operations of the Mohegan Sun (the "Buyout
Option"). In order to exercise the Buyout Option, the Tribe must (i) fully
pay and satisfy certain outstanding indebtedness, including all indebtedness
under the Authority's $175 million, 13-1/2% senior secured notes due 2002 (the
"Authority Senior Secured Notes") and the Authority's $40 million 15%
subordinated notes due 2003 and $50 million completion guarantee subordinated
notes due 2003, (ii) give notice of its intent to exercise the option not more
than 90 and not less than 30 days prior to the last day of the 60th month
after opening of the Mohegan Sun, (iii) enter into discussion with TCA to
determine the option price on commercially reasonable terms, (iv) execute and
deliver to TCA a full release of all of TCA's obligations under, and claims,
whether asserted or unasserted, liquidated or contingent, arising in
connection with, the Management Agreement and (v) pay all amounts otherwise
due TCA pursuant to the Management Agreement.
Under the Management Agreement, the Tribe has 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. The Management
Agreement is not assignable by either party without the prior consent of
the other party. Pursuant to the terms of the Management Agreement, the
Tribe and TCA have agreed that neither party may establish or operate any
other gaming facility within the states of Connecticut or Rhode Island
without first obtaining the consent of the other party, which consent may
not be unreasonably withheld. In addition, TCA has agreed to use its best
efforts to promote and manage the Casino and the Tribe has agreed that,
except as required by law, it will not adopt any amendments to its gaming
ordinances that would materially adversely affect TCA's right to operate and
maintain the Mohegan Sun. The Management Agreement provides that neither the
Tribe nor any of its agents, affiliates or representatives will impose any
taxes, fees, assessments or other charges on payments of any debt service to
TCA or any lender, on the Mohegan Sun or the revenues therefrom or on the
management fee payable to TCA thereunder and, if any such tax is imposed, TCA
has the right to obtain compensation from the Tribe in an amount equal to the
tax.
2
Under the Management Agreement, certain decision-making authority and
oversight duties are delegated to a committee comprised of an equal number of
representatives of the Tribe and of TCA (the "Business Board") but in no event
more than four persons. Actions by the Business Board require the unanimous
approval of its members or their respective designees. The Tribe and TCA have
agreed that, in the event that the Business Board is unable to reach a mutual
decision or compromise, any disputes will be submitted to summary arbitration
before a single arbitrator who shall render a decision within 48 hours of
submission of the dispute.
TCA's primary source of revenue is management fees under the Management
Agreement (the "Management Fees"). The Management Fees are paid monthly and
are calculated in three tiers based upon Net Revenues, as defined, of the
Mohegan Sun set forth below (in thousands):
I II III
______________ __________________ _______________
40% of Net Revenues in Tier I Revenues in
Revenues up to plus Tiers I &
35% of Net II plus 30% of
Revenues Net Revenues
between above
______________ __________________ _______________
Year 1............ $50,546 $50,547-$63,183 $63,183
Year 2............ $73,115 $73,116-$91,394 $91,394
Year 3............ $91,798 $91,799-$114,747 $114,747
Year 4............ $95,693 $95,694-$119,616 $119,616
Year 5............ $104,107 $104,108-$130,134 $130,134
Year 6 (subject to
Buyout Option).... $114,335 $114,336-$142,919 $142,919
Year 7 (subject to
Buyout Option).... $130,944 $130,945-$163,680 $163,680
As defined in the Management Agreement, "Net Revenues" of the Mohegan Sun
means the amount of the gross revenues of the facility less operating
expenses and certain specified categories of revenue, such as income from
any financing or refinancing, taxes or charges received from patrons on
behalf of and remitted to a governmental entity, proceeds from the sale of
capital assets, insurance proceeds and interest on the capital replacement
reserve. Net Revenues also include Net Gaming Revenues, which are equal to
the amount of the "net win" from Class III Gaming operations (i.e., the
difference between gaming wins and losses) less all gaming-related
operational expenses (excluding the management fee). Within 25 days after
the end of each calendar month, TCA is required to calculate and report to
the Tribe, the gross revenues, operating expenses and net revenues.
In addition, TCA is required to fund $1.2 million per year ($100,000 per
month) from its management fees into a capital replacement reserve.
3
Amended and Restated Omnibus Financing Agreement
- ------------------------------------------------
Pursuant to the Amended and Restated Omnibus Financing Agreement, as agreed
to by TCA, the Company and Sun International, dated September 10, 1997
(effective as of September 29, 1995), upon receipt of the management fees,
TCA is required to make a number of different types of payments to its
subcontractors. The subcontracts are primarily with TCA's partners or
their affiliates. Some of these payments are one-time non-recurring
payments (the "Non-recurring Payments") and others are required on a
continuing basis (the "Continuing Payments"). The payments marked with an
asterisk (*) below are Non-recurring Payments and the others are Continuing
Payments. One of the considerations used by the NIGC in determining
whether or not to approve a management contract is whether TCA is providing
a portion of the capital required. Accordingly, TCA agreed to provide or
cause to be provided $40 million of capital in the form of the Subordinated
Notes, as defined. However, at the time that the subordinated loan was
made, the partners of TCA, including the Company's predecessors-in-
interest, did not participate in the loan in accordance with their economic
interests in TCA. Therefore, the partners of TCA agreed that Sun
International, who subscribed for almost all of the Subordinated Notes, would
be entitled to fees for agreeing to participate in the Mohegan Sun project.
Other fees payable are to compensate the recipients for other subcontracted
services provided by them to the Mohegan Sun.
As of December 31, 1997 the Authority had outstanding the following
Authority Subordinated Notes, as defined.
1. 15% subordinated notes principal amount $40,000,000 due November 2003
(the "Subordinated Notes"). The rate of the interest payable by the
Authority on the Subordinated Notes is 15% per annum.
2. Completion guarantee subordinated notes principal 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 is the prime rate per annum announced by
Chemical Bank from "time to time" plus 1% (the "Base Rate"). The Base
Rate is set and revised at intervals of six months. At December 31,
1997, the Base Rate was 9.50% per annum.
For purposes of points (c), (d) and (e) below the Company, Sun
International and TCA have agreed that the Completion Guarantee
Subordinated Notes be split into two principal amounts of $32,500,000
Completion Guarantee Subordinated Notes (the "Non-PIK Completion
Guarantee Notes") and $17,500,000 Completion Guarantee Subordinated
Notes (the "PIK Completion Guarantee Notes").
The following table sets forth the priority of the distribution from TCA of
the Management Fees to its partners:
(a) First, for the period ending on November 8, 1996, a maximum sum of
$938,000 will be paid from the Management Services Fee, as defined,
for expenses incurred with respect to the Mohegan Sun through such
date, and for the period commencing on November 9, 1996 and ending
on September 30, 1997, and for each fiscal year of the Authority
thereafter, up to $2,000,000 per fiscal year of the Authority of
the Management Services Fee will be paid by TCA for expenses.
*(b) Second, to return capital contributions made by the partners of TCA
after September 29, 1995. These capital contributions aggregated
$2.2 million and were repaid to the partners, 50% to the Company and
50% to Sun Cove Ltd. These capital contributions were deemed
returned at the consummation of the offering of the Private Notes
upon the distribution by TCA of the $1.7 million in principal amount
of Subordinated Notes together with accrued interest and a cash
distribution totaling $275,000, 50% to Sun Cove Ltd. and 50% to the
Company.
4
(c) Third, to pay Sun International fee amounts of $2,500,000 on April
30, 1996, $2,500,000 on October 31, 1996, $2,700,000 on April 30,
1997 and every six months thereafter, beginning October 31, 1997 an
amount equal to the product of (1) $2,300,000 and (2) a fraction,
the numerator of which is the weighted average principal amount of
Subordinated Notes outstanding including all PIK Amounts (defined as
interest that is not paid in cash by the Authority on any interest
payment date, May 15 and November 15), during the applicable
Semi-Annual Period (defined as the six month periods ending,
respectively, on April 30 and October 31) and the denominator of
which is $40,000,000 (the "Subordinated Notes Fee Amounts"). On
November 8, 1996 the Company purchased from Sun International
$19,150,000 principal amount of Subordinated Notes and Sun
International assigned to the Company its right to receive
$3,850,000 of the Subordinated Notes Fee Amounts payable on April
30, 1996, October 31, 1996 and April 30, 1997 and from May 1, 1997
and every six months thereafter each of the Company and Sun
International are entitled to one half of the Subordinated Notes Fee
Amounts payable beginning October 31, 1997.
(d) Fourth, i) to pay Sun International fee amounts of $525,000 on
October 31, 1996, $2,600,000 on April 30, 1997 and every six months
thereafter, beginning October 31, 1997 an amount equal to the
product of the number arrived at by dividing the difference between
(26 1/2% and the Base Rate) by two (the "Multiplier") and the
weighted average of principal amount of Non-PIK Completion Guarantee
Notes outstanding during the applicable Semi-Annual Period (the
"Completion Guarantee Notes Fee Amounts"), and ii) payment of an
amount equal to the Base Rate on the Non-PIK Completion Guarantee
Notes to the extent the Authority is not permitted to pay interest
thereon (the "Deferred Interest Amounts"). This amount will be paid
semi-annually pari passu with the amount under paragraph (d)i)
above. When the Authority can pay such interest, payment under
this paragraph (d) ii) shall be reduced accordingly.
In addition when the Authority pays Sun International any amounts
relating to the Non-PIK Completion Guarantee Notes (other than
current interest), such amounts that relate to the Deferred Interest
Amounts acquired by TCA shall be immediately paid over to TCA.
Up until October 12, 1997 any amounts paid under paragraph (d) were
paid to Sun International. After October 12, 1997 portions of these
amounts are payable to the Company as it purchases its share of the
Non-PIK Completion Guarantee Notes.
(e) Fifth, to pay Sun International fee amounts of $80,000 on October
31, 1996, $1,350,000 on April 30, 1997 and every six months
thereafter, beginning October 31, 1997 an amount equal to the
product of the Multiplier and the weighted average of principal
amount of PIK Completion Guarantee Notes (including the applicable
PIK Amounts) outstanding during the applicable Semi-Annual Period.
*(f) Sixth, return of capital contributions made before September 29,
1995. These capital contributions aggregated $6,715,000 (balance as
of December 31, 1997 is approximately $449,000 and is to be repaid
to the partners, 50% to the Company and 50% to Sun Cove Ltd., from
repayments by the Tribe to TCA of amounts due in terms of the
promissory note dated September 29, 1995 between TCA and the Tribe).
*(g) Seventh, payment of a Development Services Fee to Sun International
Management Limited ("SIML") equal to $8,280,000 constituting 3% of
the total development costs (less land acquisition costs) of the
Mohegan Sun plus $25,000. SIML has subcontracted with certain
affiliates of the Company. The fees payable by SIML to the
affiliates of the Company are equal to 20.83% of the Development
Services Fee plus $25,000 (total $1,749,724).
(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% the organizational and
administrative fee and the marketing and casino operations fee.
After deducting operating expenses (which will be the following
amounts: $2.0 million if the Mohegan Sun's EBITDA (defined as the
Mohegan Sun's net income plus depreciation, amortization, management
fee expense, interest expense and other non-cash charges less
interest income) is $200.0 million or less, $3.0 million if the
Mohegan's Sun's EBITDA is greater than $200.0 million but
less than $225.0 million, and $4.0 million if the Mohegan Sun's
EBITDA is greater than $225.0 million) the remaining amounts will be
distributed in equal amounts to SIML and the Company.
*(i) Ninth, payment of a fee to Sun International of $5,520,000
constituting 2% of the total development costs (less land
acquisition costs) of the Mohegan Sun.
(j) Tenth, distribution of amount equal to the state and federal income
tax liability of TCA as if it were an individual paying federal
income tax and the higher of Michigan or Connecticut taxes. This
amount will be paid 50% to Sun Cove Ltd. and 50% to the Company.
(k) Eleventh, all remaining fees and Excess Cash distributed 50% to Sun
Cove Ltd. and 50% to the Company.
The previous items reflect the Amended and Restated Omnibus Financing
Agreement. The Company believes that the amendments are not adverse to the
economic interests of the holders of the Company's $65,000,000 12-3/4% senior
notes payable November 15, 2003 (the "Senior Notes").
5
Payments by the Authority on the Subordinated Notes, Non-PIK Completion
- -----------------------------------------------------------------------
Guarantee Notes and PIK Completion Guarantee Notes (collectively the
- --------------------------------------------------------------------
"Authority Subordinated Notes")
- -------------------------------
Interest is calculated semi-annually on the Authority Subordinated Notes.
Interest is deferred (and compounds semi-annually) until the Authority
purchases or offers to purchase at least 50% of its Authority Senior
Secured Notes and certain fixed charge coverage ratios are met. The
Authority is required to offer annually to purchase the Authority Senior
Secured Notes with the sum of (i) 50% of its Excess Cash Flow (defined as
an amount equal to the cash flow of the Authority for any given period,
less (a) management fees for such period, (b) interest expense and
principal payments on indebtedness of the Authority for such period, (c)
amounts set aside in the Cash Maintenance Account (as defined in the
indenture for the Authority Senior Secured Notes) for such period, (d)
amounts for the payment of federal and state taxes for such period, and (e)
certain other amounts (not to exceed $6.8 million) for such fiscal year),
(ii) 100% of the amount of Deferred Subordinated Interest (as defined in
the indenture for the Authority Senior Secured Notes) for such fiscal year and
(iii) accrued and unpaid interest, if any, to the date of closing of
such Excess Cash Purchase Offer (as defined in the indenture for the Authority
Senior Secured Notes). If the holders of the Authority Senior Secured Notes
do not accept the offer, then such amount of the Excess Cash must be offered
to purchase the Authority Subordinated Notes. In the event that the Company
receives an offer to purchase the Company's Authority Subordinated Notes, the
Indenture requires the Company to accept such offer in the same proportion as
Sun International. On March 12, 1998 the Authority made such an offer with
Excess Cash of $29,050,805 to the holders of the Authority Subordinated
Notes. Sun International and the Company will not accept the offer.
The Authority may make an optional redemption of the Authority Subordinated
Notes; however, such redemption, except as detailed above, may be made only
after the Authority Senior Secured Notes have been paid in full.
The Mohegan Tribal Gaming Authority
- -----------------------------------
The Tribe is a federally recognized Indian tribe with a 240-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).
The General Manager of the Mohegan Sun is appointed by TCA, subject to the
approval of the Authority; other senior officers of the Mohegan Sun are
appointed by TCA. The following table provides information as of December
31, 1997 with respect to each of the (i)executive officers of the Mohegan
Sun and (ii) the members of the Management Board.
6
NAME POSITION
- ---- --------
Roland J. Harris Chairman and member, Management Board
Jayne G. Fawcett Vice Chairman and member, Management Board
William J. Velardo Executive Vice President and General Manager, Mohegan Sun
Mitchell Grossinger Etess Senior Vice President, Marketing, Mohegan Sun
Jeffrey E. Hartmann Senior Vice President and Chief Financial Officer, Mohegan Sun
Carlisle M. Fowler Treasurer and member, Management Board
Loretta F. Roberge Corresponding Secretary and member, Management Board
Shirley M. Walsh Recording Secretary and member, Management Board
Mark F. Brown Member, Management Board
Courtland C. Fowler Member, Management Board
Maynard I. Strickland Member, Management Board
Glen R. LaVigne Member, Management Board
The Management Board also selects representatives to serve on the Business
Board. The Authority has established the Mohegan Tribal Gaming Commission
(the "Commission"), which is responsible for the regulation of the Mohegan
Sun. The Commission ensures the integrity of the gaming operation through
the promulgation and enforcement of appropriate regulations. The
Commission staff 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 the Tribe's
240-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. Celebrating the history and traditions of the
Tribe, the Mohegan Sun's circular design and Indian themes are directly
influenced by the Tribe's belief and culture. The Mohegan Sun is separated
into four quadrants, each of which features its own entrance and a seasonal
theme - Winter, Spring, Summer and Fall- highlighting the importance of
seasonal changes to Mohegan Life. The 625,000 square foot facility
includes 167,000 square feet of gaming space (including a bingo hall),
and accommodates approximately 3,000 slot machines, 150 table games
(including blackjack, roulette, craps, baccarat, Caribbean Stud Poker and
Let It Ride), 39 poker tables and a 1,400 seat high stakes bingo hall. Food
amenities at the Mohegan Sun include the 680-seat buffet, three themed
gourmet restaurants, a 24-hour full service coffee shop, a New York style
delicatessen and a 10-station food court featuring international cuisine.
The bingo hall also serves as a special events center which is utilized for
entertainment, boxing events and casino marketing events. The 10,000
square foot Wolf Den Lounge and showroom in the center of the Mohegan Sun
features live entertainment seven days a week and seats 350 patrons. Multiple
full-service and floor service bars are located throughout the Mohegan Sun.
The Mohegan Sun also offers a children's arcade area and Kids Quest child care
facility. There are approximately 7,500 parking spaces for customers, along
with employee parking with a capacity of 1,700 vehicles.
7
The Mohegan Sun - Competition
- -----------------------------
Existing Competitors
The gaming industry is characterized by intense competition among entities
that, in many instances, have greater resources than the Authority. The
Mohegan Sun is marketed primarily to the day-trip customer, and the
Authority competes primarily with other casinos within 150 miles, and to a
lesser extent, with casinos in Atlantic City, New Jersey. Currently,
Foxwoods Resort Casino ("Foxwoods") is the only casino in operation within
150 miles of the Mohegan Sun. However, Foxwoods is located approximately
10 miles from the Mohegan Sun and is the largest gaming facility in the
United States in terms of the number of total gaming positions. Foxwoods
has approximately 300 table games and 5,500 slot machines. In addition,
Foxwoods offers amenities that the Mohegan Sun does not, such as hotels and
extensive entertainment facilities; Foxwoods currently has 312 guest rooms
available to the public and is adding approximately 800 hotel rooms that
are expected to be completed and open by the Spring of 1998. Foxwoods has
been in operation for over five years, and the Authority believes that
Foxwoods' successful operation has enabled it to build financial resources
that are currently substantially greater than the Authority's or the
Tribe's.
Potential New Competitors
Currently, outside of Atlantic City, New Jersey, casino gaming in the
northeastern United States may be conducted only by federally recognized
Indian tribes operating under IGRA. At least two federally recognized tribes
in New England are each currently seeking to establish gaming operations. In
addition, a number of tribes in New England are seeking federal recognition in
order to establish gaming operations. The Authority cannot predict whether
any of these tribes will be successful in establishing gaming operations, and
if established, whether such gaming operations will have a material adverse
effect on the proposed operations by the Authority. In addition, a number of
states, including Connecticut, have investigated legalizing casino gaming by
non-Indians in one or more locations.
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, 1997, the Mohegan Sun employed approximately 4,500 full
time equivalent 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.
8
The Mohegan Sun - Material Agreements
- -------------------------------------
The Mohegan Compact
The Tribe and State of Connecticut entered into the Mohegan Compact that
authorized and regulated Class III gaming operations on land owned by the
Tribe. On December 5, 1994, the Secretary of the Interior approved the
Mohegan Compact in accordance with IGRA. The Mohegan Compact provides,
among other things, that:
(1) The Tribe agrees to submit all gaming-related operation and
development to the regulation of the State of Connecticut Gaming
Commission (i.e. the Division of Special Revenue) in order to
attempt to ensure the fair and honest operation of gaming
activities and to maintain integrity of all activities conducted
in regard to Class III gaming.
(2) The Tribe may conduct, on the Site, games of chance, including:
Blackjack, Poker Dice, Money-Wheels, Roulette, Baccarat, Chuck-a-Luck,
Pai Gow, Over and Under, Horse Race Game, Acey-ducey, Beat the Dealer,
Bouncing Ball, Slot Machines, video facsimile games and pari-mutuel
betting.
(3) Law enforcement matters relating to Class III gaming activities are
under the jurisdiction of the State of Connecticut and the Tribe.
(4) All gaming employees will obtain and maintain a gaming license issued
by the Connecticut Division of Special Revenue.
(5) Any enterprise providing gaming services or gaming equipment to the
Tribe will be required to hold a current valid registration issued by
the Connecticut Division of Special Revenue.
(6) The State of Connecticut will annually assess the Tribe for the costs
attributable to its regulation of the Tribe's gaming operations and
for the provision of law enforcement.
(7) The Tribe will have each of its Class III Gaming operations audited on
an annual basis by an independent certified public accountant and
include any additional procedures required by the State of Connecticut
Gaming Commission.
(8) The Tribe will enact fire, building, sanitary and health ordinances
and regulations no less rigorous than laws and regulations of the
State of Connecticut.
(9) Service of alcoholic beverages within any gaming facility will be
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.
9
Memorandum of Understanding
The Tribe and the State of Connecticut, on April 25, 1994, entered into a
Memorandum of Understanding ("MOU") setting forth certain matters regarding the
implementation of the Mohegan Compact. The MOU provides that:
(1) So long as there is no change in the State law to permit the operation
of slot machines or other commercial casino table games by any other
person (other than the Mashantucket Pequot Tribe), the Tribe, through
the Authority, will contribute to the State of Connecticut on a
monthly basis a sum equal to 25% of gross operating revenues derived
from slot machines operated by the Authority ("Slot Win
Contribution"), which amount shall be adjusted by the amounts set
forth in (2) and (3) hereof.
(2) The Slot Win contribution is to be reduced by $5,000,000 in the second
year of the Authority's gaming operations, by $2,500,000 in the third
year of the Authority's gaming operations, and by $2,500,000 in the
fourth year of the Authority's gaming operations. This represents the
settlement of the land claims of the Tribe.
(3) The Authority's payment is to be increased by $3,000,000 in the first
year following the completed transfer of Fort Shantok State Park to
the United States Government to be held in trust for the Tribe.
(4) For each fiscal year commencing July 1, the minimum Slot Win
Contribution of the Authority to the State of Connecticut shall be the
lesser of (a) 30% of gross revenues from slot machines, or (b) the
greater of (i) 25% of gross revenues from slot machines or (ii)
$80,000,000. For the fiscal year of the State, ending June 30, 1997
(which did not constitute a full year), the Tribe's Slot Win
Contribution paid by the Authority totaled approximately $57.6
million.
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
annual payment was remitted to the Town on October 12, 1997. 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. The Authority anticipates funding the
$3,000,000 to the Town by September 30, 1998.
10
Subsequent Events
- -----------------
A. On February 7, 1998, TCA, the Tribe and the Authority finalized
contract negotiations and, subject to receipt of regulatory approvals,
are prepared to move forward with an estimated $450 million expansion
project at the Mohegan Sun.
Under the terms of the new agreement, TCA will continue to manage the
Mohegan Sun under the existing Management Agreement until December 31,
1999. On January 1, 2000, the Management Agreement will terminate and
the Tribe will assume day-to-day management of the Mohegan Sun. As
part of this "Relinquishment Agreement" and to compensate TCA for
giving up its rights under the current agreements, the Tribe has
agreed to pay to TCA 5% of gross revenues, generated from the
Mohegan Sun and from the planned expansion, beginning January 1, 2000
and ending December 31, 2014. The effective date under the Relinquishment
Agreement is the later of (a) the date the Authority receives all
required approvals or (b) the date the Authority Senior Secured Notes
are refinanced or repaid.
TCA has also negotiated a second agreement with the Tribe and the
Authority which will make TCA the exclusive developer of the planned
expansion of the property. Under this "Development Agreement", TCA
will oversee the planning, design, and construction of the expansion
of the Mohegan Sun. TCA will be paid a development fee of $14 million
under the terms of the Development Agreement. The effective date
under the Development Agreement is the first day of the first calendar
month following the later of (a) the date the Authority receives all
required approvals or (b) closing of the anticipated refinancing of
certain of the Authority's existing indebtedness, together with
construction financing. On February 27, 1998 the Development
Agreement was approved by the Bureau of Indian Affairs.
B. On February 7, 1998, the Company, Sun International, the Authority and
the Tribe agreed to a letter of understanding (the "Letter"),
regarding the repurchase of the Authority Subordinated Notes. The
Letter provides that until January 1, 2000, neither the Authority nor
the Tribe shall exercise any option it may have to redeem the
Authority Subordinated Notes provided that nothing contained in the
Letter shall limit or amend the rights of the holders of the Authority
Subordinated Notes to require the Authority to redeem or repurchase
the Authority Subordinated Notes - pursuant to the Note Purchase
Agreement dated as of September 29, 1995 between the Authority and Sun
International.
C. On February 7, 1998, a Memorandum of Understanding (the "Memorandum")
was agreed to by the Company, Sun, Sun International and TCA. The
Memorandum provides for the following:
(i) There will be no change in the existing relationship
between Sun and the Company until January 1, 2000.
(ii) If the Relinquishment Agreement becomes effective, during
the 7-year period beginning January 1, 2000, the Company
will not be entitled to receive any fees or cash flows from
TCA, with the exception of (a) the existing agreement
regarding annual operating expenses of TCA which shall not
exceed $2,000,000 and (b) the Company's right to receive
$2,000,000 to pay such amount to Leisure Resort Technology,
Inc. ("Leisure")in any year until TCA has first paid Sun
consideration in the amount of $5,000,000 in such year.
(iii) In terms of the Development Agreement TCA will be paid a
development fee of $14 million. TCA will subcontract with
SIML who in turn will subcontract with certain affiliates
of the Company to provide certain of the services pursuant
to the Development Agreement.
The information concerning Sun International, the Tribe and the Authority has
been derived from publicly filed information.
11
Item 2. Properties
- --------------------
The Company does not have an ownership interest in real property.
Item 3. Legal Proceedings
- --------------------------
On August 6, 1997 Leisure, a former partner of TCA, filed a lawsuit against
TCA, the Company and its owners, Sun and RJH Development Corp., claiming
breach of contract, breach of fiduciary duties and other matters in connection
with the development of the Mohegan Sun by TCA. On January 6, 1998, the
lawsuit was settled. The Company paid $5,000,000 to Leisure and, in return,
Leisure gave up its beneficial interest in TCA and any other claims it may have
had.
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.
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, 1997.
12
PART II
-------
Item 5. Market for Registrant's Common Equity and Related
- ----------------------------------------------------------
Stockholders Matters
- --------------------
Not applicable.
Item 6. Selected Financial Data
- --------------------------------
Period or Quarter Ended
----------------------------------------------------------------
December 31, March 31, June 30, September 30, December 31
1996 1997 1997 1997 1997
-------- -------- -------- -------- --------
OPERATING RESULTS
Interest and Dividend Income $ 623,213 $ 1,096,412 $1,151,298 $1,084,271 $1,260,227
Subordinated Notes Fee Income -
Trading Cove Associates --- 442,340 842,699 --- 1,447,491
-------- ---------- ---------- ---------- ----------
Total Revenue 623,213 1,538,752 1,993,997 1,084,271 2,707,718
-------- ---------- ---------- ---------- ----------
Total Expenses (1,355,985) (2,234,733) (2,173,179) (2,248,363) (2,684,235)
Equity in income (loss) of
Trading Cove Associates (384,826) (405,400) (454,565) 2,084,514 (389,906)
-------- ---------- ---------- ---------- ----------
Net income (loss) $(1,117,598) $(1,101,381) $ (633,747) $ 920,422 $ (366,423)
=========== =========== =========== ========== ==========
OTHER DATA
Interest Expense $ 1,220,104 $ 2,071,875 $ 2,078,375 $ 2,071,875 $ 2,465,579
Net cash used in
operating activities (1) --- --- 2,649,998 2,488,364 5,835,475
Net cash provided by
operating activities (1) 33,064 1,052,299 --- --- ---
Net cash used in
investing activities (1) 51,345,292 53,528 --- --- ---
Net cash provided by
investing activities (1) --- --- 2,749,681 16,000,002 9,043,282
Net cash used in
financing activities (1) --- --- 78,538 373,560 3,816,560
Net cash provided by
financing activities (1) 52,152,740 --- --- --- ---
QUARTER-END STATUS:
Total current assets (1) $16,737,416 $19,283,162 $16,049,031 $15,891,823 $ 9,980,267
Investment in Trading Cove
Associates (1) 12,682,469 12,277,069 11,747,610 10,998,878 10,384,292
Investment in 15% Subordinated
Notes Receivable (1) 25,965,897 24,886,511 25,806,647 26,750,793 27,742,146
Investment in Completion
Guarantee Subordinated Notes
Receivable (1) --- --- --- 2,798,125 2,548,162
Deferred Financing Costs Net of
Accumulated Amortization (1) 2,788,529 2,686,841 2,776,772 2,818,115 2,702,744
---------- ---------- ---------- ---------- ----------
Total Assets (1) $58,174,311 $59,133,583 $56,380,060 $59,257,734 $53,357,611
=========== =========== =========== =========== ===========
Total current liabilities (1) $ 1,273,614 $ 3,334,267 $ 1,214,491 $ 3,171,743 $ 1,081,043
12-3/4% Senior Notes payable (1) 65,000,000 65,000,000 65,000,000 65,000,000 61,471,000
----------- ---------- ---------- ---------- ----------
Total liabilities (1) $66,273,614 $68,334,267 $66,214,491 $68,171,743 $62,552,043
=========== =========== =========== =========== ===========
(1) Year-to-date cumulative totals
13
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 (the
"Commission") (as well as information included in oral statements or other
written statements made or to be made by the Company) contains
forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements include information
relating to the Mohegan Sun including plans for future expansion and other
business development activities, financing sources and the effects of
regulation (including gaming and tax regulation) and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and,
accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company.
Certain Risk Factors
- --------------------
Lack of Operations; Dependance on the Mohegan Sun
- --------------------------------------------------
The Company does not conduct any business operations, and is prohibited by
the Indenture from conducting any business operations, other than in
connection with its role as a managing general partner of TCA and
activities incidental to the ownership of the Subordinated Notes and
Completion Guarantee Subordinated Notes (collectively the "Notes") and the
issuance of the Senior Notes. The Company has no material business or
assets other than its interests in TCA, the Notes and temporary investments.
The Company's primary source of revenues is from payments from TCA and
payments under the Notes that it holds. Although the Authority has engaged
the management services of TCA, whose partners have substantial experience in
the development and management of resorts and gaming facilities, there can be
no assurance that the Mohegan Sun will continue to generate sufficient revenues
for the Authority to be profitable or to service its debt obligations
(including its obligations under the Notes) or pay management fees so that
the Company will be able to meet its obligations. The future operating results
of the Mohegan Sun will depend, in part, on matters over which the Authority
and TCA have no control including, without limitation, general economic
conditions, effects of competition, political and regulatory factors and the
actual number of gaming customers and the amount wagered.
While the Company expects its future operating cash flows will be
sufficient to cover its obligations and expenses, including interest costs,
the Company cannot give any assurance that it will be able to do so.
Results of Operations
- ---------------------
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's financial statements and the
notes thereto included elsewhere herein.
Overview of Current and Future Cash Flows
- -----------------------------------------
The Company expects to fund its operating, debt service and capital needs
from cash flows from the Company's share of payments from TCA, the
Subordinated Notes, (to the extent interest and Subordinated Notes Fee
Amounts are payable in cash on the Subordinated Notes and to the extent of
principal payments on the Subordinated Notes), Non-PIK Completion Guarantee
Notes (to the extent interest and Completion Guarantee Notes Fee Amounts
are payable in cash on the Non-PIK Completion Guarantee Notes and to the
extent of principal payments on the Non-PIK Completion Guarantee Notes) and
from amounts in the Company's cash collateral account (the "Cash Collateral
Account"). Based upon the Company's anticipated future operations,
management believes that available cash flow will be sufficient to meet the
Company's anticipated requirements for future operating expenses and future
scheduled payments of principal of and interest on the Senior Notes. No
assurance, however, can be given that the operating cash flow will be
sufficient for that purpose.
14
Sources of Revenues
- -------------------
The Company has two primary sources of revenues: payments from TCA and payments
under the Notes that it holds.
Distributions on the Company's partnership interest in TCA
- ----------------------------------------------------------
TCA's primary source of revenue is Management Fees under the Management
Agreement. For the year ended December 31, 1997, the Company received
$7,826,500 from TCA and $293,923 was due from TCA, which represents the
Company's share in terms of the Amended and Restated Omnibus Financing
Agreement 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. The actual amount of Management Fees earned by TCA
for any annual period ending September 30, are subject to year-end
adjustment.
For the year ended December 31, 1997 the Company also received $524,154 in
cash distributions from TCA which represents the Company's share of
repayments by the Tribe to TCA of amounts due in terms of the promissory
note dated September 29, 1995 between TCA and the Tribe.
The Company anticipates regular payments from TCA based on the results of
the Authority and Management Fees payment by the Authority.
Payments on the Authority Subordinated Notes
- --------------------------------------------
For the year ended December 31, 1997 the Company did not receive any cash
payments on the Authority Subordinated Notes from the Authority.
Results of Operations
- ---------------------
Discussion of the year ended December 31, 1997
- ----------------------------------------------
Interest and dividend income. Interest and dividend income of $4,592,208
for the year ended December 31, 1997 was attributable to accrued interest on
the Subordinated Notes of $3,733,910, accrued interest on the Non-PIK
Completion Guarantee Notes of $47,500, interest earned on cash and temporary
investments of $677,419 and dividends earned on temporary investments of
$133,379.
Subordinated notes fee income - Trading Cove Associates. Subordinated
notes fee income - Trading Cove Associates of $2,732,530 for the twelve
months ended December 31, 1997 represents subordinated notes fee amounts
received as detailed under point (c) of the table set forth above under
"Amended and Restated Omnibus Financing Agreement".
Interest expense. Interest expense of $8,687,704 for the year ended
December 31, 1997 resulted from paid, and accrued and unpaid, interest on
the Senior Notes. On May 15, 1997 $4,311,396 and on November 15, 1997
$4,143,750 was paid as interest on the Senior Notes. On November 15, 1997
$449,947 was paid as a premium on redemption of Senior Notes when $3,529,000
principal amount of Senior Notes were redeemed at the redemption price of
112.750%.
Amortization on deferred financing costs. Amortization on deferred
financing costs for the twelve months ended December 31, 1997 of $459,345
resulted from amortization of costs associated with the issuance of the
Senior Notes.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 1997 was $193,461 which was primarily
attributable to investment management, legal and accounting fees.
Equity in income of Trading Cove Associates. Equity in income of Trading
Cove Associates for the twelve months ended December 31, 1997 was $834,643.
As a result of the foregoing factors, the Company experienced a net loss of
$1,181,129 for the twelve months ended December 31, 1997.
15
Discussion of the period from September 30, 1996 (commencement of
- -----------------------------------------------------------------
operations) to December 31, 1996
- ---------------------------------
Interest and dividend income. Interest and dividend income of $623,213 for
the period ended December 31, 1996 was attributable to accrued interest on the
Subordinated Notes of $507,448 and interest earned on cash and temporary
investments of $115,765.
Subordinated notes fee income - Trading Cove Associates. For the period
ended December 31, 1996 the Company had no subordinated notes fee income -
Trading Cove Associates.
Interest expense. Interest expense of $1,220,104 for the period ended
December 31, 1996 resulted from accrued and unpaid interest on the Senior
Notes.
Amortization on deferred financing costs. Amortization on deferred
financing costs for the period ended December 31, 1996 of $58,731 resulted
from amortization of costs associated with the issuance of the Senior
Notes.
General and administrative expenses. General and administrative expenses
for the period ended December 31, 1996 was $77,150 which was primarily
attributable to investment management, legal and accounting fees.
Equity in loss of Trading Cove Associates. Equity in loss of Trading
Cove Associates for the period ended December 31, 1996 was $384,826.
As a result of the foregoing factors, the Company experienced a net loss of
$1,117,598 for the period ended December 31, 1996.
The Company was formed on September 30, 1996 and accordingly there are
no comparative results of operations for the fiscal year ending December
31, 1995.
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 Senior Notes, the Company used approximately $25.1
million to purchase from Sun International $19.2 million in principal
amount of Subordinated Notes plus accrued and unpaid interest and
Subordinated Notes Fee Amounts. In addition, TCA distributed approximately
$850,000 in principal amount of Subordinated Notes to the Company. During
September 1997 the Company purchased from Sun International $2.5 million
principal amount of Non-PIK Completion Guarantee Notes plus accrued and
unpaid interest and Non-PIK Completion Guarantee Fee Amounts (total cost
approximately $2.8 million).
Current Assets decreased from $16,737,416 to $9,980,267 at December 31,
1997. The decrease was primarily caused by funding the following out of
temporary investments: i) interest payments on the Senior Notes of $4,311,396
on May 15, 1997 and $4,143,750 on November 15, 1997; ii) the redemption of
Senior Notes of $3,529,000 principal amount at the redemption price of 112.750%
on November 15, 1997; and iii) the purchase of the Non-PIK Completion Guarantee
Notes during September, 1997.
Current Liabilities decreased from $1,273,614 to $1,081,043 at December 31,
1997. The decrease was primarily attributable to the decrease in accrued
and unpaid interest on the Senior Notes.
The Company is required to purchase from Sun International on each October
12, 1998 and October 12, 1999 $2.5 million principal amount of the
outstanding first funded Non-PIK Completion Guarantee Notes owned by Sun
International.
The purchase price which is to be paid by the Company to Sun International
will be equal to the outstanding principal balance of the Non-PIK Completion
Guarantee Notes to be purchased plus any amounts due thereon under points (d)
(i) and (d) (ii) of the table set forth above under "Amended and Restated
Omnibus Financing Agreement". As of December 31, 1997, $32.5 million principal
was outstanding as Non-PIK Completion Guarantee Notes.
The Company is required to make a mandatory redemption on November 15 and
May 15 of each year, which commenced on November 15, 1997, of Senior Notes
using 100% of Company Excess Cash, as defined in the Indenture, held by the
Company in excess of $10 million, as of the preceding September 30 and
March 31.
16
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
See Index to Financial Statements on Page 21.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The following table sets 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.............. 43 Chairman of the Board and Chief Executive
Officer
Del J. Lauria........... 49 Director, Chief Financial Officer and
Secretary
Stephan F. Slavik, Sr. . 77 Director
Mark Wolman............. 40 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 Waterford Hotel Group, Inc. Under Mr. Wolman, Waterford
Hotel Group, Inc. has grown from one hotel management contract to 20 properties
in eight states. Mr. Wolman was actively involved in the development and
construction of the Mohegan Sun. Mr. Wolman was instrumental in 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 is a member of the Business Board and is an employee of TCA. Mr.
Wolman is the brother of Mark Wolman. Mr. Wolman has served as President and
Chief Executive Officer of Finance since its inception. Mr. Wolman is a
Director of Slavik Suites, Inc.
Del J. Lauria. Mr. Lauria became a director of the Company, Chief
Financial Officer and Secretary upon its formation. Mr. Lauria is also an
Officer and Director of Waterford Hotel Group, Inc. and is Executive Vice
President and Director of Slavik Suites, Inc., one of the Company'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 known as Deloitte & Touche and is a
certified public accountant. Mr. Lauria has served as Treasurer and Secretary
of Finance since its inception.
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 an Officer of Wolman Construction, L.L.C.
("Construction"). Construction is a commercial development and construction
firm based in eastern Connecticut and is actively involved in developing the
Mohegan Sun. Mr. Wolman has been working with the Mohegan Tribe since 1992
and has 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.
17
Item 11. Executive Compensation
- --------------------------------
The Company's directors and officers will not be compensated by the
Company, but will receive compensation as part of the operating expenses of
TCA as detailed under points (a) and (h) of the table set forth above under
"Amended and Restated Financing Agreement".
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth the beneficial ownership interest in the
Company by each person known by the Company to beneficially own 5% or more
of the outstanding Company interests. Finance is a wholly-owned subsidiary
of the Company.
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.
(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.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Pursuant to the Development Services Agreement dated September 29, 1994
between TCA and SIML, TCA shall pay SIML a fee (the "Development Services
Fee") 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 plus
$25,000 (total $1,749,724). Wolman is owned 50% by Len Wolman and
50% by Mark Wolman. Pursuant to a subcontract, Construction will pay The
Slavik Company $250,000 of Construction's $1,749,724. Del J. Lauria and
Stephan F. Slavik, Sr. have a financial interest in The Slavik Company. For
the year ended December 31, 1997 Construction received $368,560 and The Slavik
Company received $61,440 of their share of the Development Services Fee.
Slavik and the other principals of the Company have interests 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.
The Company reimbursed certain expenses incurred by an affiliate in servicing
the Company totaling $86,000 in 1997, which was funded by capital
contributions of the members.
18
PART IV
-------
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, L.L.C. (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)
4.2 Registration Rights Agreement, dated as of
November 8, 1996, among, Waterford Gaming,
L.L.C.,, Waterford Gaming Finance Corp., Bear,
Stearns & Co., Inc., and Merrill Lynch,
Pierce, Fenner & Smith Incorporated. (i)
4.3 Note Pledge Agreement, dated as of November
8, 1996, between Waterford Gaming, L.L.C. and
Fleet National Bank, as trustee. (i)
4.4 Cash Collateral and Disbursement Agreement,
dated as of November 8, 1996, among Fleet
National Bank, as trustee, Fleet National
Bank, as disbursement agent, and Waterford
Gaming, L.L.C. (i)
4.5 Specimen Form of 12-3/4% Senior Notes due
2003 (the "Private Notes") (included
in Exhibit 4.1). (i)
4.6 Specimen Form of 12-3/4% Senior Notes due 2003
(The "Exchange Note") (included in Exhibit
4.1). (i)
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)
10.3 Amended and Restated Partnership Agreement of
Trading Cove Associates, dated as of September
21, 1994, among Sun Cove Ltd., 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 Ltd., Slavik Suites, Inc., RJH
Development Corp., LMW Investments, Inc. and
Waterford Gaming, L.L.C. (i)
10.5 Purchase Agreement, dated as of November 5,
1996, among Waterford Gaming, L.L.C.,
Waterford Gaming Finance Corp., Bear, Stearns
& Co., Inc. and Merrill Lynch, Pierce, Fenner
and Smith Incorporated. (i)
19
10.5.1 Agreement with Respect to Redemption or
Repurchase of Subordinated Notes, dated
September 10, 1997 (ii)
10.6 Limited Liability Company Agreement of
Waterford Gaming, L.L.C., dated as of
September 30, 1996, among Slavik Suites, Inc.,
LMW Investments, Inc. and Waterford Gaming,
L.L.C. (i)
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, Ltd. (iii)
21.1 Subsidiaries of Waterford Gaming, L.L.C. (i)
21.2 Subsidiaries of Waterford Gaming Finance Corp. (i)
27 Financial Data Schedule (iv)
99.1 Annual Report for the fiscal year ended
September 30, 1997, on Form 10-K of the
Mohegan Tribal Gaming Authority (the
"Authority") dated December 29, 1997,
incorporated by reference to the Authority's
electronic filing of such report on Form 10-K
Commission file reference no. 033-80655.
99.2 Quarterly Report, for the quarter ended
December 31, 1997, on Form 10-Q of the Mohegan
Tribal Gaming Authority (the "Authority")
dated February 13, 1998, incorporated by
reference to the Authority's electronic
filing of such report on Form 10-Q Commission
file reference no. 033-80655.
(i) Incorporated by reference to the Registrant's
Registration Statement on Form S-4, 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) Filed herewith.
(iv) Included in Edgar filing only.
20
(b) Financial Statement Schedules
---------------------------------
INDEX
Page
Report of Independent Accountants F1
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996 F2
Statements of Operations for the year ended
December 31, 1997 and for the period from
September 30,1996 (commencement of operations)
to December 31, 1996 F3
Statements of Changes in Members' Deficiency for
the year ended December 31, 1997 and for the period
from September 30, 1996 (commencement of operations)
to December 31, 1996 F4
Statements of Cash Flows for the year ended
December 31, 1997 and for the period from
September 30, 1996 (commencement of operations)
to December 31, 1996 F5
Notes to Financial Statements F6-F13
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Waterford Gaming, L.L.C.:
We have audited the accompanying balance sheets of Waterford Gaming, L.L.C.
(the "Company") as of December 31, 1997 and 1996, and the related statements
of operations, changes in members' equity (deficiency) and cash flows for the
year ended December 31, 1997 and for the period from September 30, 1996
(commencement of operations) to December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Waterford Gaming, L.L.C. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended December 31, 1997 and for the period from September
30, 1996 (commencement of operations) to December 31, 1996 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
March 6, 1998
F1
WATERFORD GAMING, L.L.C.
BALANCE SHEETS
December 31, 1997 and 1996
____________
1997 1996
---- ----
Current assets
Cash $ 232,759 $ 841,512
Cash in escrow 5,000,000 ---
Temporary investments 4,383,379 15,836,843
Due from Trading Cove Associates 293,923 ---
Other assets 70,206 59,061
------------ ------------
Total current assets 9,980,267 16,737,416
------------ ------------
Investment in Trading Cove Associates 10,384,292 12,682,469
Investment in 15% subordinated notes
receivable 27,742,146 25,965,897
Investment in completion guarantee
subordinated note receivable 2,548,162 ---
Deferred financing costs net of
accumulated amortization of $518,076 and
$58,731 in 1997 and 1996, respectively 2,702,744 2,788,529
------------ ------------
Total assets $ 53,357,611 $ 58,174,311
============ ============
LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities:
Accrued expenses $ 78,328 $ 53,510
Accrued interest on senior
notes payable 1,002,715 1,220,104
------------ ------------
Total current liabilities 1,081,043 1,273,614
12-3/4% senior notes payable 61,471,000 65,000,000
------------ ------------
Total liabilities 62,552,043 66,273,614
------------ ------------
Members' deficiency (9,194,432) (8,099,303)
------------- -------------
Total liabilities and
members' deficiency $ 53,357,611 $ 58,174,311
============ ============
The accompanying notes are an integral part of the financial statements.
F2
WATERFORD GAMING, L.L.C.
STATEMENTS OF OPERATIONS
for the year ended December 31, 1997
and for the period from September 30, 1996
(commencement of operations) to December 31, 1996
____________
For the period from
For the year ended September 30, 1996 to
December 31, 1997 December 31, 1996
------------------ ---------------------
Revenue:
Interest and dividend
income $ 4,592,208 $ 623,213
Subordinated notes
fee income -
Trading Cove Associates 2,732,530 ---
-------------- ------------
Total revenue 7,324,738 623,213
============== ============
Expenses:
Interest expense 8,687,704 1,220,104
Amortization on deferred
financing costs 459,345 58,731
General and administrative 193,461 77,150
-------------- ------------
Total expenses 9,340,510 1,355,985
-------------- ------------
(2,015,772) (732,772)
Equity in income (loss) of
Trading Cove Associates 834,643 (384,826)
-------------- -------------
Net loss $ (1,181,129) $ (1,117,598)
=============== =============
The accompanying notes are an integral part of the financial statements.
F3
WATERFORD GAMING, L.L.C.
STATEMENTS OF CHANGES IN MEMBERS' DEFICIENCY
for the year ended December 31, 1997
and for the period from September 30, 1996
(commencement of operations) to December 31, 1996
____________
Total
Members'
Slavik Suites, Inc. LMW Investments, Inc. Deficiency
------------------- --------------------- ------------
Balance,
September 30, 1996 $ 667 $ 333 $ 1,000
Capital contributions 2,011,530 1,005,765 3,017,295
Net loss (757,695) (359,903) (1,117,598)
Distributions (6,666,667) (3,333,333) (10,000,000)
-------------- ------------- -------------
Balance,
December 31, 1996 (5,412,165) (2,687,138) (8,099,303)
Capital 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)
=============== ============= ============
The accompanying notes are an integral part of the financial statements.
F4
WATERFORD GAMING, L.L.C.
STATEMENTS OF CASH FLOWS
for the year ended December 31, 1997
and for the period from September 30, 1996
(commencement of operations) to December 31, 1996
---------------
For the period
For the year ended September 30, 1996 to
December 31, 1997 December 31, 1996
------------------ ------------------
Cash flows from operating activities:
Net loss $ (1,181,129) $ (1,117,598)
------------- -------------
Adjustments to reconcile net loss
to net cash used in (provided by)
operating activities:
Amortization 459,345 58,731
Equity in (income) loss of
Trading Cove Associates (834,643) 384,826
Change in operating assets
and liabilities:
Accrued interest receivable -
15% subordinated notes
receivable (3,733,909) (507,448)
Accrued interest receivable -
completion guarantee
subordinated note receivable (47,500) ---
Due from Trading Cove Associates (293,923) ---
Other assets (11,145) (59,061)
Accrued expenses 24,818 53,510
Accrued interest on senior
notes payable (217,389) 1,220,104
------------ -----------
Total adjustments (4,654,346) 1,150,662
------------ -----------
Net cash (used in) provided by
operating activities (5,835,475) 33,064
------------ -----------
Cash flows from investing activities:
Sales and purchases of temporary
investments - net 11,453,464 (15,836,843)
Cash in escrow (5,000,000) ---
Distributions from Trading Cove
Associates 3,132,820 137,594
Investment in completion guarantee
subordinated note receivable (2,798,125) ---
Investment in 15% subordinated
notes receivable --- (25,072,543)
Return on investment in 15%
subordinated notes receivable 1,957,660 612,500
Return on investment in completion
guarantee subordinated
note receivable 297,463 ---
Investments in Trading Cove
Associates --- (11,186,000)
------------ -------------
Net cash provided by (used in)
investing activities 9,043,282 (51,345,292)
------------ --------------
Cash flows from financing activities:
Redemption of senior notes (3,529,000) ---
Deferred financing costs (373,560) (2,847,260)
Contributions by members 86,000 ---
Proceeds from senior notes issuance --- 65,000,000
Distributions to members --- (10,000,000)
-------------- --------------
Net cash (used in) provided by
financing activities (3,816,560) 52,152,740
-------------- --------------
Net increase (decrease) in cash (608,753) 840,512
Cash at beginning of year (period) 841,512 1,000
------------- -------------
Cash at end of year (period) $ 232,759 $ 841,512
============= =============
Supplemental disclosure of cash
flow information:
Cash paid during the year for
interest $ 8,455,146 $ ---
============= =============
The accompanying notes are an integral part of the financial statements.
F5
WATERFORD GAMING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
____________
1. Organization and Membership Agreement:
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 invests in certain financial
instruments issued by the Mohegan Tribal Gaming Authority (the
"Authority").
Effective as of May 15, 1997 the Company's $65,000,000 12-3/4% Senior
Notes payable November 15, 2003 (the "Senior Notes") were registered
with the Securities and Exchange Commission (the "Commission") through
a Registration Statement on Form S-4 under the Securities Exchange Act
of 1933. As a result, the Company is subject to the informational
requirements of the Securities Exchange Act of 1934.
The Company is governed by a board of managers pursuant to the
members' agreement described in Note 3.
2. 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.
Temporary Investments
---------------------
Temporary investments at December 31, 1997 are comprised of an
investment in the John Hancock US Government Cash Revenue 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. Temporary
investments at December 31, 1996 are comprised of commercial paper
investments, all having original maturities of less than 90 days.
They are classified as held-to-maturity and are reported at amortized
cost plus accrued interest, which approximated market.
Investment in Trading Cove Associates
-------------------------------------
The investment in TCA 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 is being amortized on a straight-line basis over a 7-year
term, which represents the term of the management agreement between
TCA and the Authority.
Deferred Financing Costs
------------------------
Costs incurred with the issuance of the Senior Notes were capitalized
and are amortized on a straight-line basis over the 7-year term of the
Senior Notes.
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.
F6
Concentration of Credit Risk
----------------------------
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
-----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments" ("FAS 107"), requires that
the Company disclose the estimated fair values of its 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, FAS 107 allows a wide range of valuation techniques,
therefore, comparisons between entities, however similar, may be
difficult.
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 1996 balances to
conform to the 1997 presentation.
3. Member Allocations:
The limited liability company agreement (the "Agreement") is effective
until September 30, 2020 and may be terminated by unanimous decision
of the members or any other event as stated in the Agreement.
The members' profits interests, as defined, were adjusted after the
1996 distribution to the members of $10,000,000 made in order to
purchase and retire certain indirect ownership interests. The
members' respective allocation of income, gains, losses and
deductions, as amended, are generally as follows:
Slavik Suites, Inc. ("Slavik") 67.7967%
LMW Investments, Inc. ("LMW") 32.2033%
---------
100.0000%
=========
F7
4. Investment in 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 Casino (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 operation on October 12, 1996. Since the opening of the
Mohegan Sun, TCA has overseen the Mohegan Sun's day-to day operations.
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 now has a 50% voting and
profits interest in TCA (see Note 8). The remaining 50% interest is
owned by Sun Cove Ltd. ("Sun"), 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, 1997 and 1996, the following information relates to
Trading Cove Associates. Total revenues and net income are for the year
ended December 31, 1997 and for the period from November 9 through
December 31, 1996 which represents the period that the Company was a
partner in TCA.
1997 1996
---- ----
Total assets $ 6,162,500 $ 7,107,914
Total liabilities (1,074,602) (488,723)
---------------- -----------------
Partners' capital $ 5,087,898 $ 6,619,191
================ ================
Total revenues $ 28,935,534 $ 1,252,196
================ ================
Net income (loss) $ 4,734,346 $ (326,930)
================ ================
Company's interest:
Investment in Trading Cove
Associates, beginning of
year (period) $ 12,682,469 $ ---
Contributions --- 3,603,295
Interest purchased --- 10,600,000
Distributions (3,132,820) (1,136,000)
---------------- ----------------
9,549,649 13,067,295
---------------- ----------------
Income (loss) from
Trading Cove Associates 2,367,173 (163,465)
Amortization of interests
purchased (1,532,530) (221,361)
---------------- ----------------
Equity in income (loss) of
Trading Cove Associates 834,643 (384,826)
---------------- ----------------
Investment in Trading Cove
Associates, end of year
(period) $ 10,384,292 $ 12,682,469
=============== ================
F8
5. Notes Receivable:
On November 8, 1996, the Company purchased 15% subordinated notes
receivable from the Authority 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 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, $1,957,660 related to subordinated notes fee
amounts 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 note fee
payments were netted against the $1,957,660, resulting in recognition
of $2,732,530 in subordinated notes fee income during the year ended
December 31, 1997.
On September 22, 1997, the Company purchased a completion guarantee
subordinated note receivable, from the Authority which matures
November 15, 2003, in the principal amount of $2,500,000 from Sun
International. The Company also purchased the related accrued
interest and deferred interest amounts which had not been paid by TCA
totaling $106,875 and completion guarantee note fee amounts totaling
$191,250. During the period from September 22, 1997 to December 31,
1997, the Company received $106,638 from TCA of the $106,875 of
accrued interest and deferred interest amounts, and $190,825 of the
$191,250 of completion guarantee note fee amounts. The rate of
interest payable by the Authority on the completion guarantee
subordinated notes is the prime rate per annum announced by Chemical
Bank from "time to time" plus 1% (the "Base Rate"). The Base Rate is
set and revised at intervals of six months. At December 31, 1997, the
Base Rate was 9.50% per annum.
The 15% subordinated notes receivable from the Authority bear interest
at 15% per annum and mature November 15, 2003. Interest, on the
Authority's 15% subordinated notes in the principal amount of
$40,000,000 due November 2003 and on the Authority's completion
guarantee subordinated notes in the principal amount of $50,000,000
due November 2003 (collectively the "Authority Subordinated Notes"),
is payable semi-annually in arrears on each May 15 and November 15.
Interest is deferred and compounds semi-annually until the Authority
retires or offers to purchase at least 50% of its $175,000,000, 13-1/2%
senior secured notes (the "Authority Senior Secured Notes"). Interest
on deferred interest shall accrue and be deferred semi-annually at the
applicable interest rate. The Authority has the option to prepay the
Authority Subordinated Notes, subject to certain restrictions contained
in the indenture of the Authority Senior Secured Notes. The Authority
is required to offer annually to purchase the Authority Senior Secured
Notes with 50% of Excess Cash, as defined in the indenture of the
Authority Senior Secured Notes. If the holders of the Authority Senior
Secured Notes do not accept such purchase offer, then such amount of
Excess Cash must be offered to purchase the Authority Subordinated Notes.
The Company must accept such offer to purchase its 15% subordinated notes
receivable from the Authority in the principal amount of $20,000,000 and
completion guarantee subordinated note receivable from the Authority in
the principal amount of $2,500,000 in the same proportion as Sun
International. On March 12, 1998 the Authority made such an offer with
Excess Cash of $29,050,805 to the holders of the Authority Subordinated
Notes. Sun International and the Company will not accept the offer.
The Company is required to purchase from Sun International on each
October 12, 1998 and October 12, 1999 $2.5 million principal amount of
the outstanding first funded Authority's completion guarantee
subordinated notes due November 2003., at the purchase price equal to
the outstanding principal balance of the Authority completion
guarantee subordinated note due November 2003, plus the related
accrued interest and deferred interest amounts which have not been
paid by TCA and completion guarantee note fee amounts.
The carrying value of the Notes, plus accrued interest , plus fee
amounts, are stated at cost, which the Company believes approximates
market.
F9
6. 12-3/4% Senior Notes Payable:
The Senior Notes payable at December 31, 1997 consist of $61,471,000
aggregate principal amount of the Senior Notes issued on November 8,
1996 by the Company and its wholly-owned subsidiary, Waterford Gaming
Finance Corp., maturing November 15, 2003. The Senior Notes bear
interest at a rate of 12-3/4% per annum, payable semi-annually in
arrears on May 15 and November 15 of each year, which commenced on May
15, 1997. The Senior Notes will be redeemable at the option of the
Company in whole or in part at any time on or after November 15, 1999.
Accrued interest payable on the Senior Notes totaled $1,002,715 and
$1,220,104 as of December 31, 1997 and 1996, respectively.
The Senior Notes are collateralized by the Company's Notes receivable
(Note 5), cash and temporary investments. The indenture with respect
to the Senior Notes prohibits the Company and its wholly-owned
subsidiary from incurring any other indebtedness other than the Senior
Notes.
The Company is required to make a mandatory redemption of Senior Notes
on November 15 and May 15 of each year, which commenced on November
15, 1997, using 100% of Company Excess Cash (as defined in the
indenture, between the Company and Waterford Gaming Finance Corp., the
issuers, and Fleet National Bank, as trustee, relating to the Senior
Notes) held by the Company in excess of $10,000,000, as of the
preceding September 30 and March 31. Company Excess Cash as of
September 30, 1997 totaled $3,979,590. On November 15, 1997,
$3,529,000 principal amount of Senior Notes were redeemed at the
redemption price of 112.750%.
The fair value of the Company's Senior Notes payable is estimated,
based on the quoted market prices for the same or similar issues, or
on current rates offered to the Company for debt of the same remaining
maturities.
F10
7. Reconciliation of Financial Statement and Tax Information:
The following is a reconciliation of net loss for financial statement
purposes to net loss for federal income tax purposes for the year
ended December 31, 1997 and for the period from September 30, 1996
(commencement of operations) to December 31, 1996.
For the period
For the year ended September 30, 1996 to
December 31, 1997 December 31, 1996
------------------ ---------------------
Financial statement net loss $ (1,181,129) $ (1,117,598)
Financial statement equity in
(income) loss on investment in
TCA over tax basis equity in
(income) loss on investment
in TCA (212,768) 156,501
Other 113,906 12,880
-------------- --------------
Federal income tax basis net loss $ (1,279,991) $ (948,217)
============== ==============
The following is a reconciliation of members' deficiency for financial
statement purposes to members' deficiency for federal income tax purposes as
of December 31, 1997 and 1996:
1997 1996
---- ----
Financial statement member's
deficiency $ (9,194,432) $ (8,099,303)
Adjustment for cumulative
difference between tax basis
of investment in TCA and GAAP
basis of investment in TCA 209,065 39,684
Current year financial statement
net loss over (under) federal
income tax basis net loss (98,862) 169,381
------------- -------------
Federal income tax basis
members' deficiency $ (9,084,229) $ (7,890,238)
============= =============
8. Related Party Transactions:
Pursuant to the Development Services Agreement dated September 29,
1994 between TCA and Sun International Management Limited ("SIML"),
TCA shall pay SIML a fee (the "Development Services Fee") 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
plus $25,000 (total $1,749,724). Wolman is owned 50% by Len Wolman
and 50% by Mark Wolman. Pursuant to a subcontract, Construction will
pay The Slavik Company $250,000 of Construction's $1,749,724. Del J.
Lauria and Stephan F. Slavik, Sr. have a financial interest in The
Slavik Company. For the year ended December 31, 1997 Construction
received $368,560 and The Slavik Company received $61,440 of their
share of the Development Services Fee. For the period from September
30, 1996 to December 31, 1996 neither Construction nor The Slavik
Company received any amounts of their share of the Development
Services Fee.
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Slavik and the other principals of the Company have interests 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.
The Company reimbursed certain expenses incurred by an affiliate in
servicing the Company totaling $86,000 in 1997 ($0 for the period from
September 30, 1996 to December 31, 1996) which was funded by capital
contributions of the members.
9. Subsequent Events:
A. On August 6, 1997, Leisure Resort Technology, Inc., a Connecticut
corporation ("Leisure"), a former partner of TCA filed a lawsuit
against TCA, the Company and its owners, Sun Cove Ltd. and RJH
Development Corporation, claiming breach of contract, breach of
fiduciary duties and other matters in connection with the development
of the Mohegan Sun by TCA. On January 6, 1998, the lawsuit was settled.
The Company paid $5,000,000 to Leisure (such funds were held in escrow
at December 31, 1997) and, in return, Leisure gave up its beneficial
interest in TCA and any other claims it may have had.
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 other involvement of any kind with, the
Tribe's gaming facilities or other related facilities or 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 may be
required to pay $2,000,000 to Leisure. Such payment would be due on the
earliest to occur of (i) the retirement of the Senior Notes, (ii) any
renewal, extension, refinancing or refunding of (whether direct or
indirect), or amendment, modification or supplement to, the Senior Notes,
whether or not between or among the parties to the Indenture, and (iii)
November 30, 2003. The Company will have no obligation to make this
payment if TCA's management or operation of, or other involvement with,
the Tribe's gaming facilities or other related facilities or enterprises
is extended, through one or more agreements, for a total of 90 days or
less.
B. On February 7, 1998, TCA , the Tribe and the Authority finalized
contract negotiations and, subject to receipt of regulatory approvals,
are prepared to move forward with an estimated $450 million expansion
project at the Mohegan Sun.
Under the terms of the new agreement, TCA will continue to manage the
Mohegan Sun under the existing Management Agreement until December 31,
1999. On January 1, 2000, the Management Agreement will terminate and
the Tribe will assume day-to-day management of the Mohegan Sun. As
part of this "Relinquishment Agreement" and to compensate TCA for
giving up its rights under the current agreements, the Tribe has
agreed to pay to TCA 5% of gross revenues, generated from the
Mohegan Sun and from the planned expansion, beginning January 1, 2000
and ending December 31, 2014. The effective date under the Relinquishment
Agreement is the later of (a) the date the Authority receives all
required approvals or (b) the date the Authority Senior Secured Notes
are refinanced or repaid.
TCA has also negotiated a second agreement with the Tribe and the
Authority which will make TCA the exclusive developer of the planned
expansion of the property. Under this "Development Agreement", TCA
will oversee the planning, design, and construction of the expansion
of the Mohegan Sun. TCA will be paid a development fee of $14 million
under the terms of the Development Agreement. The effective date under
the Development Agreement is the first day of the first calendar month
following the later of (a) the date the Authority receives all
required approvals or (b) closing of the anticipated refinancing of
certain of the Authority's existing indebtedness, together with
construction financing.
F12
C. On February 7, 1998, the Company, Sun International, the Authority and the
Tribe agreed to a letter of understanding (the "Letter"), regarding the
repurchase of the Notes. The Letter provides that until January 1, 2000,
neither the Authority nor the Tribe shall exercise any option it may have
to redeem the Notes provided that nothing contained in the Letter, shall
limit or amend the rights of the holders of the Notes to require the
Authority to redeem or repurchase the Notes - pursuant to the Note
Purchase Agreement dated as of September 29, 1995 between the Authority
and the Sun International.
D. On February 7, 1998, a Memorandum of Understanding (the "Memorandum")
was agreed to by the Company, Sun, Sun International and TCA. The
Memorandum provides for the following:
(i) There will be no change in the existing relationship between
Sun and the Company until January 1, 2000.
(ii) If the Relinquishment Agreement becomes effective, during
the 7-year period beginning January 1, 2000, the Company
will not be entitled to receive any fees or cash flow from
TCA, with the exception of (a) the existing agreement
regarding annual operating expenses of TCA which shall not
exceed $2,000,000 and (b) the Company's right to receive
$2,000,000 to pay such amount to Leisure, in any year until
TCA has first paid Sun consideration in the amount of
$5,000,000 in such year.
(iii) In terms of the Development Agreement TCA will be paid a
development fee of $14 million. TCA will subcontract with
SIML who in turn will subcontract with certain affiliates of
the Company to provide the necessary services pursuant to
the Development Agreement.
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(c) Reports on Form 8-K
------------------------
(i) Form 8-K filed on January 8, 1998
Item 5.
The Mohegan Tribal Gaming Authority (the "Authority") has
filed its annual report on Form 10-K for the fiscal year
ended September 30, 1997, 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 SEC file reference no. 033-80655.
Date of Report: December 29, 1997
(ii) Form 8-K filed on February 18, 1998
Item 5.
The Mohegan Tribal Gaming Authority (the "Authority") has
filed its quarterly report on Form 10-Q for the quarter
ended December 31, 1997, 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 SEC file reference no. 033-80655.
Date of Report: February 13, 1998
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Waterford Gaming, L.L.C.
Date: March 30, 1998 By: /s/Len Wolman
Len Wolman, Chief Executive Officer
Date: March 30, 1998 By: /s/Del J. Lauria
Del J. Lauria, Chief Financial Officer
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 the capacities indicated on March 30, 1998.
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,
- ---------------- Chief Financial Officer, 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.