UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 6/30/2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______ to________
Commission file number 333-17795
WATERFORD GAMING, L.L.C.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1465402
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
914 Hartford Turnpike, P.O. Box 715
Waterford , CT 06385
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 442-4559
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.
WATERFORD GAMING, L.L.C.
INDEX TO FORM 10-Q
Page
Number
PART I -- FINANCIAL INFORMATION
- -------------------------------
Item 1 -- Financial Statements
Report of Independent Accountants 1
Financial Information 2
Condensed Balance Sheets of Waterford Gaming, L.L.C. as of
June 30, 2002 (unaudited) and December 31, 2001 3
Condensed Statements of Operations of Waterford Gaming, L.L.C.
for the three and six month periods ended June 30, 2002 (unaudited)
and June 30, 2001 (unaudited) 4
Condensed Statements of Changes in Members' Deficiency of Waterford
Gaming, L.L.C. for the six month periods ended
June 30, 2002 (unaudited) and June 30, 2001 (unaudited) 5
Condensed Statements of Cash Flows of Waterford Gaming, L.L.C.
for the six month periods ended June 30, 2002 (unaudited)
and June 30, 2001 (unaudited) 6
Notes to Condensed Financial Statements for Waterford
Gaming, L.L.C. (unaudited) 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 -- Quantitative and Qualitative Disclosures about
Market Risk 16
Part II -- OTHER INFORMATION
- ----------------------------
Item 1 -- Legal Proceedings 17
Item 2 -- Changes in Securities 17
Item 3 -- Defaults upon Senior Securities 17
Item 4 -- Submission of Matters to a Vote of Security Holders 17
Item 5 -- Other Information 17
Item 6 -- Exhibits and Reports on Form 8-K 18
Signatures- Waterford Gaming, L.L.C. 21
Report of Independent Accountants
---------------------------------
To the Member of Waterford Gaming, L.L.C.:
We have reviewed the accompanying condensed balance sheet of Waterford Gaming,
L.L.C. (the "Company") as of June 30, 2002, and the related condensed statements
of operations, for each of the three-month and six-month periods ended June 30,
2002 and 2001, and the related condensed statements of changes in member's
deficiency and cash flows for each of the six-month periods ended June 30, 2002
and 2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the balance sheet as of December 31, 2001, and
the related statements of operations, changes in member's deficiency and cash
flows for the year then ended (not presented herein), and in our report dated
March 20, 2002 we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of December 31, 2001, is fairly stated in all
material respects in relation to the balance sheet from which it has been
derived.
PricewaterhouseCoopers LLP
August 7, 2002
Hartford, Connecticut
1
PART I -- FINANCIAL INFORMATION
- -------------------------------
Item 1 -- Financial Statements
The unaudited condensed financial information as of June 30, 2002 and 2001, and
for each of the three-month and six-month periods ended June 30, 2002 and 2001
included in this report was reviewed by PricewaterhouseCoopers LLP, independent
public accountants, in accordance with the professional standards and procedures
established for such reviews by the American Institute of Certified Public
Accountants.
2
Waterford Gaming, L.L.C.
Condensed Balance Sheets
June 30, 2002 (Unaudited) and December 31, 2001
-----------------------------------------------
June 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 834,955 $ 3,570,949
Restricted investments 25,743,575 26,189,434
Due from Trading Cove Associates 9,390,000 8,357,604
Other current assets 51,315 9,072
------------- -------------
Total current assets 36,019,845 38,127,059
------------- -------------
Trading Cove Associates-equity investment 5,269,623 5,778,458
Beneficial interest-Leisure Resort
Technology, Inc. 4,730,587 4,918,029
Deferred financing costs, net of accumulated
amortization of $1,208,406 and $1,024,974 at
June 30, 2002 and December 31, 2001,
respectively 2,826,770 3,010,202
Fixed assets, net of accumulated depreciation
of $36,832 and $31,442 at June 30, 2002
and December 31, 2001, respectively 17,086 22,476
------------- -------------
Total assets $ 48,863,911 $ 51,856,224
============= =============
LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities
Accrued expenses and accounts payable $ 149,362 $ 171,610
Accrued interest on senior notes payable 3,116,189 3,228,946
------------- -------------
Total current liabilities 3,265,551 3,400,556
------------- -------------
9-1/2% senior notes payable 111,403,000 115,434,000
------------- -------------
Total liabilities 114,668,551 118,834,556
------------- -------------
Contingencies --- ---
Members' deficiency (65,804,640) (66,978,332)
------------- -------------
Total liabilities and
members' deficiency $ 48,863,911 $ 51,856,224
============= =============
The accompanying notes are an integral part of these condensed financial
statements.
3
Waterford Gaming, L.L.C.
Condensed Statements of Operations
For the Three and Six Month Periods ended June 30, 2002 and 2001
(Unaudited)
-----------------------------
For the three months For the three months For the six months For the six months
ended June 30, 2002 ended June 30, 2001 ended June 30, 2002 ended June 30, 2001
-------------------- -------------------- -------------------- --------------------
Revenue
25% of relinquishment payments -
Trading Cove Associates $ 9,390,000 $ --- $ 11,011,000 $ ---
Organizational and administrative
fee income - Trading Cove Associates --- 8,049,158 --- 10,319,158
Interest and dividend income 131,820 330,972 326,547 802,448
------------------ ------------------ ------------------ ------------------
Total revenue 9,521,820 8,380,130 11,337,547 11,121,606
------------------ ------------------ ------------------ ------------------
Expenses
Interest expense 2,645,821 2,831,926 5,648,861 5,707,813
Salaries - related parties 204,599 171,957 391,668 336,269
General and administrative 131,117 145,678 245,465 229,315
Amortization of beneficial interest -
Leisure Resort Technology, Inc. 94,239 94,239 187,442 187,442
Amortization on deferred financing costs 91,716 91,716 183,432 183,432
Depreciation 2,695 2,695 5,390 5,390
------------------ ------------------ ------------------ ------------------
Total expenses 3,170,187 3,338,211 6,662,258 6,649,661
------------------ ------------------ ------------------ ------------------
6,351,633 5,041,919 4,675,289 4,471,945
Equity in loss of
Trading Cove Associates (855,335) (1,040,981) (158,835) (1,770,218)
------------------ ----------------- ------------------ ------------------
Net income $ 5,496,298 $ 4,000,938 $ 4,516,454 $ 2,701,727
================== ================== ================== ===================
The accompanying notes are an integral part of these condensed financial
statements.
4
Waterford Gaming, L.L.C.
Condensed Statements of Changes in Members' Deficiency
For the Six Month Periods ended June 30, 2002 and 2001
(Unaudited)
---------------
For the Six Months Ended June 30, 2002
Balance, January 1, 2002 $(66,978,332)
Contributions ---
Distributions (3,342,762)
Net income 4,516,454
-------------
Balance, June 30 , 2002 $(65,804,640)
=============
For the Six Months Ended June 30, 2001
Balance, January 1, 2001 $(71,813,244)
Contributions ---
Distributions (1,575,660)
Net income 2,701,727
-------------
Balance, June 30, 2001 $ (70,687,177)
=============
The accompanying notes are an integral part of these condensed financial
statements.
5
Waterford Gaming, L.L.C.
Condensed Statements of Cash Flows
For the Six Month Periods ended June 30, 2002 and 2001
(Unaudited)
-----------------------------
2002 2001
--------------- ----------------
Cash flows from operating activities
Net income $ 4,516,454 $ 2,701,727
--------------- ----------------
Adjustments to reconcile net income
to net cash provided by operating
activities
Amortization 370,874 370,874
Depreciation 5,390 5,390
Equity in loss of
Trading Cove Associates 158,835 1,770,218
Changes in operating assets and
liabilities
Increase in due from Trading Cove
Associates (1,032,396) (4,279,158)
Increase in other current assets (42,243) (21,118)
(Decrease) increase in accrued
expenses and accounts payable (22,248) 56,323
Decrease in accrued interest on
senior notes payable (112,757) (12,643)
--------------- ----------------
Total adjustments (674,545) (2,110,114)
--------------- ----------------
Net cash provided by
operating activities 3,841,909 591,613
--------------- ----------------
Cash flows from investing activities
Contributions to Trading Cove Associates (600,000) (400,000)
Distributions from Trading Cove Associates 950,000 400,000
Sales and (purchases) of restricted
investments - net 445,859 174,579
--------------- ----------------
Net cash provided by
investing activities 795,859 174,579
--------------- ----------------
Cash flows from financing activities
Redemption of 9-1/2% senior notes (4,031,000) (452,000)
Distributions to member (3,342,762) (1,575,660)
--------------- ----------------
Net cash used in
financing activities (7,373,762) (2,027,660)
--------------- ----------------
Net decrease in cash and cash equivalents (2,735,994) (1,261,468)
Cash and cash equivalents at beginning
of period 3,570,949 4,024,021
-------------- ----------------
Cash and cash equivalents at end of period $ 834,955 $ 2,762,553
=============== ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 5,761,618 $ 5,720,456
=============== ================
The accompanying notes are an integral part of these condensed financial
statements.
6
WATERFORD GAMING, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
-----------
1. Basis of Presentation:
The unaudited condensed interim financial statements have been prepared in
accordance with the policies described in Waterford Gaming, L.L.C.'s (the
"Company") 2001 audited financial statements and should be read in conjunction
with the Company's 2001 audited financial statements within the Company's Annual
Report for the fiscal year ended December 31, 2001 on Form 10-K as filed with
the Securities and Exchange Commission (the "Commission") File No. 333-17795 on
March 28, 2002. The condensed balance sheet at December 31, 2001, contained
herein, was derived from audited financial statements, but does not include all
disclosures contained in the Form 10-K and required by accounting principles
generally accepted in the United States of America. The unaudited condensed
interim financial statements include normal and recurring adjustments which are,
in the opinion of management, necessary to present a fair statement of financial
position as of June 30, 2002, the results of operations for each of the
three-month and six-month periods ended June 30, 2002 and 2001, and statements
of member's deficiency and of cash flows for each of the six-month periods ended
June 30, 2002 and 2001. Results of operations for the period are not necessarily
indicative of the results to be expected for the full year. In March 1999, the
Company with its wholly-owned subsidiary Waterford Gaming Finance Corp.
("Finance") has issued $125 million 9-1/2% senior notes payable which mature
March 15, 2010 (the "125 Million Senior Notes") in connection with the
redemption of the Company's and Finance's $65 million 12-3/4% senior notes (the
"$65 Million Senior Notes").
During December 1999, the Company received a payment on notes it held due from
the Mohegan Tribal Gaming Authority (the "Authority") and a distribution from
Trading Cove Associates ("TCA"). As contemplated in the $125 Million Senior
Notes offering (the "Offering"), the Company distributed approximately
$34,672,000 to Waterford Group, L.L.C. ("Waterford Group") during January 2000.
In connection with the Offering the Company distributed $37,050,000 to Waterford
Group during March 1999.
2. Trading Cove Associates - Equity Investment:
As of June 30, 2002 and 2001, the following summary information relates to TCA.
Total revenues and net income (loss) are for the six-month periods ended June
30, 2002 and 2001:
2002 2001
------------ ------------
Total assets $ 24,339,792 $ 21,719,315
Total liabilities (22,789,721) (19,240,074)
------------- -------------
Partners' capital $ 1,550,071 $ 2,479,241
============= =============
Total revenue $ 27,889,693 $ 22,049,158
============= =============
Net income (loss) $ 122,358 $ (3,100,408)
============= =============
Company's interest:
Trading Cove Associates -
equity investment, beginning
of period $ 5,778,458 $ 7,944,454
Contributions 600,000 400,000
Distributions (950,000) (400,000)
------------ ------------
5,428,458 7,944,454
------------ ------------
Income (loss) from Trading Cove
Associates 61,179 (1,550,204)
Amortization of interests
purchased (220,014) (220,014)
------------ ------------
Equity in income (loss) of
Trading Cove Associates (158,835) (1,770,218)
------------ ------------
Trading Cove Associates -
equity investment, end of period $ 5,269,623 $ 6,174,236
============= ============
7
3. Beneficial Interest - Leisure Resort Technology, Inc.:
On January 6, 1998, the Company paid $5,000,000 to Leisure Resort Technology,
Inc. ("Leisure") whereby Leisure gave up its beneficial interest in 5% of
certain fees and excess cash flows, as defined, of TCA and any other claims it
may have had against the Company, TCA and TCA's partners and former partner. On
August 6, 1997, Leisure, a former partner of TCA, had filed a lawsuit against
TCA, Sun Cove Limited ("Sun Cove"), former partner of TCA, RJH Development Corp.
and the Company and its owners, claiming breach of contract, breach of fiduciary
duties and other matters in connection with the development of the Mohegan Sun
Casino (the "Mohegan Sun") by TCA. The Company agreed to acquire Leisure's
contractual rights and settle all matters. The Company no longer has the
obligation to pay to Leisure 5% of the Organizational and Administrative fee, as
defined in the Organizational and Administrative Services Agreement, and 5% of
TCA's Excess Cash as defined in TCA's partnership agreement. The Company is now
entitled to such cash flow. On March 17, 1999, the Company and Finance's $65
Million Senior Notes were retired and on March 18, 1999, the Company paid an
additional $2,000,000 to Leisure pursuant to the settlement and release
agreement. On January 7, 2000, Leisure filed a subsequent complaint against the
Company and certain other defendants (see Note 6).
The Leisure payments plus associated costs were amortized on a straight-line
basis over the remaining term of TCA's management agreement through March 17,
1999. As a result of the Relinquishment Agreement becoming effective, the
remaining balance will be amortized over 189 months which began March 18, 1999.
Accumulated amortization at June 30, 2002 and 2001 amounts to $2,326,624 and
$1,948,634, respectively.
4. $125 Million 9-1/2% Senior Notes Payable:
On March 17, 1999, the Company and Finance, issued $125 Million Senior Notes.
Payment of the principal of, and interest on, the $125 Million Senior Notes is
subordinate in right of payment to all of their existing and future secured
debts.
Interest is payable semi-annually in arrears on March 15 and September 15 at a
rate of 9-1/2% per annum which commenced on September 15, 1999.
The principal amount of the $125 Million Senior Notes is payable on March 15,
2010. The Company and Finance may elect to redeem the $125 Million Senior Notes
at any time on or after March 15, 2004 at a redemption price equal to a
percentage (105.182% after March 14, 2004 and declining to 104.318% after March
14, 2005, 103.455% after March 14, 2006, 102.591% after March 14, 2007, 101.727%
after March 14, 2008, 100.864% after March 14, 2009, and to 100% after March 14,
2010) of the principal amount thereof plus accrued interest. The $125 Million
Senior Notes provide that upon the occurrence of a Change of Control (as
defined), the holders thereof will have the option to require the redemption of
the $125 Million Senior Notes at a redemption price equal to 101% of the
principal amount thereof plus accrued interest.
If the Company and Finance have any Company Excess Cash, as defined, they must
redeem the $125 Million Senior Notes (on a semi-annual basis on March 15 and
September 15) equal to a percentage (109.500% after March 15, 1999 and declining
to 108.636% after March 14, 2000, 107.773% after March 14, 2001, 106.909% after
March 14, 2002, 106.045% after March 14, 2003, 105.182% after March 14, 2004,
104.318% after March 14, 2005, 103.455% after March 14, 2006, 102.591% after
March 14, 2007, 101.727% after March 14, 2008, 100.864% after March 14, 2009,
and to 100.00% after March 14, 2010). On February 1, 2001 the Company and
Finance had Company Excess Cash, as defined, available for mandatory redemption
of the $125 Million Senior Notes totaling approximately $6,173,000 and
accordingly on March 15, 2001 the Company and Finance made a mandatory
redemption of the $125 Million Senior Notes in the principal amount of $452,000
at the redemption price of 107.773%. On August 1, 2001 the Company and Finance
had Company Excess Cash, as defined, available for mandatory redemption of the
$125 Million Senior Notes totaling approximately $9,765,000, and accordingly on
September 15, 2001 the Company and Finance made a mandatory redemption of the
$125 Million Senior Notes in the principal amount of $3,805,000 at the
redemption price of 107.773%. On February 1, 2002 the Company and Finance had
Company Excess Cash, as defined, available for mandatory redemption of the $125
Million Senior Notes totaling approximately $9,793,000 and accordingly on March
15, 2002 the Company and Finance made a mandatory redemption of the $125 Million
Senior Notes in the principal amount of $4,031,000 at the redemption price of
106.909%. On August 1, 2002 the Company and Finance had Company Excess Cash, as
defined, available for mandatory redemption of the $125 Million Senior Notes
totaling approximately $8,923,000 and accordingly on September 15, 2002 the
Company and Finance will make a mandatory redemption of the $125 Million Senior
Notes in the principal amount of $3,396,000 at the redemption price of 106.909%.
In some circumstances, if either the Company or its partner in TCA exercises the
option to buy or sell partnership interests in TCA, the Company and Finance must
redeem the $125 Million Senior Notes.
The indenture relating to the $125 Million Senior Notes (the "Indenture")
contains certain affirmative and negative covenants customarily contained in
agreements of this type, including without limitation, covenants that restrict,
subject to specified exceptions the Company's and Finance's ability to (i)
borrow money, (ii) pay dividends on stock or make certain other restricted
payments, (iii) use assets as security in other transactions, (iv) make
investments, (v) sell other assets or merge with other companies and (vi) engage
in any business except as currently conducted or contemplated or amend their
relationship with TCA. The Indenture also provides for customary events of
default and the establishment of a restricted investment fund with a trustee for
interest reserves.
The fair value of the Company's long term debt at June 30, 2002 and December 31,
2001 is estimated to be approximately $115,302,000 and $118,897,000,
respectively, based on the quoted market price for the same issue.
8
5. Certain Relationships and Related Transactions
Len Wolman, the Company's Chairman of the Board of Directors and Chief Executive
Officer, is a managing partner of TCA.
On February 9, 1998 the Agreement Relating to Development Services (the
"Development Services Agreement Phase II") was entered into between TCA and Sun
International Management Limited ("SIML"). Pursuant to the Development Services
Agreement Phase II, TCA subcontracted with SIML and SIML agreed to perform those
services assigned to SIML by TCA in order to facilitate TCA's fulfillment of its
duties and obligations to the Authority an instrumentality of the Mohegan Tribe
of Indians of Connecticut (the "Tribe") under the Development Agreement, as
defined. The Development Services Agreement Phase II was subsequently assigned
to Sun Cove. TCA shall pay to Sun Cove a fee, as subcontractor (the "Development
Services Fee Phase II") equal to 3% of the development costs of the Project, as
defined, less all costs incurred by TCA in connection with the Project, as
defined. The Development Services Fee Phase II shall be paid in installments due
on December 31, 1999 and 2000 and on the Completion Date, as defined in the
Development Agreement, with a final payment being made when the actual
development costs of the Project are known. The payment of the Development
Services Fee Phase II will be made from available cash flow, if any, in
accordance with the Amended and Restated Omnibus Termination Agreement. SIML has
further subcontracted (the "Local Construction Services Agreement") with Wolman
Construction, L.L.C. ("Construction") to provide certain of those services
assigned to SIML by TCA. This Local Construction Services Agreement was also
assigned to Sun Cove. The fee payable by Sun Cove to Construction as and when
Sun Cove receives payment from TCA is 20.83% of the Development Services Fee
Phase II. Construction has subcontracted with The Slavik Company for 14.30% of
its fee. On April 26, 2000, July 26, 2000 and January 26, 2001 TCA paid
$3,095,000, $1,238,000 and $6,474,000, respectively, as partial payment
Development Services Fee Phase II. Construction received $644,688, $257,875 and
$1,348,534, respectively, and Construction paid The Slavik Company $92,190,
$36,876 and $192,840 on April 26, 2000, July 26, 2000 and January 26, 2001,
respectively.
Effective July 1, 2002, Sun Cove Limited changed its name to Kerzner Investments
Connecticut, Inc, Sun International Hotels Limited changed its name to Kerzner
International Limited and Sun International Management Limited changed its name
to Kerzner International Management Limited.
On September 28, 1998, the Company entered into an employment agreement with Len
Wolman. The employment agreement provides for a base annual salary of $250,000
reduced by any amounts Mr. Wolman receives as a salary from TCA for such period.
Pursuant to such employment agreement, the Company shall pay to Mr. Wolman an
amount equal to 0.05% of the revenues of the Mohegan Sun including the expansion
to the extent Mr. Wolman has not received such amounts from TCA. On and after
January 1, 2004, the Company shall pay to Mr. Wolman incentive compensation
based on the revenues of the Mohegan Sun, including the expansion, as a
percentage (ranging from .00% to .10%) to be determined using a formula attached
to the employment agreement which compares actual revenues to predetermined
revenue targets. For the six months ended June 30, 2002 and 2001 the Company
paid and incurred $391,668 and $336,269, respectively, as an expense pursuant to
Len Wolman's employment agreement.
For the six months ended June 30, 2002 and 2001 approximately $23,000 and
$464,000, respectively, was paid and incurred by TCA to the principals and
affiliates of the Company as part of TCA's operating expenses.
In 1999, the Company renovated Len Wolman's office space at a cost of $32,413,
of which $30,000 was paid to Wolman Homes Inc., a related party. Cost of the
improvement is being depreciated over five years. Expense for each of the six
months ended June 30, 2002 and 2001, was $3,240.
Waterford Group, Slavik and the other principals of Waterford Group have
interests in and may acquire interests in hotels in southeastern Connecticut
which have or may have arrangements with the Mohegan Sun to reserve and provide
hotel rooms to patrons of the Mohegan Sun
9
6. Contingencies:
Legal Proceedings
- -----------------
On January 6, 1998, Leisure Resort Technology, Inc. ("Leisure") and defendants
Waterford Gaming, L.L.C., Trading Cove Associates, LMW Investments, Inc., and
Slavik Suites, Inc. settled a prior lawsuit brought by Leisure. In connection
with this settlement, Leisure and Trading Cove Associates, Waterford Gaming,
L.L.C., LMW Investments, Inc., and Slavik Suites, Inc. entered into a settlement
and release agreement. Pursuant to this settlement and release agreement,
Waterford Gaming, L.L.C. bought out Leisure's beneficial interest in Trading
Cove Associates.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a
four count complaint naming as defendants Waterford Gaming, L.L.C., Trading Cove
Associates, LMW Investments, Inc., Slavik Suites, Inc., Waterford Group, L.L.C.,
Len Wolman and Mark Wolman (collectively, the "Defendants"). The matter has been
transferred to the complex litigation docket and is pending in Waterbury,
Connecticut. The complaint alleged breach of fiduciary duties, fraudulent
non-disclosure, violation of Connecticut Statutes Section 42-110a, et seq., and
unjust enrichment in connection with the negotiation by certain of the
Defendants of the settlement and release agreement. The complaint also brought a
claim for an accounting. The complaint seeks unspecified legal and equitable
damages. On February 29, 2000, Defendants filed a Motion to Strike and a Motion
for Summary Judgement, each with respect to all claims. The Court granted
Defendants' Motion to Strike in part and denied Defendants' Motion for Summary
Judgement, on October 13, 2000. The Court's order dismissed the claim for an
accounting and the claim under Connecticut Statutes Section 42-110a, et seq. The
Court also struck the alter ego allegations in the complaint against LMW
Investments, Inc., Slavik Suites, Inc., Len Wolman and Mark Wolman. In a
decision dated August 6, 2001, the Court dismissed all claims against LMW
Investments, Inc., Slavik Suites, Inc., Len Wolman and Mark Wolman.
On November 15, 2000, the Company and its co-defendants answered the complaint.
In addition, the Company and Trading Cove Associates asserted counterclaims for
breach of the settlement and release agreement and breach of the implied
covenant of good faith against Leisure and its president, Lee Tyrol. In a
decision dated June 6, 2001, the Court dismissed the counterclaims against Lee
Tyrol.
Discovery has commenced. Pursuant to the current scheduling order, all
depositions are to be completed by January 28, 2003. A trial date has not been
set.
The Company believes that it has meritorious defenses and intends to vigorously
contest the claims in this action and to assert all available defenses. At the
present time, the Company is unable to express an opinion on the likelihood of
an unfavorable outcome or to give an estimate of the amount or range of
potential loss to the Company as a result of this litigation due to the disputed
issues of law and/or facts on which the outcome of this litigation depends and
due to the infancy of both the action and discovery in the action.
10
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Company's condensed financial statements and the notes
thereto included elsewhere herein.
Certain Forward Looking Statements
- ----------------------------------
Certain information included in this Form 10-Q and other materials filed or to
be filed by the Company with the Commission (as well as information included in
oral statements or other written statements made or to be made by the Company)
contains forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements include, but are not limited to,
information relating to the Mohegan Sun including plans for future expansion and
other business development activities, financing sources, the effects of
regulation (including gaming and tax regulation) and competition. Any
forward-looking statements included herein do not purport to be predictions of
future events or circumstances. Forward-looking statements can be identified by,
among other things, the use of forward-looking terminology such as "believes",
"expects", "may", "will", "should", "seeks", "pro forma", "anticipates",
"intends", or the negative of any thereof or other variations thereon or
comparable terminology. Such forward-looking information involves important
risks and uncertainties that could significantly affect anticipated results in
the future and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company.
Development and Operational Activities
- --------------------------------------
The Company is a special purpose Company formed solely for the purpose of
holding its partnership in TCA, a Connecticut general partnership and the
manager (until January 1, 2000) and developer of the Mohegan Sun.
Trading Cove Associates
- -----------------------
TCA was organized on July 27, 1993. The primary purpose of TCA has been to
assist the Tribe and the Authority, in obtaining federal recognition, negotiate
the tribal-state compact with the State of Connecticut, obtain financing for the
development of the Mohegan Sun located on certain Tribal land in Uncasville,
Connecticut, negotiate the Amended and Restated Gaming Facility Management
Agreement (the "Management Agreement") and participate in the design and
development of the Mohegan Sun, which commenced operations on October 12, 1996.
Since the opening of the Mohegan Sun, and until January 1, 2000, TCA had
overseen the Mohegan Sun's day-to-day operations. The TCA partnership will
terminate on December 31, 2040, or earlier, in accordance with the terms of the
partnership agreement. The Company has a 50% voting and profits interest in TCA.
The remaining 50% interest is owned by Sun Cove, an affiliate of Sun
International Hotels Limited ("Sun International").
Trading Cove Associates - Material Agreements
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Relinquishment Agreement
- ------------------------
Under the terms of an agreement (the "Relinquishment Agreement") TCA continued
to manage the Mohegan Sun under the Management Agreement until January 1, 2000.
On December 31, 1999 the Management Agreement terminated and the Tribe assumed
day-to-day management of the Mohegan Sun. Under this Relinquishment Agreement to
compensate TCA for terminating its rights under the Management Agreement and the
Hotel/Resort Management Agreement, the Authority has agreed to pay to TCA 5% of
Revenues, as defined, (the "Relinquishment Fees") generated by the Mohegan Sun
including the significant expansion project (the "Project") during the 15-year
period commencing on January 1, 2000.
The payments under the Relinquishment Agreement will be divided into senior
relinquishment payments and junior relinquishment payments, each of which will
be 2.5% of "Revenues". Revenues are defined as gross gaming revenues (other than
Class II gaming revenue, i.e. bingo) and all other facility revenues (including,
without limitation, hotel revenues, food and beverage sales, parking revenues,
ticket revenues and other fees or receipts from the convention/events center in
the expansion and all rental or other receipts from lessees, licensees and
concessionaires operating in the facility but not the gross receipts of such
lessees, licensees and concessionaires). Revenues exclude revenues generated by
any other expansion of the Mohegan Sun. Senior relinquishment payments will be
payable quarterly in arrears commencing on April 25, 2000 for the quarter ended
March 31, 2000, and the junior relinquishment payments will be payable
semi-annually in arrears commencing on July 25, 2000 for the six months ended
June 30, 2000, assuming sufficient funds are available after satisfaction of the
Tribe's senior obligations.
For the quarter and six months ended June 30, 2002, total Relinquishment Fees
earned were $20,438,439 and $26,666,998, respectively. For the quarter and six
months ended June 30, 2001, total Relinquishment Fees earned were $16,036,421
and $21,127,043, respectively. Relinquishment Fees are based upon Revenues
reported to TCA by the Authority.
11
Development Agreement
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TCA and the Authority entered into a development services agreement on February
7, 1998. Under this "Development Agreement", TCA agreed to oversee the design,
construction, furnishing, equipping and staffing of the Project for a $14.0
million development fee (the "Development Fee"). On May 24, 2000 TCA and the
Authority agreed that TCA had performed and completed all its obligations
relating to the staffing of the Project and that TCA has no further obligations
relating to the staffing of the Project. The first phase of the Project,
including the Casino of the Sky, the Shops at Mohegan Sun and the 10,000-seat
Mohegan Sun Arena opened in September 2001. In April 2002, 734 of the
1,200-hotel rooms in the 34-story luxury hotel as well as the meeting and
convention space and spa opened. The balance of the 1,200-hotel rooms opened
during June 2002.
The Authority will pay the Development Fee to TCA quarterly beginning on January
15, 2000 until the Completion Date, as defined in the Development Agreement, of
the Project based on incremental completion of the Project as of each payment
date. A summary of the quarterly Development Fee payments received by TCA in
accordance with the terms of the Development Agreement is as follows:
January 15, 2000 $ 1,372,000
April 20, 2000 896,000
July 17, 2000 1,260,000
October 13, 2000 1,372,000
January 23, 2001 588,000
April 16, 2001 1,582,000
July 20, 2001 2,212,000
October 17, 2001 1,974,000
January 25, 2002 1,260,000
April 22, 2002 413,000
July 19, 2002 581,000
-----------
$13,510,000
===========
On February 9, 1998 the Development Services Agreement Phase II was entered into
between TCA and SIML. Pursuant to the Development Services Agreement Phase II,
TCA subcontracted with SIML and SIML agreed to perform those services assigned
to SIML by TCA in order to facilitate TCA's fulfillment of its duties and
obligations to the Authority under the Development Agreement. The Development
Services Agreement Phase II was subsequently assigned to Sun Cove. TCA shall pay
to Sun Cove a fee, as subcontractor (the "Development Services Fee Phase II")
equal to 3% of the development costs of the Project, less all costs incurred by
TCA in connection with the Project. The Development Services Fee Phase II shall
be paid in installments due on December 31, 1999 and 2000 and on the Completion
Date, as defined in the Development Agreement, with a final payment being made
when the actual development costs of the Project are known. The payment of the
Development Services Fee Phase II will be made from available cash flow of TCA,
if any, subordinate to certain other fees as described below under the heading
"Amended and Restated Omnibus Termination Agreement".
SIML has further subcontracted with Construction (the "Local Construction
Services Agreement") to provide certain of those services assigned to SIML by
TCA. This agreement was also assigned to Sun Cove. Sun Cove shall pay 20.83% of
the Development Services Fee Phase II as and when Sun Cove receives payment from
TCA. Construction has subcontracted with The Slavik Company for 14.30% of its
fee.
Certain Risk Factors
- --------------------
Lack of Operations; Dependance on the Mohegan Sun
The Company has one primary source of revenue and cash flow: payments from TCA.
The Company does not conduct any business operations other than in connection
with its role as a managing general partner of TCA and activities incidental to
the issuance of the $125 Million Senior Notes and the making of restricted and
temporary investments. The Company is prohibited by the terms of the Indenture
from engaging in any other business activities. The Company intends to fund its
operating, debt service and capital needs primarily from cash flows from TCA and
from cash flows (dividend and interest) from restricted and temporary
investments.
TCA has two current sources of revenue and cash flows, Relinquishment Fees and
the Development Fee. There can be no assurance that the Mohegan Sun will
continue to generate sufficient revenues for the Authority to be profitable or
to service its debt obligations, or to pay Relinquishment Fees and Development
Fee. The Company is entirely dependent upon the performance of the Mohegan Sun,
which is subject to matters over which TCA and the Company have no control
including, without limitation, general economic conditions, effects of
competition, political, regulatory and other factors, and the actual number of
gaming customers and the amount wagered.
Although TCA is entitled to a $14.0 million Development Fee under the
Development Agreement, it has entered into a subcontract with Sun Cove who has
subcontracted with affiliates of the Company to provide certain of the services
required by such agreement and TCA is to pay such subcontractors a Development
Services Fee Phase II and incur expenses equal to 3% of the total cost of the
Project. On October 13, 2000 the Tribe approved a $160 million increase to the
original budget (excluding capitalized interest) of $800 million for the
Project. In a press release dated May 5, 2002 the Tribe indicated that the cost
of completing the Project is estimated to be $1.0 billion (excluding capitalized
interest) which represents an increase of $40 million over the previous estimate
of $960 million. Based upon the latest estimated cost of completing the Project
of $1.0 billion (excluding capitalized interest) such Development Services Fee
Phase II and expenses are expected to be approximately $30 million. Such
Development Services Fee Phase II are only payable to the extent of available
cash flow. Thus, ultimately TCA may pay more in Development Services Fee Phase
II to its subcontractors and expenses than it will receive under the Development
Agreement. If the total estimated costs of the Project of $1.0 billion
(excluding capitalized interest) increase, then the total Development Services
Fee Phase II and expenses paid by TCA will increase proportionately, which
reduces the cash flow distributable to the Company.
While the Company expects its future operating cash flows will be sufficient to
cover its expenses, including interest costs, the Company cannot give any
assurance that it will be able to do so.
12
Overview of Current and Future Cash Flows
- -----------------------------------------
The Company expects to fund its operating, debt service and capital needs from
cash flows from the Company's share of payments from TCA, and from the Company's
available cash. Based upon the Company's anticipated future operations,
management believes that available cash flow will be sufficient to meet the
Company's anticipated requirements for future operating expenses, future
scheduled payments of principal and interest on the $125 Million Senior Notes
and additional investments in TCA that may be required in connection with the
Project. No assurance, however, can be given that the operating cash flow will
be sufficient for that purpose.
Sources of Revenues and Cash Flows
- ----------------------------------
The Company has one primary source of revenue and cash flow: payments from TCA.
The Company anticipates regular payments from TCA based on the results of the
Mohegan Sun and Relinquishment Fees and Development Fee payments by the
Authority.
Distribution on the Company's Partnership Interest in TCA
- ---------------------------------------------------------
TCA's major sources of revenues for 2002 are Relinquishment Fees and Development
Fee which are both payable by the Authority.
For the six months ended June 30, 2002 the Company received $1,821,000 from TCA
and $9,390,000 was due from TCA which represents the Company's share under the
Amended and Restated Omnibus Termination Agreement of approximately $26,667,000
in Relinquishment Fees earned by TCA pursuant to the Relinquishment Agreement
for the same period and $994,000 in Development Fee earned by TCA pursuant to
the Development Agreement for the same period. For the six months ended June 30,
2001 the Company received $2,470,000 from TCA and $8,049,158 was due from TCA
which represents the Company's share under the Amended and Restated Omnibus
Termination Agreement of approximately $21,127,000 in Relinquishment Fees earned
by TCA pursuant to the Relinquishment Agreement for the same period and
$3,794,000 in Development Fee earned by TCA pursuant to the Development
Agreement for the same period.
Amended and Restated Omnibus Termination Agreement
- --------------------------------------------------
Effective March 18, 1999, the Amended and Restated Omnibus Termination Agreement
(the " Amended and Restated Omnibus Termination Agreement") was entered into by
TCA, Sun International, the Company, SIML, LMW, Sun Cove, Slavik and
Construction; which (i) terminated the memorandum of understanding dated
February 7, 1998; and (ii) effective January 1, 2000 terminated a) the Amended
and Restated Omnibus Financing Agreement, b) completion guarantee and investment
banking and financing arrangement fee agreement (the "Financing Arrangement
Agreement"); c) the management services agreement; d) the organizational and
administrative services agreement; e) the marketing services agreement; and f) a
letter agreement relating to expenses dated October 19, 1996.
In consideration for the termination of such agreements, TCA will use its cash
to pay the following obligations in the priority set forth below:
(a) First, to pay all unpaid amounts which may be due under the
terminated letter agreement and to pay certain affiliates of the
Company and to Sun Cove a percentage of an annual fee of $2.0 million
less the actual expenses incurred by TCA. Such annual fee shall be
payable in equal quarterly installments beginning March 31, 2000 and
ending December 31, 2014. For the six months ended June 30, 2002 and
2001, $0 and $876,389 ($438,194 to Sun Cove and $438,195 to affiliates
of the Company), respectively, had been paid and incurred by TCA in
terms of the first priority.
(b) Second, to return all capital contributions made by the partners
of TCA after September 29, 1995. TCA anticipates making capital calls
to fund expenses related to the development of the Project, and these
capital calls will be repaid, based on cash flow, in the quarter
following the quarter in which the capital call was made. From January
1, 2000 to June 30, 2002 these capital contributions aggregated
$6,300,000. From January 1, 2000 to June 30, 2002 $5,500,000 has been
repaid to the partners of TCA, 50% to the Company and 50% to Sun Cove.
As of June 30, 2002, $800,000 in capital contributions remained
outstanding. On July 26, 2002, a cash distribution of $400,000 was
made to each partner.
(c) Third, to pay any accrued amounts for obligations performed prior to
January 1, 2000 under the Financing Arrangement Agreement. All
required payments were made during 2000.
(d) Fourth, to make the payments set forth in the agreements relating to
the Development Services Agreement Phase II and the Local Construction
Services Agreement. No payments are required or due at June 30, 2002.
The contingent obligation at June 30, 2002 was approximately
$10,221,000.
13
(e) Fifth, to pay Sun Cove an annual fee of $5.0 million payable in equal
quarterly installments of $1.25 million beginning March 31, 2000 and
ending December 31, 2006. For each of the six months ended June 30,
2002 and 2001, $2,500,000 had been paid and incurred by TCA in terms
of the fifth priority.
(f) Sixth, to pay any accrued amounts for obligations performed with
respect to periods prior to January 1, 2000 under the management
services agreement, the organizational and administrative services
agreement and the marketing services agreement. For the six months
ended June 30, 2001, $20,638,316,000 ($10,319,158 to SIML and
$10,319,158 to the Company) had been paid and incurred by TCA in terms
of the sixth priority. The final required payments were made during
2001.
(g) Seventh, for the period beginning March 31, 2000 and ending December
31, 2014, to pay each of Sun Cove and the Company twenty-five percent
(25%) of the relinquishment payments. For the six months ended June
30, 2002 and 2001, $22,022,000 ($11,011,000 to Sun Cove and
$11,011,000 to the Company)and $0, respectively, had been paid and
incurred by TCA in terms of the seventh priority. The contingent
obligation at June 30, 2002 was approximately $15,214,000.
(h) Eighth, to distribute all excess cash.
In addition, TCA shall not make any distributions pursuant to the Amended and
Restated Omnibus Termination Agreement until it has annually distributed to its
partners pro rata, the amounts related to its partners tax obligations as
described in Section 3.03a(1) of the Partnership Agreement less twice the amount
of all other funds paid or distributed to the Company during such year pursuant
to the Amended and Restated Omnibus Termination Agreement.
To the extent TCA does not have adequate cash to make the payments pursuant to
the Amended and Restated Omnibus Termination Agreement, such amount due shall be
deferred without the accrual of interest until TCA has sufficient cash to pay
them.
Results of Operations
- ---------------------
Comparison of Operating Results for the Quarters ended June 30, 2002
- --------------------------------------------------------------------
and 2001
- --------
Total revenue for the three months ended June 30, 2002 was $9,521,820 compared
with $8,380,130 for the three months ended June 30, 2001. This increase was
primarily attributable to an increase in Revenues of the Mohegan Sun which
resulted in greater Relinquishment Fees payment to TCA and offset by a decrease
in Development Fee payment to TCA and by the timing of payments pursuant the
Amended and Restated Omnibus Termination Agreement. 25% of relinquishment
payments - Trading Cove Associates, as detailed under point (g) of the table set
forth above under "Amended and Restated Omnibus Termination Agreement",
increased by $9,390,000 and organizational and administrative fee income -
Trading Cove Associates, as detailed under point (f) of the table set forth
above under "Amended and Restated Omnibus Termination Agreement", decreased by
$8,049,158. In addition interest and dividend income decreased by $199,152.
Total expenses for the quarter ended June 30, 2002 was $3,170,187 compared with
$3,338,211 for the quarter ended June 30, 2001. Interest expense decreased by
$186,105 due primarily to the redemption of the $125 Million Senior Notes in the
principal amounts of $3,805,000 and $4,031,000 on September 15, 2001 and March
15, 2002, respectively, salaries - related parties increased by $32,642 due to
the increase in Revenues of the Mohegan Sun and general and administrative costs
decreased by $14,561 (primarily attributable to a decrease in legal and other
expenses related to the defense of the Leisure litigation, as detailed under
Part II Other Information: Item I Legal Proceedings, totaling approximately
$19,700, by a decrease in other legal expenses of approximately $4,600 and
offset by an increase in insurance expense of approximately $5,100 and by an
increase in accounting fees of approximately $4,600).
Equity in income (loss) of Trading Cove Associates was $(855,335) for the three
months ended June 30, 2002 compared with $(1,040,981) for the three months ended
June 30, 2001 as a result of the loss from Trading Cove Associates of $745,328
for the three months ended June 30, 2002 compared with a loss of $930,974 for
the three months ended June 30, 2001 due to payments pursuant to the Amended and
Restated Omnibus Termination Agreement exceeding revenues during the period.
As a result of the foregoing factors the Company experienced net income of
$5,496,298 for the quarter ended June 30, 2002 compared with net income of
$4,000,938 for the quarter ended June 30, 2001.
Comparison of Operating Results for the Six Months ended June 30, 2002
- ---------------------------------------------------------------------
and 2001.
- ---------
Total revenue for the six months ended June 30, 2002 was $11,337,547 compared
with $11,121,606 for the six months ended June 30, 2001. This increase was
primarily attributable to an increase in Revenues of the Mohegan Sun which
resulted in greater Relinquishment Fees payments to TCA and offset by a decrease
in Development Fee payments to TCA and by the timing of payments pursuant to the
Amended and Restated Omnibus Termination Agreement. 25% of relinquishment
payments - Trading Cove Associates, as detailed under point (g) of the table set
forth above under "Amended and Restated Omnibus Termination Agreement",
increased by $11,011,000 and organizational and administrative fee income -
Trading Cove Associates, as detailed under point (f) of the table set forth
above under "Amended and Restated Omnibus Termination Agreement", decreased by
$10,319,158. In addition interest and dividend income decreased by $475,901.
Total expenses for the six months ended June 30, 2002 was $6,662,258 compared
with $6,649,661 for the six months ended June 30, 2001. Interest expense
decreased by $58,952 due primarily to the redemption of the $125 Million Senior
Notes in the principal amounts of $3,805,000 and $4,031,000 on September 15,
2001 and March 15, 2002, respectively, salaries - related parties increased by
$55,399 due to the increase in Revenues of the Mohegan Sun and general and
administrative costs increased by $16,150 (primarily attributable to an increase
in insurance expense of approximately $9,500, by an increase in bank sweep fees
of approximately $9,400, by an increase in accounting fees of approximately
$5,100 and offset by a decrease in other legal expenses of approximately
$8,900).
Equity in income (loss) of Trading Cove Associates was $(158,835) for the six
months ended June 30, 2002 compared with $(1,770,218) for the six months ended
June 30, 2001 as a result of income from Trading Cove Associates of $61,179 for
the six months ended June 30, 2002, due to revenues exceeding payments pursuant
to the Amended and Restated Omnibus Termination Agreement during the period,
compared with a loss of $1,550,204 for the six months ended June 30, 2001, due
to payments pursuant to the Amended and Restated Omnibus Termination Agreement
exceeding revenues during the period.
As a result of the foregoing factors the Company experienced net income of
$4,516,454 for the six months ended June 30, 2002 compared with net income of
$2,701,727 for the six months ended June 30, 2001.
14
Liquidity and Capital Resources
- -------------------------------
The initial capital of the Company consists of the partnership interests in TCA
contributed by Slavik and LMW in forming the Company. In connection with the
offering of the $65 Million Senior Notes, the Company used approximately $25.1
million to purchase from Sun International $19.2 million in principal amount of
Authority subordinated notes plus accrued and unpaid interest and subordinated
notes fee amounts. In addition, TCA distributed approximately $850,000 in
principal amount of Authority subordinated notes to the Company. During
September 1997 and on October 12, 1998 and 1999, the Company purchased from Sun
International $2.5 million Authority subordinated notes plus accrued and unpaid
interest and completion guarantee fee amounts (total cost approximately $2.8
million for each transaction).
On January 6, 1998 the Company paid $5,000,000 to Leisure whereby Leisure gave
up its beneficial interest in 5% of the organizational and administrative fee
and excess cash of TCA and any other claims it may have had against the Company,
TCA and TCA's partners and former partner.
In connection with the Offering of the $125 Million Senior Notes, the Company
used approximately $72 million to repurchase its $65 Million Senior Notes,
distributed approximately $37 million to its new parent, Waterford Group and
paid the final $2 million to Leisure.
On December 30, 1999, the Authority paid to the holders of the Authority
subordinated notes, an amount to satisfy all obligations of such Authority
subordinated notes. The Company received $44,403,517 from the Authority.
On December 30, 1999, TCA distributed $10,536,543 to its partners. The Company
received $5,268,272.
On January 4, 2000 in accordance with the terms of the Indenture and the
Security and Control Agreement dated as of March 17, 1999 between the Company
and Finance and State Street Bank and Trust Company, $15,000,000 was transferred
to restricted investments ("Interest Reserve Account").
On January 4, 2000 also in accordance with the terms of the Indenture, the
Company distributed $34,671,789 to its sole member Waterford Group.
During 1999, 2000, 2001, on January 11, 2002 and on June 10, 2002, the Company
distributed $886,285, $3,059,393, $1,739,660, $1,416,900 and $1,925,862
respectively to Waterford Group as tax distributions, in accordance with the
terms of the Indenture.
Accordingly, after taking into consideration net income (loss) since inception
the Company has a member's deficit of approximately $65,804,640 and $70,687,177
at June 30, 2002 and 2001, respectively.
For the six months ended June 30, 2002 and 2001, net cash provided by operating
activities (as shown in the Condensed Statements of Cash Flows) was $3,841,909
and $591,613, respectively.
Current assets decreased from $38,127,059 at December 31, 2001 to $36,019,845 at
June 30, 2002. The decrease was caused primarily by the redemption on March 15,
2002 of $125 Million Senior Notes in the principal amount of $4,031,000 by the
scheduled semi-annual payment of interest on March 15, 2002 on the $125 Million
Senior Notes in the amount of approximately $5,483,000 and offset by
approximately $3,842,000 of cash provided by operations and by the distributions
by TCA in terms of the Amended and Restated Omnibus Termination Agreement.
Current liabilities decreased from $3,400,556, at December 31, 2001 to
$3,265,551 at June 30, 2002. The decrease was primarily attributable to a
decrease in accrued interest on senior notes payable of approximately $112,800
and by a decrease in accrued expenses and accounts payable of approximately
$22,200 (primarily attributable to a decrease in the amount due for legal and
other expenses related to the defense of the Leisure litigation, as detailed
under Part II Other Information: Item I Legal Proceedings of approximately
$29,600, and by a decrease in the amount due for other legal expenses of
approximately $2,800 and offset by an increase in the amount due for salaries -
related parties of approximately $3,300 and by an increase in the amount due for
accounting services of approximately $9,600.
For the six months ended June 30, 2002 and 2001, net cash provided by investing
activities (as shown in the Condensed Statements of Cash Flows) was $795,859 and
$174,579, respectively. The net cash provided by investing activities in 2002
was primarily the result of sales and (purchases) of restricted investments -
net of approximately $445,900, distributions from TCA of $950,000 and offset by
contributions to TCA of $600,000 (to fund certain of TCA's development expenses
in connection with the Project at the Mohegan Sun). The net cash provided by
investing activities in 2001 was primarily the result of sales and (purchases)
of restricted investments - net of approximately $174,600, distributions from
TCA of $400,000 and offset by contributions to TCA of $400,000 (to fund certain
of TCA's development expenses in connection with the Project at the Mohegan
Sun).
The Company anticipates that up to $1,350,000 in additional contributions may
have to be made to TCA (to fund certain of TCA's development expenses in
connection with the Project at the Mohegan Sun). As of June 30, 2002 $4,150,000
had been contributed by the Company to TCA to fund certain of TCA's development
expenses in connection with the Project at the Mohegan Sun.
For the six months ended June 30, 2002 and 2001, net cash used in financing
activities (as shown in the Condensed Statements of Cash Flows) was $7,373,762
and $2,027,660, respectively. The net cash used in financing activities in 2002
was primarily the result of the redemption of the $125 Million Senior Notes in
the principal amount of $4,031,000 and by tax distributions to the Company's
sole member of $3,342,762. The net cash used in financing activities in 2001 was
primarily the result of the redemption of the $125 Million Senior Notes, in the
principal amount of $452,000 and by tax distributions to the Company's sole
member of $1,575,660.
15
The Company and Finance are required to make a mandatory redemption on September
15 and March 15, of each year, which began September 15, 1999, of $125 Million
Senior Notes using any Company Excess Cash, as defined in the Indenture, which
the Company and Finance may have as of the preceding August 1 and February 1. On
August 1, 1999 the Company and Finance had Company Excess Cash, as defined in
the Indenture, available for mandatory redemption of the $125 Million Senior
Notes totaling approximately $8,983,000, and accordingly on September 15, 1999
the Company and Finance made a mandatory redemption of $125 Million Senior Notes
in the principal amount of $2,841,000 at the redemption price of 109.50%. On
February 1, 2000 the Company and Finance had Company Excess Cash, as defined in
the Indenture, available for mandatory redemption of the $125 Million Senior
Notes totaling approximately $8,276,000, and accordingly on March 15, 2000 the
Company and Finance made a mandatory redemption of $125 Million Senior Notes in
the principal amount of $2,277,000 at the redemption price of 108.636%. On
August 1, 2000 the Company and Finance had Company Excess Cash, as defined,
available for mandatory redemption of the $125 Million Senior Notes, totaling
approximately $5,902,000, and accordingly on September 15, 2000 the Company and
Finance made a mandatory redemption of $125 Million Senior Notes in the
principal amount of $191,000 at the redemption price of 108.636%. On February 1,
2001 the Company and Finance had Company Excess Cash, as defined, available for
mandatory redemption of the $125 Million Senior Notes totaling approximately
$6,173,000 and accordingly on March 15, 2001 the Company and Finance made a
mandatory redemption of the $125 Million Senior Notes in the principal amount of
$452,000 at the redemption price of 107.773%. On August 1, 2001 the Company and
Finance had Company Excess Cash, as defined in the Indenture, available for
mandatory redemption of the $125 Million Senior Notes totaling approximately
$9,765,000, and accordingly on September 15, 2001 the Company and Finance made a
mandatory redemption of $125 Million Senior Notes in the principal amount of
$3,805,000 at the redemption price of 107.773%. On February 1, 2002 the Company
and Finance had Company Excess Cash, as defined, available for mandatory
redemption of the $125 Million Senior Notes totaling approximately $9,793,000,
and accordingly on March 15, 2002 the Company and Finance made a mandatory
redemption of the $125 Million Senior Notes in the principal amount of
$4,031,000, at the redemption price of 106.909%. On August 1, 2002 the Company
and Finance had Company Excess Cash, as defined, available for mandatory
redemption of the $125 Million Senior Notes totaling approximately $8,923,000
and accordingly on September 15, 2002 the Company and Finance will make a
mandatory redemption of the $125 Million Senior Notes in the principal amount of
$3,396,000 at the redemption price of 106.909%.
If certain specified conditions are met, the Indenture allows the Company to
make a dividend (a "Permitted Dividend") to Waterford Group in an amount not to
exceed the amount by which the amount in the Interest Reserve Account (as
defined in the Indenture) exceeds the IRA Required Balance (as defined in the
Indenture). Such a dividend is payable following the Mohegan Note Transfer (as
defined in the Indenture), but in no event prior to Completion (as defined in
the Indenture), and if (a) no default or event of default under the Indenture is
continuing at the time of, or would occur after giving pro forma effect to, such
dividend and (b) on the date such dividend is made the Consolidated Coverage
Ratio (as defined in the Indenture) for the two full fiscal quarters ended
immediately prior to the date such dividend is paid, after giving effect on a
pro forma basis to such dividend, would be greater than or equal to 2 to 1. The
Company believes that the conditions set forth in clause (a) above have been met
and anticipates that the conditions set forth under clause (b) above will be met
during 2002. Upon the satisfaction of each of the foregoing conditions in 2002,
the Company anticipates making a Permitted Dividend in the amount of $15
million.
The Company expects to fund its operating, debt service and capital needs from
cash flows from the Company's share of payments from TCA, and from the Company's
available cash. Based upon the Company's anticipated future operations,
management believes that available cash flow will be sufficient to meet the
Company's anticipated requirements for future operating expenses, future
scheduled payments of principal and interest on the $125 Million Senior Notes
and additional investments in TCA that may be required by TCA to fund certain of
TCA's development expenses in connection with the Project at the Mohegan Sun. No
assurance, however, can be given that the operating cash flow will be sufficient
for that purpose.
Effective July 1, 2002, Sun Cove Limited changed its name to Kerzner Investments
Connecticut, Inc, Sun International Hotels Limited changed its name to Kerzner
International Limited and Sun International Management Limited changed its name
to Kerzner International Management Limited.
Item 3 -- Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. Changes in these factors could cause
fluctuations in earnings and cash flows.
For fixed rate debt, changes in interest rates generally affect the fair market
value of the debt instrument, but not earnings or cash flows. Therefore,
interest rate risk and changes in the fair market value of fixed rate debt
should not have a significant impact on earnings or cash flows until such debt
is refinanced, if necessary. For variable rate debt, changes in interest rates
generally do not impact the fair market value of the debt instrument, but do
affect future earnings and cash flows. The Company did not have any variable
rate debt outstanding at June 30, 2002 and December 31, 2001. The fair market
value of the Company's long-term debt at June 30, 2002 and December 31, 2001 is
estimated to be approximately $115,302,000 and $118,897,000, respectively, based
on the quoted market price for the same issue.
The Company is exposed to market risks from fluctuations in interest rates and
the effects of those fluctuations on market values of the Company's cash
equivalents and restricted investments. Cash equivalents generally consist of
overnight investments while the restricted investments at June 30, 2002 are
principally comprised of an investment in a Federal National Mortgage
Association Discount Note which was purchased at a discount of 1.87%, has a face
value of $15,094,000 and matures July 12, 2002, and an investment in a Federal
Home Loan Bank Discount Note which was purchased at a discount of 2.01%, has a
face value of $10,600,000 and matures September 13, 2002. These investments are
not significantly exposed to interest rate risk, except to the extent that
changes in interest rates will ultimately affect the amount of interest income
earned and cash flow from these investments.
The Company does not currently have any derivative financial instruments in
place to manage interest costs, but that does not mean that the Company will not
use them as a means to manage interest rate risk in the future.
The Company does not use foreign currency exchange forward contracts or
commodity contracts and does not have foreign currency exposure in its
operations.
16
Part II -- OTHER INFORMATION
- ----------------------------
Item 1 -- Legal Proceedings:
On January 6, 1998, Leisure Resort Technology, Inc. ("Leisure") and defendants
Waterford Gaming, L.L.C., Trading Cove Associates, LMW Investments, Inc., and
Slavik Suites, Inc. settled a prior lawsuit brought by Leisure. In connection
with this settlement, Leisure and Trading Cove Associates, Waterford Gaming,
L.L.C., LMW Investments, Inc., and Slavik Suites, Inc. entered into a settlement
and release agreement. Pursuant to this settlement and release agreement,
Waterford Gaming, L.L.C. bought out Leisure's beneficial interest in Trading
Cove Associates.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a
four count complaint naming as defendants Waterford Gaming, L.L.C., Trading Cove
Associates, LMW Investments, Inc., Slavik Suites, Inc., Waterford Group, L.L.C.,
Len Wolman and Mark Wolman (collectively, the "Defendants"). The matter has been
transferred to the complex litigation docket and is pending in Waterbury,
Connecticut. The complaint alleged breach of fiduciary duties, fraudulent
non-disclosure, violation of Connecticut Statutes Section 42-110a, et seq., and
unjust enrichment in connection with the negotiation by certain of the
Defendants of the settlement and release agreement. The complaint also brought a
claim for an accounting. The complaint seeks unspecified legal and equitable
damages. On February 29, 2000, Defendants filed a Motion to Strike and a Motion
for Summary Judgement, each with respect to all claims. The Court granted
Defendants' Motion to Strike in part and denied Defendants' Motion for Summary
Judgement, on October 13, 2000. The Court's order dismissed the claim for an
accounting and the claim under Connecticut Statutes Section 42-110a, et seq. The
Court also struck the alter ego allegations in the complaint against LMW
Investments, Inc., Slavik Suites, Inc., Len Wolman and Mark Wolman. In a
decision dated August 6, 2001, the Court dismissed all claims against LMW
Investments, Inc., Slavik Suites, Inc., Len Wolman and Mark Wolman.
On November 15, 2000, the Company and its co-defendants answered the complaint.
In addition, the Company and Trading Cove Associates asserted counterclaims for
breach of the settlement and release agreement and breach of the implied
covenant of good faith against Leisure and its president, Lee Tyrol. In a
decision dated June 6, 2001, the Court dismissed the counterclaims against Lee
Tyrol.
Discovery has commenced. Pursuant to the current scheduling order, all
depositions are to be completed by January 28, 2003. A trial date has not been
set.
The Company believes that it has meritorious defenses and intends to vigorously
contest the claims in this action and to assert all available defenses. At the
present time, the Company is unable to express an opinion on the likelihood of
an unfavorable outcome or to give an estimate of the amount or range of
potential loss to the Company as a result of this litigation due to the disputed
issues of law and/or facts on which the outcome of this litigation depends and
due to the infancy of both the action and discovery in the action.
Item 2 -- Changes in Securities:
None
Item 3 -- Defaults upon Senior Securities:
None
Item 4 -- Submission of Matters to a Vote of Security Holders:
None
Item 5 -- Other Information:
None
17
Item 6 -- Exhibits and Reports on Form 8-K:
(a) Exhibits
--------
Exhibit No. Description
3.1 Certificate of Formation, as amended, of Waterford
Gaming, LLC (i)
3.2 Certificate of Incorporation of Waterford Gaming
Finance Corp. (i)
3.3 Bylaws of Waterford Gaming Finance
Corp. (i)
4.1 Indenture, dated as of November 8, 1996, between
Waterford Gaming, L.L.C. and Waterford Gaming
Finance Corp., the issuers, and Fleet National
Bank, as trustee, relating to $65,000,000 12-3/4%
Senior Notes due 2003. (i)
4.1.1 First Supplemental Indenture, dated as of March 4,
1999, among Waterford Gaming, L.L.C. and Waterford
Gaming Finance, Corp., as issuers, and State
Street Bank and Trust Company, as trustee,
relating to $65,000,000 12-3/4% Senior Notes due
2003. (vi)
4.2 Indenture, dated as of March 17, 1999, among
Waterford Gaming, L.L.C. and Waterford Gaming
Finance Corp., as issuers, and State Street Bank
and Trust Company, as trustee, relating to
$125,000,000 9-1/2% Senior Notes
due 2010. (vi)
4.3 Security and Control Agreement, dated as of March
17, 1999, among Waterford Gaming, L.L.C. and
Waterford Gaming Finance Corp., as pledgors and
State Street Bank and Trust Company, as securities
intermediary. (vi)
4.4 Specimen Form of 9-1/2% Senior Notes due 2010
(included in Exhibit 4.2). (vi)
10.1 Omnibus Financing Agreement, dated as of September
21, 1995, between Trading Cove Associates and Sun
International Hotels Limited. (i)
10.2 First Amendment to the Omnibus Financing
Agreement, dated as of October 19, 1996, among
Trading Cove Associates, Sun International Hotels
Limited and Waterford Gaming, L.L.C. (i)
10.2.1 Amended and Restated Omnibus Financing Agreement
dated September 10, 1997 (ii)
10.2.2 Omnibus Termination Agreement, dated as of March
18, 1999, among Sun International Hotels Limited,
Trading Cove Associates, Waterford Gaming,
L.L.C., Sun International Management Limited, LMW
Investments, Inc., Sun Cove Limited, Slavik
Suites, Inc., and Wolman Construction, L.L.C.(vi)
10.2.3 Amended and Restated Omnibus Termination
Agreement, dated as of January 1, 2000 and
effective as of March 18, 1999, among Sun
International Hotels Limited, Trading Cove
Associates, Waterford Gaming, L.L.C., Sun
International Management Limited, LMW
Investments, Inc., Sun Cove Limited, Slavik
Suites, Inc., and Wolman Construction, L.L.C.(vii)
10.3 Amended and Restated Partnership Agreement of
Trading Cove Associates, dated as of September 21,
1994, among Sun Cove Limited, RJH Development
Corp., Leisure Resort Technology, Inc., Slavik
Suites , Inc., and LMW Investments, Inc. (i)
10.4 First Amendment to Amended and Restated
Partnership Agreement of Trading Cove Associates,
dated as of October 22, 1996, among Sun Cove
Limited, Slavik Suites, Inc., RJH Development
Corp., LMW Investments, Inc. and Waterford Gaming,
L.L.C. (i)
10.5 Purchase Agreement, dated as of March 10, 1999,
among Waterford Gaming, L.L.C., Waterford Gaming
Finance Corp., Bear, Stearns & Co., Inc., Merrill
Lynch, Pierce, Fenner and Smith Inc. and Salomon
Smith Barney. (vi)
10.5.1 Agreement with Respect to Redemption or Repurchase
of Subordinated Notes, dated September 10,
1997 (ii)
18
10.6 Amended and Restated Limited Liability Company
Agreement of Waterford Gaming, L.L.C., dated as of
March 17, 1999 by Waterford Group, L.L.C. (vi)
10.7 Note Purchase Agreement, dated as of October 19,
1996, among Sun International Hotels Limited,
Waterford Gaming, L.L.C. and Trading Cove
Associates. (i)
10.8 Note Purchase Agreement, dated as of September 29,
1995, between the Mohegan Tribal Gaming Authority
and Sun International Hotels Limited relating to
the Subordinated Notes. (i)
10.9 Management Agreement, dated as of July 28, 1994,
between the Mohegan Tribe of Indians of
Connecticut and Trading Cove Associates. (i)
10.10 Management Services Agreement, dated September 10,
1997. (ii)
10.11 Development Services Agreement, dated September
10, 1997. (ii)
10.12 Subdevelopment Services Agreement, dated September
10, 1997. (ii)
10.13 Completion Guarantee and Investment Banking and
Financing Arrangement Fee Agreement, dated
September 10, 1997. (ii)
10.14 Settlement and Release Agreement, dated January 6,
1998, by and among Leisure Resort Technology,
Inc., Lee R. Tyrol, Trading Cove Associates,
Slavik Suites, Inc., LMW Investments, Inc., RJH
Development Corp., Waterford Gaming, L.L.C. and
Sun Cove Limited. (iii)
10.15 Waiver and Acknowledgment of Noteholder. (iv)
10.16 Relinquishment Agreement, dated February 7, 1998,
between the Mohegan Tribal Gaming Authority and
Trading Cove Associates. (v)
10.17 Development Services Agreement, dated February 7,
1998, between the Mohegan Tribal Gaming Authority
and Trading Cove Associates. (v)
10.18 Agreement, dated September 28, 1998, by and among,
Waterford Gaming, L.L.C., Slavik Suites, Inc., LMW
Investments, Inc., Len Wolman, Mark Wolman,
Stephan F. Slavik, Sr. and Del J. Lauria (Len
Wolman's Employment Agreement). (v)
10.19 Agreement Relating to Development Services, dated
as of February 9, 1998, between Trading Cove
Associates and Sun International Management
Limited. (vi)
10.20 Local Construction Services Agreement, dated as of
February 9, 1998 between Sun International
Management Limited and Wolman Construction,
L.L.C. (vi)
10.21 Escrow Deposit Agreement, dated as of the 3rd day
of March 1999, by and among the Mohegan Tribal
Gaming Authority and First Union National Bank, as
Defeasance Agent. (vi)
21.1 Subsidiaries of Waterford Gaming,
L.L.C. (i)
21.2 Subsidiaries of Waterford Gaming Finance Corp. (i)
(i) Incorporated by reference to the Registrant's Registration Statement
on Form S-4, Securities and Exchange Commission (the "Commission")
File No. 333-17795, declared effective on May 15, 1997.
(ii) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1997, Commission File No.
333-17795, as accepted by the Commission on November 14, 1997.
(iii) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, Commission File No.
333-17795, as accepted by the Commission on March 30, 1998.
(iv) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1998, Commission File No.
333-17795, as accepted by the Commission on May 14, 1998.
(v) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1998, Commission File No.
333-17795, as accepted by the Commission on November 13, 1998.
(vi) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1999, Commission File No.
333-17795 as accepted by the Commission on May 17, 1999.
(vii) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 2001, Commission File No. 333-17795
as accepted by the Commission on May 14, 2001.
19
(b) Reports on Form 8-K
-------------------
Form 8-K filed on May 29, 2002
Item 5.
On May 21, 2002, the Mohegan Tribal Gaming Authority (the "Authority")
filed Amendment No. 1 to Form S-4 registration statement under the
Securities Act of 1933 on Form S-4/A, 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 S-4/A, Securities
and Exchange Commission file reference No. 033-80655.
On May 24, 2002, the Mohegan Tribal Gaming Authority (the "Authority")
filed an Exchange Offer, pursuant to Rule 424(B)(3), on Form 424B3, 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 424B3, Securities and Exchange Commission file
reference No. 033-80655.
Date of Report: May 21, 2002
Form 8-K filed on June 26, 2002
Item 5.
On June 24, 2002, the Mohegan Tribal Gaming Authority, (the
"Authority") filed a copy of Amendment No. 4 to its senior secured
credit facility on Form 8-K, 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 8-K, Securities
and Exchange Commission file reference No. 033-80655.
Date of Report: June 24, 2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 8, 2002 By: /s/Len Wolman
Len Wolman, Chief Executive Officer
Date: August 8, 2002 By: /s/Alan Angel
Alan Angel, Chief Financial Officer
21