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 9/30/2002
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
September 30, 2002 (unaudited) and December 31, 2001 3
Condensed Statements of Operations of Waterford Gaming, L.L.C.
for the three and nine month periods ended September 30, 2002
(unaudited) and September 30, 2001 (unaudited) 4
Condensed Statements of Changes in Members' Deficiency of Waterford
Gaming, L.L.C. for the nine month periods ended
September 30, 2002 (unaudited) and September 30, 2001 (unaudited) 5
Condensed Statements of Cash Flows of Waterford Gaming, L.L.C.
for the nine month periods ended September 30, 2002 (unaudited)
and September 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 September 30, 2002, and the related condensed
statements of operations, for each of the three-month and nine-month periods
ended September 30, 2002 and 2001, and the related condensed statements of
changes in member's deficiency and cash flows for each of the nine-month periods
ended September 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
November 1, 2002
Hartford, Connecticut
1
PART I -- FINANCIAL INFORMATION
- -------------------------------
Item 1 -- Financial Statements
The unaudited condensed financial information as of September 30, 2002 and 2001,
and for each of the three-month and nine-month periods ended September 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
September 30, 2002 (Unaudited) and December 31, 2001
----------------------------------------------------
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 1,779,062 $ 3,570,949
Restricted investments 25,281,535 26,189,434
Due from Trading Cove Associates 3,350,000 8,357,604
Other current assets 31,708 9,072
------------- -------------
Total current assets 30,442,305 38,127,059
------------- -------------
Trading Cove Associates-equity investment 5,013,230 5,778,458
Beneficial interest-Leisure Resort
Technology, Inc. 4,635,313 4,918,029
Deferred financing costs, net of accumulated
amortization of $1,300,122 and $1,024,974 at
September 30, 2002 and December 31, 2001,
respectively 2,735,054 3,010,202
Fixed assets, net of accumulated depreciation
of $39,527 and $31,442 at September 30, 2002
and December 31, 2001, respectively 14,391 22,476
------------- -------------
Total assets $ 42,840,293 $ 51,856,224
============= =============
LIABILITIES AND MEMBERS' DEFICIENCY
Current liabilities
Accrued expenses and accounts payable $ 122,629 $ 171,610
Accrued interest on senior notes payable 456,029 3,228,946
------------- -------------
Total current liabilities 578,658 3,400,556
------------- -------------
9-1/2% senior notes payable 108,007,000 115,434,000
------------- -------------
Total liabilities 108,585,658 118,834,556
------------- -------------
Contingencies --- ---
Members' deficiency (65,745,365) (66,978,332)
------------- -------------
Total liabilities and
members' deficiency $ 42,840,293 $ 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 Nine Month Periods ended September 30, 2002 and 2001
(Unaudited)
-----------------------------
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
------------------- -------------------- ------------------- -------------------
Revenue
25% of relinquishment payments -
Trading Cove Associates $ 3,350,000 $ 1,370,975 $ 14,361,000 $ 1,370,975
Organizational and administrative
fee income - Trading Cove Associates --- 1,491,719 --- 11,810,877
Interest and dividend income 134,573 321,683 461,120 1,124,131
------------------ ------------------ ------------------ ------------------
Total revenue 3,484,573 3,184,377 14,822,120 14,305,983
------------------ ------------------ ------------------ ------------------
Expenses
Interest expense 2,866,112 3,111,623 8,514,973 8,819,436
Salaries - related parties 225,938 177,804 617,606 514,073
General and administrative 59,870 177,276 305,335 406,591
Amortization of beneficial interest -
Leisure Resort Technology, Inc. 95,274 95,274 282,716 282,716
Amortization on deferred financing costs 91,716 91,716 275,148 275,148
Depreciation 2,695 2,695 8,085 8,085
------------------ ------------------ ------------------ ------------------
Total expenses 3,341,605 3,656,388 10,003,863 10,306,049
------------------ ------------------ ------------------ ------------------
142,968 (472,011) 4,818,257 3,999,934
Equity in loss of
Trading Cove Associates (56,393) (954,137) (215,228) (2,724,355)
------------------ ----------------- ------------------ ------------------
Net income (loss) $ 86,575 $ (1,426,148) $ 4,603,029 $ 1,275,579
================== ================== ================== ===================
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 Nine Month Periods ended September 30, 2002 and 2001
(Unaudited)
---------------
For the Nine Months Ended September 30, 2002
Balance, January 1, 2002 $(66,978,332)
Contributions ---
Distributions (3,370,062)
Net income 4,603,029
-------------
Balance, September 30, 2002 $(65,745,365)
=============
For the Nine Months Ended September 30, 2001
Balance, January 1, 2001 $(71,813,244)
Contributions ---
Distributions (1,575,660)
Net income 1,275,579
-------------
Balance, September 30, 2001 $ (72,113,325)
=============
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 Nine Month Periods ended September 30, 2002 and 2001
(Unaudited)
-----------------------------
2002 2001
--------------- ----------------
Cash flows from operating activities
Net income $ 4,603,029 $ 1,275,579
--------------- ----------------
Adjustments to reconcile net income
to net cash provided by operating
activities
Amortization 557,864 557,864
Depreciation 8,085 8,085
Equity in loss of
Trading Cove Associates 215,228 2,724,355
Changes in operating assets and
liabilities
Decrease in due from Trading Cove
Associates 5,007,604 907,306
Increase in other current assets (22,636) (7,915)
(Decrease) increase in accrued
expenses and accounts payable (48,981) 40,428
Decrease in accrued interest on
senior notes payable (2,772,917) (2,860,635)
--------------- ----------------
Total adjustments 2,944,247 1,369,488
--------------- ----------------
Net cash provided by
operating activities 7,547,276 2,645,067
--------------- ----------------
Cash flows from investing activities
Contributions to Trading Cove Associates (800,000) (950,000)
Distributions from Trading Cove Associates 1,350,000 600,000
Sales and (purchases) of restricted
investments - net 907,899 880,224
--------------- ----------------
Net cash provided by
investing activities 1,457,899 530,224
--------------- ----------------
Cash flows from financing activities
Redemption of 9-1/2% senior notes (7,427,000) (4,257,000)
Distributions to member (3,370,062) (1,575,660)
--------------- ----------------
Net cash used in
financing activities (10,797,062) (5,832,660)
--------------- ----------------
Net decrease in cash and cash equivalents (1,791,887) (2,657,369)
Cash and cash equivalents at beginning
of period 3,570,949 4,024,021
-------------- ----------------
Cash and cash equivalents at end of period $ 1,779,062 $ 1,366,652
=============== ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $11,287,890 $11,680,071
=============== ================
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 September 30, 2002, the results of operations for each of the
three-month and nine-month periods ended September 30, 2002 and 2001, and
statements of member's deficiency and of cash flows for each of the nine-month
periods ended September 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 September 30, 2002 and 2001, the following summary information relates to
TCA. Total revenues and net income (loss) are for the nine-month periods ended
September 30, 2002 and 2001:
2002 2001
------------ ------------
Total assets $ 11,834,755 $ 11,122,294
Total liabilities (10,577,457) (10,331,312)
------------- -------------
Partners' capital $ 1,257,298 $ 790,982
============= =============
Total revenue $ 36,382,350 $ 29,057,965
============= =============
Net income (loss) $ 229,585 $ (4,788,667)
============= =============
Company's interest:
Trading Cove Associates -
equity investment, beginning
of period $ 5,778,458 $ 7,944,454
Contributions 800,000 950,000
Distributions (1,350,000) (600,000)
------------ ------------
5,228,458 8,294,454
------------ ------------
Income (loss) from Trading Cove
Associates 114,793 (2,394,334)
Amortization of interests
purchased (330,021) (330,021)
------------ ------------
Equity in income (loss) of
Trading Cove Associates (215,228) (2,724,355)
------------ ------------
Trading Cove Associates -
equity investment, end of period $ 5,013,230 $ 5,570,099
============= ============
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, Kerzner Investments Connecticut,Inc. ("Kerzner Investments") formerly Sun
Cove Limited, 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 September 30, 2002 and 2001 amounts to $2,421,898
and $2,043,908, 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 made 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 September 30, 2002 and
December 31, 2001 is estimated to be approximately $111,787,000 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
Kerzner International Management Limited ("KIML"). Pursuant to the Development
Services Agreement Phase II, TCA subcontracted with KIML and KIML agreed to
perform those services assigned to KIML 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 Kerzner Investments. TCA shall pay to Kerzner
Investments 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. KIML has further subcontracted (the "Local Construction
Services Agreement") with Wolman Construction, L.L.C. ("Construction") to
provide certain of those services assigned to KIML by TCA. This Local
Construction Services Agreement was also assigned to Kerzner Investments. The
fee payable by Kerzner Investments to Construction as and when Kernzer
Investments 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.
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 nine months ended September 30, 2002 and 2001 the
Company paid and incurred $617,606 and $514,073, respectively, as an expense
pursuant to Len Wolman's employment agreement.
For the nine months ended September 30, 2002 and 2001 approximately $35,600 and
$677,000, 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 nine
months ended September 30, 2002 and 2001, was $4,860.
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 June 30, 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 interest 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 Kerzner Investments, an affiliate of
Kerzner International Limited ("Kerzner International").
Trading Cove Associates - Material Agreements
- ---------------------------------------------
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 nine months ended September 30, 2002, total Relinquishment
Fees earned were $8,171,882 and $34,838,880, respectively. For the quarter and
nine months ended September 30, 2001, total Relinquishment Fees earned were
$5,833,465 and $26,960,508, respectively. Relinquishment Fees are based upon
Revenues reported to TCA by the Authority.
11
Development Agreement
- ---------------------
TCA and the Authority entered into a development services agreement on February
7, 1998. Under this "Development Agreement", TCA agreed to oversee the design,
construction, furnishing, equipping and staffing of the Project for a $14.0
million development fee (the "Development Fee"). 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
October 18, 2002 238,000
-----------
$13,748,000
===========
On February 9, 1998 the Development Services Agreement Phase II was entered into
between TCA and KIML. Pursuant to the Development Services Agreement Phase II,
TCA subcontracted with KIML and KIML agreed to perform those services assigned
to KIML 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 Kerzner Investments.
TCA shall pay to Kerzner Investments 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".
KIML has further subcontracted with Construction (the "Local Construction
Services Agreement") to provide certain of those services assigned to KIML by
TCA. This agreement was also assigned to Kerzner Investments. Kerzner
Investments shall pay 20.83% of the Development Services Fee Phase II as and
when Kerzner Investments 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 Kerzner
Investments 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 nine months ended September 30, 2002 the Company received $11,611,000
from TCA and $3,550,000 was due from TCA which represents the Company's share
under the Amended and Restated Omnibus Termination Agreement of approximately
$34,839,000 in Relinquishment Fees earned by TCA pursuant to the Relinquishment
Agreement for the same period and $1,232,000 in Development Fee earned by TCA
pursuant to the Development Agreement for the same period. For the nine months
ended September 30, 2001 the Company received $10,719,158 from TCA and
$3,062,694 was due from TCA which represents the Company's share under the
Amended and Restated Omnibus Termination Agreement of approximately $26,961,000
in Relinquishment Fees earned by TCA pursuant to the Relinquishment Agreement
for the same period and $5,768,000 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, Kerzner International, the Company, KIML, LMW, Kerzner Investments, 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
Kerzner Investments 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 nine months ended September 30, 2002 and
2001, $0 and $1,282,000 ($641,000 to Kerzner Investments and $641,000
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 September 30, 2002 these capital contributions aggregated
$6,700,000. From January 1, 2000 to September 30, 2002 $6,300,000 has
been repaid to the partners of TCA, 50% to the Company and 50% to
Kerzner Investments.
As of September 30, 2002, $400,000 in capital contributions remained
outstanding. On October 28, 2002, a cash distribution of $200,000 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 September 30,
2002. The contingent obligation at September 30, 2002 was
approximately $10,429,000.
13
(e) Fifth, to pay Kerzner Investments 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 nine
months ended September 30, 2002 and 2001, $3,750,000 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 nine months
ended September 30, 2001, $23,621,754 ($11,810,877 to KIML and
$11,810,877 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 Kerzner Investments and the Company
twenty-five percent (25%) of the relinquishment payments. For the nine
months ended September 30, 2002 and 2001, $28,722,000 ($14,361,000 to
Kerzner Investments and $14,361,000 to the Company) and $2,741,951,
($1,370,976 to Kerzner Investments and $1,370,975 to the Company),
respectively, had been paid and incurred by TCA in terms of the
seventh priority. The contingent obligation at September 30, 2002 was
approximately $12,600,000.
(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 September 30, 2002
- -------------------------------------------------------------------------
and 2001
- --------
Total revenue for the three months ended September 30, 2002 was $3,484,573
compared with $3,184,377 for the three months ended September 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 $1,979,025 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 $1,491,719. In addition interest and dividend income decreased by
$187,110.
Total expenses for the quarter ended September 30, 2002 was $3,341,605 compared
with $3,656,388 for the quarter ended September 30, 2001. Interest expense
decreased by $245,511 due primarily to the redemption of the $125 Million Senior
Notes in the principal amounts of $3,805,000, $4,031,000 and $3,396,000 on
September 15, 2001, March 15, 2002 and September 15, 2002, respectively,
salaries - related parties increased by $48,134 due to the increase in Revenues
of the Mohegan Sun and general and administrative costs decreased by $117,406
(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 $126,200 and offset by an
increase in insurance expense of approximately $4,300 and by an increase in
miscellaneous expense of approximately $4,500).
Equity in loss of Trading Cove Associates was $56,393 for the three months ended
September 30, 2002 compared with $954,137 for the three months ended September
30, 2001 as a result of income from Trading Cove Associates of $53,614 for the
three months ended September 30, 2002, due to revenues exceeding payments
pursuant to the Amended and Restated Omnibus Termination Agreement during the
period compared with a loss of $844,130 for the three months ended September 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
$86,575 for the quarter ended September 30, 2002 compared with a net loss of
$(1,426,148) for the quarter ended September 30, 2001.
Comparison of Operating Results for the Nine Months ended September 30, 2002
- ----------------------------------------------------------------------------
and 2001.
- ---------
Total revenue for the nine months ended September 30, 2002 was $14,822,120
compared with $14,305,983 for the nine months ended September 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 $12,990,025 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 $11,810,877. In addition interest and dividend income decreased by
$663,011.
Total expenses for the nine months ended September 30, 2002 was $10,003,863
compared with $10,306,049 for the nine months ended September 30, 2001. Interest
expense decreased by $304,463 due primarily to the redemption of the $125
Million Senior Notes in the principal amounts of $3,805,000, $4,031,000 and
$3,396,000 on September 15, 2001, March 15, 2002 and September 15, 2002,
respectively, salaries - related parties increased by $103,533 due to the
increase in Revenues of the Mohegan Sun and general and administrative costs
decreased by $101,256 (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
$124,500, by a decrease in other legal expenses of approximately $8,000 and
offset by an increase in insurance expense of approximtely $13,800, by an
increase in bank sweep fees of approxiamtely $9,100, by an increase in
miscellaneous expense of approximately $5,800 and by an increase in payroll
taxes of approximately $1,800).
Equity in loss of Trading Cove Associates was $215,228 for the nine months ended
September 30, 2002 compared with $2,724,355 for the nine months ended September
30, 2001 as a result of income from Trading Cove Associates of $114,793 for the
nine months ended September 30, 2002, due to revenues exceeding payments
pursuant to the Amended and Restated Omnibus Termination Agreement during the
period, compared with a loss of $2,394,334 for the nine months ended September
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
$4,603,029 for the nine months ended September 30, 2002 compared with net income
of $1,275,579 for the nine months ended September 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 Kerzner 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 Kerzner 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, on June 10, 2002 and on September
10, 2002 the Company distributed $886,285, $3,059,393, $1,739,660, $1,416,900,
$1,925,862 and $27,300 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 $65,745,000 and $72,113,000
at September 30, 2002 and 2001, respectively.
For the nine months ended September 30, 2002 and 2001, net cash provided by
operating activities (as shown in the Condensed Statements of Cash Flows) was
$7,547,276 and $2,645,067, respectively.
Current assets decreased from $38,127,059 at December 31, 2001 to $30,442,305 at
September 30, 2002. The decrease was caused primarily by the redemption on March
15, 2002 and September 15, 2002 of $125 Million Senior Notes in the principal
amounts of $4,031,000 and $3,396,000, respectively, by the scheduled semi-annual
payment of interest on March 15, 2002 and September 15, 2002 on the $125 Million
Senior Notes in the amounts of approximately $5,483,000 and $5,292,000,
respectively, and offset by approximately $7,457,000 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 $578,658
at September 30, 2002. The decrease was primarily attributable to a decrease in
accrued interest on senior notes payable of approximately $2,773,000 and by a
decrease in accrued expenses and accounts payable of approximately $49,000
(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 $68,300,
and offset by an increase in the amount due for salaries - related parties of
approximately $9,100 and by an increase in the amount due for accounting
services of approximately $9,800).
For the nine months ended September 30, 2002 and 2001, net cash provided by
investing activities (as shown in the Condensed Statements of Cash Flows) was
$1,457,899 and $530,224, respectively. The net cash provided by investing
activities in 2002 was primarily the result of sales and (purchases) of
restricted investments - net of approximately $907,900, distributions from TCA
of $1,350,000 and offset by contributions to TCA of $800,000 (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
$880,200, distributions from TCA of $600,000 and offset by contributions to TCA
of $950,000 (to fund certain of TCA's development expenses in connection with
the Project at the Mohegan Sun).
The Company anticipates that up to $1,150,000 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 September 30, 2002
$4,350,000 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 nine months ended September 30, 2002 and 2001, net cash used in
financing activities (as shown in the Condensed Statements of Cash Flows) was
$10,797,062 and $5,832,660, 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 amounts of $4,031,000 and $3,396,000 on
March 15, 2002 and September 15, 2002, respectively, and by tax distributions to
the Company's sole member of $3,370,062. 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 amounts of $452,000 and $3,805,000 on
March 15, 2001 and September 15, 2001, respectively, 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 made 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 clauses (a) and (b) above have
been met and accordingly a Permitted Dividend in the amount of $15 Million was
made on November 1, 2002.
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.
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 September 30, 2002 and December 31, 2001. The fair
market value of the Company's long-term debt at September 30, 2002 and December
31, 2001 is estimated to be approximately $111,787,000 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 September 30, 2002 are
principally comprised of an investment in a Federal Home Loan Bank Discount Note
which was purchased at a discount of 1.67%, has a face value of $15,158,000 and
matures October 21, 2002, and an investment in a Federal Home Loan Bank Discount
Note which was purchased at a discount of 1.64%, has a face value of $10,208,000
and matures March 7, 2003. 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 June 30, 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
-------------------
(i) Form 8-K filed on August 16, 2002
Item 5.
On August 14, 2002, the Mohegan Tribal Gaming Authority (the
"Authority") filed a Form 12b-25, Notice of Late Filing for Form 10-Q,
under the Securities Act of 1933, 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 12b-25,
Securities and Exchange Commission file reference No. 033-80655.
Date of Report: August 14, 2002
(ii) Form 8-K filed on August 21, 2002
Item 5.
On August 19, 2002, the Mohegan Tribal Gaming Authority (the
"Authority") filed its quarterly report on Form 10-Q for the quarter
ended June 30, 2002, and a current report on Form 8-K, a copy of which
is filed as an exhibit to this report and is incorporated herein by
reference to the Authority's electronic filing of such reports on Form
10-Q and Form 8-K with Securities and Exchange Commission file
reference No. 033-80655.
Date of Report: August 19, 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: November 6, 2002 By: /s/Len Wolman
Len Wolman, Chief Executive Officer
Date: November 6, 2002 By: /s/Alan Angel
Alan Angel, Chief Financial Officer
21