UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 03/31/03
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.
Prefatory Note
--------------
Waterford Gaming, L.L.C. (the "Company"), has determined that a restatement of
its financial statements for each of the fiscal years 1997 through 2002 is
required.
The Company is a general partner of Trading Cove Associates ("Trading Cove" or
"TCA") and its investment in TCA is accounted for under the equity method. TCA
has determined a need to restate its financial statements as described below. As
the Company accounts for its investment in TCA under the equity method, the
Company's financial statements will also be restated to reflect the changes
recorded by TCA. While amounts are unaudited and subject to change, the effect
on the Company's financial statements is described below and included in the
table which follows this note.
The restatement is the result of a change by TCA in the way it has historically
recorded certain contractual liabilities to its partners and their affiliates,
recognized certain revenue, and classified certain distributions to its
partners. As described in more detail below, TCA will restate its historical
financial statements to,
i) recognize as an expense certain contractual liabilities owed its partners
and their affiliates for prior services performed under contract when their
payment becomes probable pursuant to Statement of Financial Accounting
Standard No. 5 ("SFAS 5"), as opposed to when such expenses were paid or
payable (these expenses were previously disclosed as contingent
obligations);
ii) recognize as revenue junior relinquishment fees from the Mohegan Tribe of
Indians of Connecticut (the "Mohegan Tribe" or "Tribe") pursuant to the
Relinquishment Agreement in the quarter in which such fees are earned, as
opposed to at the end of every six months, when such fees became payable;
and
iii) reclassify certain payments by TCA to its partners as distributions on its
partnership interests which were previously classified as expenses in the
statement of operations.
The Company's interest in Trading Cove is its principal asset and source of
income and cash flows.
To the extent these changes affected TCA's reported net income, the Company's
net income would be affected by its proportionate share of TCA's income recorded
under the equity method. To the extent these changes cause TCA to recognize
income from relinquishment fees earlier than it previously had, the Company's
equity income of TCA would be increased by its proportionate share of such
income. Payments by TCA to the Company are reclassified as distributions, rather
than as "Revenue - 25% of relinquishment payments - Trading Cove Associates" on
its statement of operations.
The effect of the restatement to TCA is to change the timing of the recognition
of certain revenues and certain liabilities of TCA, owed to its partners and
their affiliates, and not to change the amount of such revenues or such
liabilities or the amounts paid to its partners or their affiliates. As a result
of the restatement by TCA, the Company will restate its financial information
included in each Form 10-K and Form 10-Q filed by the Company since 1997. The
Company plans to include this restated financial information in an amendment to
its Form 10-K for the year ended December 31, 2002, after its independent
accountants complete their audit of any annual, and review of any interim,
restated financial information.
The restatement will not change the cash flow from operating, investing or
financing activities that would have been available for paying interest,
principal and premium on its outstanding 9-1/2% Senior Notes due 2010 (the "$125
Million Senior Notes"). The Company believes that if TCA had made the changes
described above at the beginning of the period covered by the restated financial
statements, it would change neither the timing or amount of the $125 Million
Senior Notes redeemed from Company Excess Cash, as defined in the indenture
governing the $125 Million Senior Notes (the "Indenture"), nor the release of
collateral or the interpretation of any covenant contained in the Indenture
during such period. Moreover, if TCA had made the changes described above at the
beginning of the period covered by the restated financial statements, no default
or event of default under the Indenture would have occurred during any of the
affected periods.
As noted above, TCA will change how it has accounted for certain contractual
liabilities it owes to its partners and their affiliates for services performed
under contract. TCA will record a liability for previously provided services
pursuant to SFAS 5 when it became probable that it had been incurred rather than
when such payments became payable. As a result of this change, some payments
will be recorded as liabilities and expenses on TCA's financial statements
several years before they are due and payable. Previously, these payments were
recorded as liabilities only when payment was certain. These payments are
related to amounts due under (a) the third, fourth, fifth, seventh, eighth,
ninth and eleventh priority distributions described in the Amended and Restated
Omnibus Financing Agreement and (b) the third and fourth priority distributions
described in the Amended and Restated Omnibus Termination Agreement. For a
description of the Amended and Restated Omnibus Termination Agreement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Amended and Restated Omnibus Termination Agreement". A copy of the
Amended and Restated Omnibus Termination Agreement is filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 2001
(Commission File No. 333-17795) and is incorporated herein by reference. A copy
of the Amended and Restated Omnibus Financing Agreement, which was terminated
pursuant to the terms of the Amended and Restated Omnibus Termination Agreement,
is filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997 (Commission File No. 333-17795) and is
incorporated herein by reference.
One effect of the change described in the preceding paragraph is that TCA will
recognize an additional loss on the Development Agreement between it and the
Mohegan Tribal Gaming Authority (the "Authority"), which is accounted for in
accordance with Statement of Position 81-1. This will result in a corresponding
reduction on the Company's balance sheet as of December 31, 2002 in "Trading
Cove Associates - equity investment" of $4,496,500 and an increase in member's
deficiency of $4,496,500. Through December 31, 2002 Trading Cove had recorded a
loss of $7,007,000. After the restatement, it will record a loss of $16,000,000.
The Company's 50% share of the difference is $4,496,500. Prior to making the
change described in the preceding paragraph, TCA would have recorded this loss
in the second quarter of 2003, when the related amount would have been paid.
Also as noted above, TCA will change its historical method of accruing junior
relinquishment payments it receives from the Authority pursuant to the
Relinquishment Agreement. TCA will now accrue for such payments in each quarter
as they are earned. Prior to the restatement, TCA recognized such payments as
revenue as they became payable every six months. The restatement will require
the Company to record its investment in TCA with a portion of each junior
relinquishment payment being accrued each quarter.
Also as noted above, TCA will reclassify certain payments to its partners as
distributions on TCA's partnership interests. The payments, the classification
of which will change, are payments TCA has historically made under the fifth and
seventh priorities under the Amended and Restated Omnibus Termination Agreement,
as described in paragraphs (e) and (g) of the section below titled "Item 2 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Sources of Revenues and Cash Flows - Amended and Restated Omnibus
Termination Agreement" for the periods commencing January 1, 2000. This
reclassification by TCA will result in the reclassification by the Company of
certain income it received from TCA as "Equity in income (loss) of Trading Cove
Associates" on its statement of operations. Prior to the restatement, the
Company had classified such payments on its statement of operations as "Revenue
- - 25% of relinquishment payments - Trading Cove Associates". Such
reclassification will not change or affect the Company's aggregate net income or
loss for the period covered by the restated financial statements. These payments
are considered a distribution to the Company on its partnership interests,
rather than revenue from TCA. Accordingly, at December 31, 2002, the restated
condensed balance sheet of the Company will show $0 as due from TCA, and
accordingly "Trading Cove Associates - equity investment" will be increased by
$11,021,500, which was the amount previously recorded as an amount due from TCA
prior to making the change described in this paragraph.
As a result of the restatement, net income or loss of the Company, which
principally consists of equity income of TCA, may vary considerably on a year to
year basis from prior reported amounts for the period 1997 through 2000. For
2001, net income would remain unchanged at approximately $6.6 million. In 2002,
net income would be decreased from approximately $13.0 million to approximately
$12.0 million. As noted above, the Company does not expect that the restatement
will change cash that would have been available for redeeming or for paying
interest, principal or premium on the $125 Million Senior Notes.
The table set forth below shows the anticipated effect of the restatement on
certain selected unaudited financial data for the years ended December 31, 1999,
2000, 2001 and 2002. The financial information set forth below should be read in
conjunction with the financial statements and notes, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the
financial and other data included in this Form 10-Q. None of the financial
information set forth below has been audited. The Company intends to have each
of its restated annual financial statements audited, and information relating to
restated interim periods reviewed, by PwC. If such audits or reviews result in
any change to the financial information set forth below, the Company will file
an amendment to this Form 10-Q indicating such change.
For the Year Ended (Unaudited)
Previously Previously Previously Previously
reported Restated reported Restated reported Restated reported Restated
2002 2002 2001 2001 2000 2000 1999 1999
------------- ------------ ------------ ------------ ------------ ------------ ----------- ------------
Revenue
Organizational and
administrative
fee income-
Trading Cove
Associates $ --- $ --- $ 11,810,877 $ --- $ 11,649,600 $ --- $ 14,252,209 $ 15,431,038
25% of
relinquishment
payments-Trading
Cove Associates 25,382,500 --- 9,728,580 --- --- --- --- ---
Interest and
dividend income 534,012 --- 1,330,711 --- 1,894,738 --- 6,144,502 6,144,502
Subordinated notes
fee income-Trading
Cove Associates --- --- --- --- 692,782 --- 3,731,806 4,424,588
Management services
income-Trading
Cove Associates 1,664,699 1,664,699
Completion guarantee
notes fee income-
Trading Cove
Associates --- --- --- --- 215,625 --- 903,438 1,119,063
------------- ------------ ------------ ------------ ----------- ----------- ----------- -------------
Total revenue 25,916,512 --- 22,870,168 --- 14,452,745 --- 26,696,654 28,783,890
Total expenses (13,102,082) (13,102,082) (13,579,600) (13,579,600) (13,490,367) (13,490,367) (24,789,253) (24,789,253)
Interest and dividend
income --- 534,012 --- 1,330,711 --- 1,894,738 --- ---
Equity in income
(loss)of Trading
Cove Associates 218,880 24,601,380 (2,715,996) 18,823,461 (574,002) 16,026,008 6,115,300 (3,510,438)
------------- ------------ ------------ ------------ ------------ ------------ ----------- ------------
Net income $ 13,033,310 $ 12,033,310 $ 6,574,572 $ 6,574,572 $ 388,376 $ 4,430,379 $ 8,022,701 $ 484,199
============= ============ ============ ============ ============ ============ =========== ============
OTHER DATA
Interest expense $ 11,080,139 $ 11,080,139 $ 11,560,994 $ 11,560,994 $ 11,641,049 $ 11,641,049 $ 19,045,076 $ 19,045,076
Net increase
(decrease) in
cash and cash
equivalents 1,087,653 1,087,653 (453,072) (453,072) (56,313,596) (56,313,596) 57,554,273 57,554,273
YEAR-END STATUS
Total current
assets $ 26,032,197 $ 15,010,697 $ 38,127,059 $ 29,769,455 $ 34,708,598 $ 46,519,473 $ 72,724,437 $ 97,093,319
Trading Cove
Associates-
equity
investment 5,447,338 11,972,338 5,778,458 10,639,562 7,944,454 (7,362,924) 9,041,568 (22,865,820)
Beneficial
interest-
Leisure Resort
Technology, Inc. 4,540,039 4,540,039 4,918,029 4,918,029 5,296,019 5,296,019 5,674,009 5,674,009
Deferred financing
costs net of
accumulated
amortization 2,643,338 2,643,338 3,010,202 3,010,202 3,377,066 3,377,066 3,781,051 3,781,051
Fixed assets, net
of accumulated
depreciation 11,696 11,696 22,476 22,476 33,256 33,256 44,036 44,036
------------ ------------ ------------ ------------ ------------ ------------ ----------- ------------
Total assets $ 38,674,608 $ 34,178,108 $ 51,856,224 $ 48,359,724 $ 51,359,393 $ 47,862,890 $ 91,265,101 $ 83,726,595
============ ============ ============ ============ ============ ============ =========== ============
Total current
liabilities $ 3,133,192 $ 3,133,192 $ 3,400,556 $ 3,400,556 $ 3,481,637 $ 3,481,637 $ 3,576,539 $ 3,576,539
9-1/2% senior
notes payable 108,007,000 108,007,000 115,434,000 115,434,000 119,691,000 119,691,000 122,159,000 122,159,000
------------ ------------ ------------ ------------ ------------ ------------ ----------- ------------
Total liabilities 111,140,192 111,140,192 118,834,556 118,834,556 123,172,637 123,172,637 125,735,539 125,735,539
Member's
deficiency $(72,465,584) $(76,962,084) $(66,978,332) $(70,474,832) $(71,813,244) $(75,309,747) $(34,470,438) $(42,008,944)
============ ============ ============ ============ ============ ============ =========== ============
WATERFORD GAMING, L.L.C.
INDEX TO FORM 10-Q
Page
Number
PART I -- FINANCIAL INFORMATION
- -------------------------------
Item 1 -- Financial Statements
Report of Independent Accountants 1
Financial Information 2
Condensed Balance Sheets of Waterford Gaming, L.L.C. as of
March 31, 2003 (unaudited) and December 31, 2002
(unaudited and restated) 3
Condensed Statements of Operations of Waterford Gaming, L.L.C.
for the three month periods ended March 31, 2003
(unaudited) and March 31, 2002 (unaudited and restated) 4
Condensed Statements of Changes in Member's Deficiency of Waterford
Gaming, L.L.C. for the three month periods ended
March 31, 2003 (unaudited) and March 31, 2002
(unaudited and restated) 5
Condensed Statements of Cash Flows of Waterford Gaming, L.L.C.
for the three month periods ended March 31, 2003(unaudited)
and March 31, 2002 (unaudited and restated) 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 16
Item 3 -- Quantitative and Qualitative Disclosures about
Market Risk 28
Item 4 -- Controls and Procedures 29
Part II -- OTHER INFORMATION
- ----------------------------
Item 1 -- Legal Proceedings 29
Item 2 -- Changes in Securities 29
Item 3 -- Defaults upon Senior Securities 29
Item 4 -- Submission of Matters to a Vote of Security Holders 29
Item 5 -- Other Information 29
Item 6 -- Exhibits and Reports on Form 8-K 30
Signatures- Waterford Gaming, L.L.C. 33
Certifications 34
PART I -- FINANCIAL INFORMATION
- -------------------------------
Item 1 -- Financial Statements
Report of Independent Accountants
---------------------------------
To the Member of Waterford Gaming, L.L.C.
We have reviewed the accompanying condensed balance sheet of Waterford Gaming,
L.L.C. (the "Company") as of March 31, 2003, and the related condensed
statements of operations, for each of the three-month periods ended March 31,
2003 and 2002 (as restated), and the related condensed statements of changes in
member's deficiency and cash flows for each of the three-month periods ended
March 31, 2003 and 2002 (as restated). 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 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.
As described in Note 7, the financial statements as of and for the year ended
December 31, 2002 have been restated and are in the process of being audited.
Accordingly, we are unable and do not express any form of assurance thereon.
PricewaterhouseCoopers, LLP
May 20, 2003
Hartford, Connecticut
1
Financial Information
- ---------------------
The unaudited condensed financial information as of March 31, 2003 and 2002, and
for each of the three-month periods ended March 31, 2003 and 2002 included in
this report was reviewed by PricewaterhouseCoopers LLP, independent public
accountants, in accordance with the professional standards and procedures
established for such reviews by the American Institute of Certified Public
Accountants.
2
Waterford Gaming, L.L.C.
Condensed Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002 (Unaudited)
------------------------------------------------------------
March 31, December 31,
2003 2002
------------- ------------
(Restated
see Note 7)
ASSETS
Current assets
Cash and cash equivalents $ 3,787,526 $ 4,658,602
Restricted investments 9,731,175 10,344,130
Other current assets 83,330 7,965
------------- -------------
Total current assets 13,602,031 15,010,697
------------- -------------
Trading Cove Associates-equity investment 7,173,148 11,972,338
Beneficial interest-Leisure Resort
Technology, Inc. 4,446,836 4,540,039
Deferred financing costs, net of accumulated
amortization of $1,483,554 and $1,391,838 at
March 31, 2003 and December 31, 2002,
respectively 2,551,622 2,643,338
Fixed assets, net of accumulated depreciation
of $44,917 and $42,222 at March 31, 2003
and December 31, 2002, respectively 9,001 11,696
------------- -------------
Total assets $ 27,782,638 $ 34,178,108
============= =============
LIABILITIES AND MEMBER'S DEFICIENCY
Current liabilities
Accrued expenses and accounts payable $ 160,342 $ 111,996
Accrued interest on senior notes payable 432,140 3,021,196
------------- -------------
Total current liabilities 592,482 3,133,192
------------- -------------
9-1/2% senior notes payable 102,349,000 108,007,000
------------- -------------
Total liabilities 102,941,482 111,140,192
------------- -------------
Contingencies --- ---
Member's deficiency (75,158,844) (76,962,084)
------------- -------------
Total liabilities and
member's deficiency $ 27,782,638 $ 34,178,108
============= =============
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 Month Periods ended March 31, 2003 and 2002
(Unaudited)
-----------------------------
For the three For the three
months ended months ended
March 31, 2003 March 31, 2002
-------------- --------------
(Restated see
Note 7)
Expenses
Interest expense $ 2,883,303 $ 3,003,040
Salaries - related parties 211,163 187,069
General and administrative 98,693 114,348
Amortization of beneficial interest -
Leisure Resort Technology, Inc. 93,203 93,203
Amortization on deferred financing costs 91,716 91,716
Depreciation 2,695 2,695
-------------- -------------
Total expenses 3,380,773 3,492,071
------------- -------------
Interest and dividend income 52,603 194,727
Equity in income of
Trading Cove Associates 6,422,310 4,831,778
-------------- -------------
Net income $ 3,094,140 $ 1,534,434
============== =============
The accompanying notes are an integral part of these condensed financial
statements.
4
Waterford Gaming, L.L.C.
Condensed Statements of Changes in Member's Deficiency
For the Three Month Periods ended March 31, 2003 and 2002
(Unaudited)
---------------
For the Three Months Ended March 31, 2003
Balance, January 1, 2003 - (Restated see Note 7) $(76,962,084)
Distributions (1,290,900)
Net income 3,094,140
-------------
Balance, March 31, 2003 $(75,158,844)
=============
For the Three Months Ended March 31, 2002
(Restated see Note 7)
Balance, January 1, 2002 $(70,474,831)
Distributions (1,416,900)
Net income 1,534,434
-------------
Balance, March 31, 2002 $(70,357,297)
=============
The accompanying notes are an integral part of these condensed financial
statements.
5
Waterford Gaming, L.L.C.
Condensed Statements of Cash Flows
For the Three Month Periods ended March 31, 2003 and 2002
(Unaudited)
-----------------------------
2003 2002
--------------- ----------------
(Restated see
Note 7)
Cash flows from operating activities
Net income $ 3,094,140 $ 1,534,434
--------------- ----------------
Adjustments to reconcile net income
to net cash provided by operating
activities
Amortization 184,919 184,919
Depreciation 2,695 2,695
Equity in income of
Trading Cove Associates (6,422,310) (4,831,778)
Operating distributions from
Trading Cove
Associates 11,021,500 8,357,604
Changes in operating assets and
liabilities
Increase in other current assets (75,365) (42,751)
Increase (decrease) in accrued
expenses and accounts payable 48,346 (36,913)
Decrease in accrued interest on
senior notes payable (2,589,056) (2,758,577)
--------------- ----------------
Total adjustments 2,170,729 875,199
--------------- ----------------
Net cash provided by
operating activities 5,264,869 2,409,633
--------------- ----------------
Cash flows from investing activities
Contributions to Trading Cove Associates --- (200,000)
Distributions from Trading Cove Associates 200,000 750,000
Sales and (purchases) of restricted
investments - net 612,955 570,848
--------------- ----------------
Net cash provided by
investing activities 812,955 1,120,848
--------------- ----------------
Cash flows from financing activities
Redemption of 9-1/2% senior notes (5,658,000) (4,031,000)
Distributions to member (1,290,900) (1,416,900)
--------------- ----------------
Net cash used in
financing activities (6,948,900) (5,447,900)
--------------- ----------------
Net decrease in cash and cash equivalents (871,076) (1,917,419)
Cash and cash equivalents at beginning
of period 4,658,602 3,570,949
-------------- ----------------
Cash and cash equivalents at end of period $ 3,787,526 $ 1,653,530
=============== ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 5,472,358 $ 5,761,617
=============== ================
The accompanying notes are an integral part of these condensed financial
statements.
6
WATERFORD GAMING, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
-----------
Note 1. Basis of Presentation:
The unaudited condensed interim financial statements include normal and
recurring adjustments which are, in the opinion of management, necessary to
present a fair statement of financial position as of March 31, 2003, the results
of operations for each of the three-month periods ended March 31, 2003 and 2002,
and statements of member's deficiency and of cash flows for each of the
three-month periods ended March 31, 2003 and 2002. Results of operations for the
period are not necessarily indicative of the results to be expected for the full
year. The significant accounting policies and certain financial information
which are normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, but
are not required for interim reporting purposes are condensed or omitted.
In March 1999, the Company with its wholly-owned subsidiary Waterford Gaming
Finance Corp. ("Finance") issued 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
TCA. As contemplated in the $125 Million Senior Notes offering, the Company
distributed approximately $34,672,000 to Waterford Group, L.L.C. ("Waterford
Group") during January 2000. In connection with such offering the Company also
distributed $37,050,000 to Waterford Group during March 1999.
Certain amounts in the 2002 financial statements have been reclassified to
conform with the 2003 presentation. See Note 7 to these condensed financial
statements.
Note 2. Trading Cove Associates - Equity Investment:
As of March 31, 2003 and 2002, the following summary information relates to TCA.
Total revenues and net income are for the three-month periods ended March 31,
2003 and 2002:
2003 2002
(As restated)
------------ -------------
Total current assets $ 15,440,157 $ 13,473,742
============= =============
Total assets $ 18,049,070 $ 16,310,328
Total current liabilities (10,781,908) (11,142,044)
------------- -------------
Partners' capital $ 7,267,162 $ 5,168,284
============= =============
Total revenue $ 15,121,747 $ 12,896,221
============= =============
Net income $ 14,314,634 $ 11,133,571
============= =============
Company's interest:
Trading Cove Associates -
equity investment, beginning
of period $ 11,972,338 $ 10,639,563
Contributions --- 200,000
Distributions (11,221,500) (9,107,604)
------------ -------------
750,838 1,731,959
------------ -------------
Income from Trading Cove
Associates 6,532,317 4,941,785
Amortization of interests
purchased (110,007) (110,007)
------------ -------------
Equity in income of
Trading Cove Associates 6,422,310 4,831,778
------------ -------------
Trading Cove Associates -
equity investment, end of period $ 7,173,148 $ 6,563,737
============= =============
7
Note 3. Beneficial Interest - Leisure Resort Technology, Inc.:
On January 6, 1998, pursuant to the settlement and release agreement described
in Note 6 below, the Company paid $5,000,000 to Leisure Resort Technology, Inc.
("Leisure") and, among other things, Leisure (a) gave up its beneficial interest
in 5% of certain fees and excess cash flows, as defined, of TCA and (b) 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, filed a
lawsuit against TCA, Kerzner Investments Connecticut, Inc. (formerly Sun Cove
Limited, "Kerzner Investments"), RJH Development Corp. (a former partner of
TCA), 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. In connection with the settlement
of all matters related to such suit, pursuant to a settlement and release
agreement, the Company agreed to acquire Leisure's interests in TCA. As a result
of this acquisition, Leisure no longer has the right to 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, and the Company is now entitled to such fees and such cash.
On March 17, 1999, the $65 Million Senior Notes were retired, and on March 18,
1999, the Company paid an additional $2,000,000 to Leisure pursuant to the
settlement and release agreement. On January 7, 2000, Leisure filed a complaint
against the Company and certain other defendants relating to the settlement and
release agreement. For a description of the complaint, see Note 6 to these
condensed financial statements.
Until March 17, 1999, the payments made to Leisure pursuant to the settlement
and release agreement and associated costs were amortized on a straight-line
basis over the remaining term of the Management Agreement. As a result of the
Relinquishment Agreement becoming effective, the remaining balance will be
amortized over 189 months beginning March 18, 1999. Accumulated amortization at
March 31, 2003 and December 31, 2002 amounts to $2,610,375 and $2,232,385,
respectively.
Note 4. $125 Million 9-1/2% Senior Notes Payable:
On March 17, 1999, the Company and Finance issued the $125 Million Senior Notes.
Payment of the principal of, and interest on, the $125 Million Senior Notes is
parri passu in right of payment with all of the Company's and Finance's senior
debt, and effectively subordinate in right of payment to all of the Company's
and Finance's existing and future secured and subordinated debts.
Interest on the $125 Million Senior Notes is payable semi-annually in arrears on
March 15 and September 15 at a rate of 9-1/2% per annum, commencing 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 all or any of the $125 Million
Senior Notes at any time on or after March 15, 2004 at a redemption price equal
to a percentage of the principal amount of notes being redeemed plus accrued
interest. Such percentage is set forth in the following table:
If notes are redeemed Percentage
- --------------------- ----------
after March 14, 2004 but
on or before March 14, 2005 105.182%
after March 14, 2005 but
on or before March 14, 2006 104.318%
after March 14, 2006
but on or before March 14, 2007 103.455%
after March 14, 2007 but
on or before March 14, 2008 102.591%
after March 14, 2008
but on or before March 14, 2009 101.727%
after March 14, 2009
but on or before March 14, 2010 100.864%
after March 14, 2010 100%
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.
8
Pursuant to the terms of the Indenture, if the Company and Finance have any
Company Excess Cash, as defined, on February 1 or August 1 of any year, they
must redeem the $125 Million Senior Notes on the March 15 and September 15
following such dates. Any such redemption will be made at a premium equal to a
percentage of the principal amount being redeemed. Such percentage is set forth
in the following table:
If notes are redeemed with Premium (expressed as percentage of
Company Excess Cash principal amount being redeemed)
- ------------------------- -----------------------------------
after March 14, 1999 but
on or before March 14, 2000 109.500%
after March 14, 2000 but
on or before March 14, 2001 108.636%
after March 14, 2001 but
on or before March 14, 2002 107.773%
after March 14, 2002 but
on or before March 14, 2003 106.909%
after March 14, 2003 but
on or before March 14, 2004 106.045%
after March 14, 2004 but
on or before March 14, 2005 105.182%
after March 14, 2005 but
on or before March 14, 2006 104.318%
after March 14, 2006
but on or before March 14, 2007 103.455%
after March 14, 2007 but
on or before March 14, 2008 102.591%
after March 14, 2008
but on or before March 14, 2009 101.727%
after March 14, 2009
but on or before March 14, 2010 100.864%
after March 14, 2010 100%
The Company and Finance have periodically redeemed $125 Million Senior Notes
with Company Excess Cash, as defined, pursuant to the terms of the Indenture.
The table below summarizes (a) the amount of Company Excess Cash that the
Company and Finance have determined was available for the mandatory redemption
of the $125 Million Senior Notes on February 1st and August 1st of each
applicable year pursuant to the terms of the Indenture, (b) the aggregate
principal amount of $125 Million Notes redeemed with such Company Excess Cash,
(c) the date on which such redemption was consummated, and (d) the premium at
which such redemption was made.
Date Company Excess Cash Principal amount of Date of Redemption Premium
(approximately) notes redeemed
- ---------------- ------------------- ------------------- ------------------ -------
August 1, 1999 $8,983,000 $2,841,000 September 15, 1999 9.500%
February 1, 2000 $8,276,000 $2,277,000 March 15, 2000 8.636%
August 1, 2000 $5,902,000 $191,000 September 15, 2000 8.636%
February 1, 2001 $6,173,000 $452,000 March 15, 2001 7.773%
August 1, 2001 $9,765,000 $3,805,000 September 15, 2001 7.773%
February 1, 2002 $9,793,000 $4,031,000 March 15, 2002 6.909%
August 1, 2002 $8,923,000 $3,396,000 September 15, 2002 6.909%
February 1, 2003 $11,131,000 $5,658,000 March 15, 2003 6.045%
9
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 contains certain affirmative and negative covenants customarily
contained in such agreements, including without limitation, covenants that
restrict, subject to specified exceptions the Company's and Finance's ability to
(i) borrow money, (ii) pay dividends on stock or make certain other restricted
payments, (iii) use assets as security in other transactions, (iv) make
investments, (v) sell other assets or merge with other companies, and (vi)
engage in any business except as currently conducted or contemplated or amend
their relationship with TCA. The Indenture also provides for customary events of
default and the establishment of a restricted investment fund with a trustee for
interest reserves.
The fair value of the Company's long term debt at March 31, 2003 and December
31, 2002 is estimated to be approximately $105,931,000 and $111,787,000,
respectively, based on the quoted market price for the same issue.
On April 15, 2003, the Company and Finance commenced an offer to repurchase all
of the $125 Million Senior Notes prior to maturity and a solicitation of
consents to amend the Indenture. Such amendments would have the effect of
eliminating substantially all of the restrictive covenants and security
provisions relating to the $125 Million Senior Notes. The tender offer and
amendment of the Indenture are conditioned upon, among other things, the
consummation of financing providing proceeds sufficient to pay the total costs
of the tender offer and consent solicitation.
On May 15, 2003, the Company and Finance announced the extension of its tender
offer for all of the outstanding $125 Million Senior Notes and related consent
solicitation. The tender offer will now expire at 12:00 midnight, New York City
time, on Wednesday, June 11, 2003, unless further extended or terminated. The
consent solicitation will now expire at 5:00 p.m., New York City time, on
Thursday, May 28, 2003, unless further extended or terminated, and holders of
$125 Million Senior Notes will have the right to withdraw their previous tenders
and consents prior to the expiration of the consent solicitation. As of today,
the Company and Finance have received duly executed tenders from holders of
$102,349,000 in principal amount of the $125 Million Senior Notes, representing
100% of the principal amount of the issued and outstanding $125 Million Senior
Notes.
10
Note 5. Certain Relationships and Related Transactions
Development Services Agreement Phase II and related agreements and payments
- ---------------------------------------------------------------------------
On February 9, 1998, TCA and Kerzner International Management Limited ("KIML"),
an affiliate of Kerzner Investments, the Company's partner in TCA, entered into
the Agreement Relating to Development Services (the "Development Services
Agreement Phase II"). 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. For a summary of
the Development Agreement, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Trading Cove Associates -
Material Agreements --Development Agreement." KIML has assigned the Development
Services Agreement Phase II to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner
Investments a fee, as subcontractor (the "Development Services Fee Phase II"),
equal to 3% of the development costs of the Project Sunburst expansion (the
"Project" or "Project Sunburst expansion"), excluding capitalized interest, less
all costs incurred by TCA in connection with the Project. The Development
Services Fee Phase II is paid in installments 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.
TCA pays the Development Services Fee Phase II from available cash flow, if any,
in accordance with the Amended and Restated Omnibus Termination Agreement.
Before KIML assigned the Development Services Agreement Phase II to Kerzner
Investments, it entered into the Local Construction Services Agreement (the
"Local Construction Services Agreement") with Wolman Construction, L.L.C.
("Construction"), an affiliate of the Company, pursuant to which Construction
agreed to provide certain of those services assigned to KIML by TCA pursuant to
the Development Services Agreement Phase II. KIML has assigned the Local
Construction Services Agreement to Kerzner Investments. Pursuant to the Local
Construction Service Agreement, Kerzner Investments agreed to pay to
Construction a fee equal to 20.83% of the Development Services Fee Phase II as
and when Kernzer Investments receives payment from TCA pursuant to the
Development Services Agreement Phase II.
Construction has subcontracted with The Slavik Company, an affiliate of the
Company, to provide certain services under the Local Construction Services
Agreement. In connection with this, Construction agreed that The Slavik Company
would be paid a fee equal to 14.30% of its fee under the Local Construction
Services Agreement.
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 of the 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.
At March 31, 2003 and December 31, 2002 TCA owed its affiliates approximately
$10.2 million pursuant to the Development Service Agreement Phase II.
Employment Agreement with Mr. Len Wolman
- ----------------------------------------
Len Wolman, the Company's Chairman of the Board of Directors and Chief Executive
Officer, is the Company's designated representative to TCA under TCA's
partnership agreement.
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.
In addition, pursuant to such employment agreement, the Company agreed pay to
Mr. Wolman an amount equal to 0.05% of the revenues of the Mohegan Sun including
the Project Sunburst expansion to the extent Mr. Wolman has not received such
amounts from TCA. On and after January 1, 2004, the Company agreed pay to Mr.
Wolman incentive compensation based on the revenues of the Mohegan Sun,
including the Project Sunburst 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 three
months ended March 31, 2003 and 2002 the Company paid and incurred $211,163 and
$187,069, respectively, as an expense pursuant to Len Wolman's employment
agreement.
Other Related Party Transactions
- --------------------------------
For the three months ended March 31, 2003 and 2002, approximately $10,500 and
$10,700, respectively, was paid and incurred by TCA to the principals and
affiliates of the Company as part of TCA's operating expenses. In addition, for
the three months ended March 31, 2003 and 2002, TCA incurred approximately
$231,000 and $0, respectively, to the principals of the Company in connection
with the first priority payments set forth under the section "Trading Cove
Associates Material Agreements - Amended and Restated Omnibus Termination
Agreement".
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., an affiliate of the Company.
Cost of the improvement is being depreciated over five years. Expense for each
of the three months ended March 31, 2003 and 2002 was $1,620.
Waterford Group, Slavik Suites, Inc. ("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.
11
Note 6. Contingencies:
Legal Proceedings
- -----------------
On January 6, 1998, Leisure Resort Technology, Inc. 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, TCA, the Company, LMW Investments, Inc., and Slavik Suites,
Inc. entered into a settlement and release agreement. Pursuant to this
settlement and release agreement, the Company bought Leisure's beneficial
interest in TCA.
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 Judgment, each with respect to all claims. The Court granted
Defendants' Motion to Strike in part and denied Defendants' Motion for Summary
Judgment, 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. Leisure has moved for summary judgment seeking dismissal of the counter
claims in full. This motion for summary judgment was denied.
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 possible
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.
12
Note 7. Restatement, Reclassification and Subsequent Events
The Company has restated its financial statements for each of the fiscal years
1997 through 2002.
The Company is a general partner of Trading Cove Associates ("Trading Cove" or
"TCA") and its investment in TCA is accounted for under the equity method. TCA
has determined a need to restate its financial statements as described below. As
the Company accounts for its investment in TCA under the equity method, the
Company's financial statements will also be restated to reflect the changes
recorded by TCA. While amounts are unaudited and subject to change, the effect
on the Company's financial statements is described below and included in the
table which follows this note.
The restatement is the result of a change by TCA in the way it has historically
recorded certain contractual liabilities to its partners and their affiliates,
recognized certain revenue, and classified certain distributions to its
partners. As described in more detail below, TCA will restate its historical
financial statements to,
i) recognize as an expense certain contractual liabilities owed its partners
and their affiliates for prior services performed under contract when their
payment becomes probable pursuant to Statement of Financial Accounting
Standard No. 5 ("SFAS 5"), as opposed to when such expenses were paid or
payable (these expenses were previously disclosed as contingent
obligations);
ii) recognize as revenue junior relinquishment fees from the Mohegan Tribe of
Indians of Connecticut (the "Mohegan Tribe" or "Tribe") pursuant to the
Relinquishment Agreement in the quarter in which such fees are earned, as
opposed to at the end of every six months, when such fees became payable;
and
iii) reclassify certain payments by TCA to its partners as distributions on its
partnership interests which were previously classified as expenses in the
statement of operations.
The Company's interest in Trading Cove is its principal asset and source of
income and cash flows.
To the extent these changes affected TCA's reported net income, the Company's
net income would be affected by its proportionate share of TCA's income recorded
under the equity method. To the extent these changes cause TCA to recognize
income from relinquishment fees earlier than it previously had, the Company's
equity income of TCA would be increased by its proportionate share of such
income. Payments by TCA to the Company are reclassified as distributions, rather
than as "Revenue - 25% of relinquishment payments - Trading Cove Associates" on
its statement of operations.
The effect of the restatement to TCA is to change the timing of the recognition
of certain revenues and certain liabilities of TCA, owed to its partners and
their affiliates, and not to change the amount of such revenues or such
liabilities or the amounts paid to its partners or their affiliates. As a result
of the restatement by TCA, the Company will restate its financial information
included in each Form 10-K and Form 10-Q filed by the Company since 1997. The
Company plans to include this restated financial information in an amendment to
its Form 10-K for the year ended December 31, 2002, after its independent
accountants complete their audit of any annual, and review of any interim,
restated financial information.
The restatement will not change the cash flow from operating, investing or
financing activities that would have been available for paying interest,
principal and premium on its outstanding 9-1/2% Senior Notes due 2010 (the "$125
Million Senior Notes"). Moreover, if TCA had made the changes described above at
the beginning of the period covered by the restated financial statements, no
default or event of default under the Indenture would have occurred during any
of the affected periods.
As noted above, TCA will change how it has accounted for certain contractual
liabilities it owes to its partners and their affiliates for services performed
under contract. TCA will record a liability for previously provided services
pursuant to SFAS 5 when it became probable that it had been incurred rather than
when such payments became payable. As a result of this change, some payments
will be recorded as liabilities and expenses on TCA's financial statements
several years before they are due and payable. Previously, these payments were
recorded as liabilities only when payment was certain. These payments are
related to amounts due under (a) the third, fourth, fifth, seventh, eighth,
ninth and eleventh priority distributions described in the Amended and Restated
Omnibus Financing Agreement and (b) the third and fourth priority distributions
described in the Amended and Restated Omnibus Termination Agreement.
One effect of the change described in the preceding paragraph is that TCA will
recognize an additional loss on the Development Agreement between it and the
Mohegan Tribal Gaming Authority (the "Authority"), which is accounted for in
accordance with Statement of Position 81-1. This will result in a corresponding
reduction on the Company's balance sheet as of December 31, 2002 in "Trading
Cove Associates - equity investment" of $4,496,500 and an increase in member's
deficiency of $4,496,500. Through December 31, 2002 Trading Cove had recorded a
loss of $7,007,000. After the restatement, it will record a loss of $16,000,000.
The Company's 50% share of the difference is $4,496,500. Prior to making the
change described in the preceding paragraph, TCA would have recorded this loss
in the second quarter of 2003, when the related amount would have been paid.
Also as noted above, TCA will change its historical method of accruing junior
relinquishment payments it receives from the Authority pursuant to the
Relinquishment Agreement. TCA will now accrue for such payments in each quarter
as they are earned. Prior to the restatement, TCA recognized such payments as
revenue as they became payable every six months. The restatement will require
the Company to record its investment in TCA with a portion of each junior
relinquishment payment being accrued each quarter.
Also as noted above, TCA will reclassify certain payments to its partners as
distributions on TCA's partnership interests. The payments, the classification
of which will change, are payments TCA has historically made under the fifth and
seventh priorities under the Amended and Restated Omnibus Termination Agreement,
for the periods commencing January 1, 2000. This reclassification by TCA will
result in the reclassification by the Company of certain income it received from
TCA as "Equity in income (loss) of Trading Cove Associates" on its statement of
operations. Prior to the restatement, the Company had classified such payments
on its statement of operations as "Revenue - 25% of relinquishment payments -
Trading Cove Associates". Such reclassification will not change or affect the
Company's aggregate net income or loss for the period covered by the restated
financial statements. These payments are considered a distribution to the
Company on its partnership interests, rather than revenue from TCA. Accordingly,
at December 31, 2002, the restated condensed balance sheet of the Company will
show $0 as due from TCA, and accordingly "Trading Cove Associates - equity
investment" will be increased by $11,021,500, which was the amount previously
recorded as an amount due from TCA prior to making the change described in this
paragraph.
The Condensed Balance Sheet at December 31, 2002, Condensed Statement of
Operations for the three months ended March 31, 2002, Condensed Statement of
Changes in Member's Deficiency for the three months ended March 31, 2002, and
Condensed Statement of Cash Flows for the three months ended March 31, 2002
contained herein have been updated to reflect these restatements.
The following tables show the effect of the restatement on the Company's
Condensed Balance Sheet as of December 31, 2002, as well as the Company's
Condensed Statement of Operations, Condensed Statement of Changes in Member's
Deficiency, and Condensed Statement of Cash Flows for the three months ended
March 31, 2002. The restatement adjustments outlined below do not impact total
cash flows of the Company or its reported cash balances.
Waterford Gaming, L.L.C.
Condensed Balance Sheet
as of December 31, 2002
(Unaudited)
---------------------------------
Previously
reported Restated
December 31, Restatement December 31,
2002 * adjustments ** 2002
-------------- -------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 4,658,602 $ --- $ 4,658,602
Restricted investments 10,344,130 --- 10,344,130
Due from Trading Cove Associates 11,021,500 (11,021,500) (a) ---
Other current assets 7,965 --- 7,965
-------------- -------------- ------------
Total current assets 26,032,197 (11,021,500) 15,010,697
-------------- -------------- ------------
Trading Cove Associates - equity investment 5,447,338 6,525,000 (d) 11,972,338
Beneficial interest - Leisure Resort Technology, Inc. 4,540,039 --- 4,540,039
Deferred financing costs, net of accumulated amortization of $1,391,838
at December 31, 2002 2,643,338 --- 2,643,338
Fixed assets, net of accumulated depreciation of $42,222 at
December 31, 2002 11,696 --- 11,696
-------------- -------------- ------------
Total assets $ 38,674,608 $ (4,496,500) $ 34,178,108
============== ============== ============
LIABILITIES AND MEMBER'S DEFICIENCY
Current liabilities
Accrued expenses and accounts payable $ 111,996 $ --- $ 111,996
Accrued interest on senior notes payable 3,021,196 3,021,196
-------------- -------------- ------------
Total current liabilities 3,133,192 --- 3,133,192
-------------- -------------- ------------
9-1/2% senior notes payable 108,007,000 --- 108,007,000
-------------- ------------- ------------
Total liabilities 111,140,192 --- 111,140,192
-------------- ------------- ------------
Contingencies --- --- ---
Member's deficiency (72,465,584) (4,496,500) (b) (76,962,084)
-------------- ------------- ------------
Total liabilities and member's deficiency $ 38,674,608 $ (4,496,500) $ 34,178,108
============== ============= ============
* Previously reported in Form 10-K filed by the Company on March 26, 2003
** See page 15 of the notes to the Company's financial statements for the
description of the restatement adjustments
13
Waterford Gaming, L.L.C.
Condensed Statement of Operations
for the three months ended March 31, 2002
(Unaudited)
-----------------------------
Previously reported Restated
for the three months Restatement for the three months
ended March 31, 2002 * adjustments ** ended March 31, 2002
---------------------- -------------- ---------------------
Revenue
25% of relinquishment payments - Trading
Cove Associates $ 1,621,000 $ (1,621,000) (a) ---
Interest and dividend income 194,727 (194,727) (c) ---
---------------- -------------- ---------------------
Total revenue 1,815,727 (1,815,727) ---
---------------- -------------- ---------------------
Expenses
Interest expense 3,003,040 --- $ 3,003,040
Salaries - related parties 187,069 --- 187,069
General and administrative 114,348 --- 114,348
Amortization of beneficial interest -
Leisure Resort Technology, Inc. 93,203 --- 93,203
Amortization on deferred financing costs 91,716 --- 91,716
Depreciation 2,695 --- 2,695
---------------- -------------- ---------------------
Total expenses 3,492,071 --- 3,492,071
---------------- -------------- ---------------------
(1,676,344) (1,815,727) (3,492,071)
Interest and dividend income 194,727 (c) 194,727
Equity in income of
Trading Cove Associates 696,500 4,135,278 (e) 4,831,778
---------------- -------------- ---------------------
Net income (loss) $ (979,844) $ 2,514,278 $ 1,534,434
================ ============== =====================
* Previously reported in Form 10-Q filed by the Company on May 14, 2002
** See page 15 of the notes to the Company's financial statements for the
description of the restatement adjustments
Waterford Gaming, L.L.C.
Condensed Statement of Changes in Member's Deficiency
for the three months ended March 31, 2002
(Unaudited)
-----------------------------
Previously reported Restated
for the three months Restatement for the three months
ended March 31, 2002 * adjustments ** ended March 31, 2002
--------------------- -------------- ---------------------
Balance, January 1, 2002 $ (66,978,332) $ (3,496,499) (b) $ (70,474,831)
Distributions (1,416,900) --- (1,416,900)
Net income (loss) (979,844) 2,514,278 (d) 1,534,434
--------------------- -------------- ---------------------
Balance, March 31, 2002 $ (69,375,076) $ (982,221) $ (70,357,297)
===================== ============== =====================
* Previously reported in Form 10-Q filed by the Company on May 14, 2002
** See page 15 of the notes to the Company's financial statements for the
description of the restatement adjustments
14
Waterford Gaming, L.L.C.
Condensed Statement of Cash Flows
for the three months ended March 31, 2002
(Unaudited)
-----------------------------
Previously reported Restated
for the three months Restatement for the three months
ended March 31, 2002 * adjustments ** ended March 31, 2002
---------------------- --------------- --------------------
Cash flows from operating activities
Net income (loss) $ (979,844) $ 2,514,278 $ 1,534,434
---------------- --------------- --------------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Amortization 184,919 --- 184,919
Depreciation 2,695 --- 2,695
Equity in income of Trading Cove Associates (696,500) (4,135,278) (d) (4,831,778)
Operating distributions from
Trading Cove Associates --- 8,357,604 (a) 8,357,604
Changes in operating assets and liabilities
Decrease in due from Trading Cove Associates 6,736,604 (6,736,604) (a) ---
Increase in other current assets (42,751) --- (42,751)
Decrease in accrued expenses and accounts payable (36,913) --- (36,913)
Decrease in accrued interest on senior notes payable (2,758,577) --- (2,758,577)
--------------- --------------- --------------------
Total adjustments 3,389,477 (2,514,278) 875,199
---------------- --------------- --------------------
Net cash provided by
operating activities 2,409,633 --- 2,409,633
---------------- --------------- --------------------
Cash flows from investing activities
Contributions to Trading Cove Associates (200,000) --- (200,000)
Distributions from Trading Cove Associates 750,000 --- 750,000
Sales and (purchases) of restricted investments - net 570,848 --- 570,848
---------------- --------------- --------------------
Net cash provided by
investing activities 1,120,848 --- 1,120,848
---------------- --------------- --------------------
Cash flows from financing activities
Redemption of 9-1/2% senior notes (4,031,000) --- (4,031,000)
Distributions to member (1,416,900) --- (1,416,900)
---------------- --------------- --------------------
Net cash used in
financing activities (5,447,900) --- (5,447,900)
---------------- --------------- --------------------
Net decrease in cash and cash equivalents (1,917,419) --- (1,917,419)
Cash and cash equivalents at beginning of quarter 3,570,949 --- 3,570,949
---------------- --------------- --------------------
Cash and cash equivalents at end of quarter $ 1,653,530 $ --- $ 1,653,530
================ =============== ====================
Supplemental disclosure of cash flow information:
Cash paid during the quarter for interest $ 5,761,617 $ --- $ 5,761,617
================== =============== ====================
* Previously reported in Form 10-Q filed by the Company on May 14, 2002
** See page 15 of the notes to the Company's financial statements for the
description of the restatement adjustments
Waterford Gaming, L.L.C.
FOOTNOTES TO RESTATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(a) To reflect receipt of 25% of the relinquishment payments (as detailed under
point (g) set forth below under the section "Amended and Restated Omnibus
Termination Agreement") as a distribution of operating income of TCA rather
than revenue in the period received.
(b) To reflect a cumulative adjustment of equity income from TCA to reflect the
Company's share of TCA's loss on an uncompleted development services
subcontract with affiliated entities of TCA (the Agreement Relating to
Development Services Phase II).
(c) Reclassification from revenue to other income.
(d) To reflect the impact on its equity in the income of Trading Cove
Associates caused by the explanations in notes (a) and (e) to the Restated
Condensed Financial Statements.
(e) To reflect the impact of TCA recording the junior relinquishment revenue in
the period earned, rather than every six months, when such payments became
due, and to reflect certain payments to affiliates of TCA, as distributions
by TCA rather than as an expense to TCA. (See note (a), above).
15
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.
A - Certain Forward Looking Statements
- --------------------------------------
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, in
particular, the statements about the Company's and Mohegan Sun's plans,
strategies and prospects. Although the Company believes that such statements are
based on reasonable assumptions, these forward-looking statements are subject to
numerous factors, risks and uncertainties that could cause actual outcomes and
results to be materially different from those projected. These factors, risks
and uncertainties include, among others, the risk factors described below under
the heading "Risk Factors" and the following:
a) the financial performance of the Mohegan Sun;
b) changes in laws or regulations (including, without limitation, gaming
laws or regulations);
c) the effects of new competition; and
d) general domestic and global economic conditions.
The Company's and Mohegan Sun's actual results, performance or achievements
could differ materially from those expressed in, or implied by, the
forward-looking statements contained herein. The Company can give no assurances
that any of the events anticipated by the forward-looking statements will occur
or, if any of them do, what impact they will have on our results of operations
and financial condition. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this quarterly
report on Form 10-Q.
B - 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.
1 - Trading Cove Associates
- ---------------------------
TCA was organized on July 27, 1993. The primary purpose of TCA has been,
a) to assist the Tribe and the Authority, in obtaining federal
recognition,
b) to negotiate the tribal-state compact with the State of Connecticut on
behalf of the Tribe,
c) to obtain financing for the development of the Mohegan Sun,
d) to negotiate the Amended and Restated Gaming Facility Management
Agreement (the "Management Agreement"),
e) to oversee all operations of the Mohegan Sun Casino pursuant to the
terms of the Management Agreement until December 31, 1999, and
f) to participate in the design and development of the Mohegan Sun.
The Mohegan Sun commenced operations on October 12, 1996. Since the opening of
the casino, 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 it 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"). The complete text of (a) the Amended and Restated Partnership
Agreement of Trading Cove Associates, dated as of September 21, 1994, among Sun
Cove Limited (now Kerzner Investments), RJH Development Corp., Leisure Resort
Technology, Inc., Suites, Inc., and LMW Investments, Inc., and (b) the 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.
is filed as exhibits to the Company's Registration Statement on Form S-4, filed
with Securities and Exchange Commission (File No. 333-17795) and declared
effective on May 15, 1997 and each is incorporated herin by reference.
16
2 - Trading Cove Associates - Material Agreements
- -------------------------------------------------
a) Relinquishment Agreement
- ----------------------------
On February 7, 1998, TCA and the Authority entered into the Relinquishment
Agreement (the "Relinquishment Agreement"). Under the terms of the
Relinquishment Agreement, TCA continued to manage the Mohegan Sun under the
Management Agreement until midnight December 31, 1999, and on January 1, 2000,
the Management Agreement terminated and the Tribe assumed day-to-day management
of the Mohegan Sun.
Under the Relinquishment Agreement, to compensate TCA for terminating its rights
under the Management Agreement and the Hotel/Resort Management Agreement, the
Authority agreed to pay to TCA a fee (the "Relinquishment Fees") equal to 5% of
Revenues, as defined in the Relinquishment Agreement, generated by the Mohegan
Sun during the 15-year period commencing on January 1, 2000, including revenue
generated by the Project Sunburst expansion project (the "Project").
The Development Fees are divided into senior relinquishment payments and junior
relinquishment payments, each of which equals 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. Such revenue includes, hotel revenues,
food and beverage sales, parking revenues, ticket revenues and other fees or
receipts from the convention/events center in the Project Sunburst 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. Such revenues exclude revenues generated by any other
expansion of the Mohegan Sun.
Senior relinquishment payments are payable quarterly in arrears commencing on
April 25, 2000 for the quarter ended March 31, 2000, and the junior
relinquishment payments are 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, as defined in
the Relinquishment Agreement. (See section below titled "Risk Factors - Trading
Cove's right to receive the relinquishment payments from the Authority is junior
to certain payments by the Authority to the Mohegan Tribe and holders of its
indebtedness".)
For the quarters ended March 31, 2003 and 2002, total Relinquishment Fees earned
were $14,866,320 and $12,457,116, respectively. The amount of Relinquishment
Fees reported in this quarterly report on Form 10-Q are based upon amounts
reported to TCA by the Authority.
The complete text of the Relinquishment Agreement is filed as an exhibit to the
Company'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.
b) Development Agreement and Other Related Agreements
- -----------------------------------------------------
On February 7, 1998, TCA and the Authority entered into the Development Services
Agreement (the "Development Agreement"). Pursuant to the 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. At March 31, 2003 the Project has been
substantially completed.
Pursuant to the Development Agreement, the Authority agreed to pay the
Development Fee to TCA quarterly beginning on January 15, 2000, based on
incremental completion of the Project as of each payment date. The last payment
of the Development Fee is to be paid on the Completion Date, as defined in the
Development Agreement, of the Project. A summary of the quarterly Development
Fee payments received by TCA in accordance with the terms of the Development
Agreement is as follows:
Date Received by TCA Relinquishment Fee Received
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
January 24, 2003 84,000
April 15, 2003 112,000
-----------
$13,944,000
===========
The Development Agreement terminates after the earlier of the completion of the
Project or 10 years. In addition, each party has the right to terminate the
Development Agreement if there is a default or failure to perform by the other
party. The parties must submit disputes arising under the agreement to
arbitration and have agreed that punitive damages may not be awarded to either
party by an arbitrator. The Authority has waived sovereign immunity for the
purpose of permitting, compelling or enforcing arbitration and has agreed to be
sued by TCA in any court of competent jurisdiction for the purposes of
compelling arbitration or enforcing any arbitration or judicial award arising
out of the Development Agreement.
As described in Note 5 to the financial statements included in Item 1 of this
quarterly report on Form 10-Q, on February 9, 1998, TCA and KIML entered into
the Development Services Agreement Phase II. 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. After entering into the Development Services Agreement Phase II, KIML
assigned it to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner
Investments the Development Services Fee Phase II. Such fee equals 3% of the
development costs of the Project, as defined in the Development Services
Agreement Phase II, less all costs incurred by TCA in connection with the
Project. The Development Services Fee Phase II is paid in three installments -
on December 31, 1999, December 31, 2000 and on the Completion Date, as defined
in the Development Agreement - with the final payment being made when the actual
development costs of the Project are known. TCA pays the Development Services
Fee Phase II from available cash flow, if any, in accordance with the Amended
and Restated Omnibus Termination Agreement. The total payments will exceed the
related revenue by $16 million which has been reflected in the accompanying
financial statements. At March 31, 2003 and December 31, 2002, approximately
$10.2 million was payable to affiliates.
17
Also as described in Note 5 to the financial statements included in Item 1 of
this quarterly report on Form 10-Q, before KIML assigned the Development
Services Agreement Phase II to Kerzner Investments, it entered into the Local
Construction Services Agreement with Construction, pursuant to which
Construction agreed to provide certain of those services assigned to KIML by TCA
pursuant to the Development Services Agreement Phase II. KIML has assigned the
Local Construction Services Agreement to Kerzner Investments. Pursuant to the
Local Construction Services Agreement, Kerzner Investments agreed to pay to
Construction a fee equal to 20.83% of the Development Services Fee Phase II as
and when Kernzer Investments receives payment from TCA pursuant to the
Development Services Agreement Phase II. Construction has subcontracted with The
Slavik Company to provide certain services under the Local Construction Services
Agreement. In connection with this subcontracting, Construction agreed that The
Slavik Company would be paid a fee equal to 14.30% of its fee under the Local
Construction Services Agreement.
C - Certain Risk Factors
- ------------------------
1 - Lack of Operations; Dependence on the Mohegan Sun - The Company is entirely
dependent upon the performance of the Mohegan Sun to meet its debt service
obligations.
The Company does not conduct any business operations other than in connection
with its role as a general partner of Trading Cove and activities incidental to
the issuance of the $125 Million Senior Notes and the making of restricted and
temporary investments. The Company is prohibited by the terms of the Indenture
from engaging in any other business activities. The Company intends to fund its
operating debt service and capital needs from cash flows from Trading Cove and
from cash flows (dividend and interest) from temporary investments.
Trading Cove's only material source of revenue and cash flows is the
Relinquishment Fees it receives from the Mohegan Sun. There can be no assurance
that the Mohegan Sun will continue to generate sufficient revenues for the
Authority to be profitable or to service its debt obligations, or to pay
Relinquishment Fees. The Company's ability to meet its obligations under the
$125 Million Senior Notes is entirely dependent upon the performance of the
Mohegan Sun, which is subject to matters over which Trading Cove and the Company
have no control, including, without limitation, general economic conditions,
effects of competition, political, regulatory and other factors, the actual
number of gaming customers and the amount wagered.
In addition, Trading Cove has entered into subcontracts with Kerzner Investments
(who has further subcontracted with certain of our affiliates) in connection
with the development and construction of the Project Sunburst expansion. Under
the subcontracts, Trading Cove has agreed to pay a development fee equal to 3%
of the total costs of the Project Sunburst expansion, excluding capitalized
interest, which is estimated to be $1.0 billion, less Trading Cove's actual
costs relating to the Project Sunburst expansion. The Company expects Trading
Cove will pay Kerzner Investments and our affiliates a development fee of
approximately $20 million pursuant to these subcontracts. Pursuant to the
Amended and Restated Omnibus Termination Agreement, Trading Cove is required to
pay the development fee prior to making any distribution to its partners,
including the Company. To date, Trading Cove has paid approximately $10.8
million to Kerzner Investments and the Company's affiliates under the
Development Services Agreement and expects to pay the remaining approximately
$9.2 million in July 2003. Any payment of the development fee reduces amounts
available to be distributed to the Company.
The Company cannot assure you that its future operating cash flow will be
sufficient to cover its expenses, including interest on the $125 Million Senior
Notes.
18
2 - Leverage - The Company's and the Authority's substantial indebtedness could
adversely affect the Company's ability to fulfill its obligations under the $125
Million Senior Notes.
The Company has an aggregate long-term senior indebtedness of $102,349,000,
consisting of the $125 Million Senior Notes. The Authority is also highly
leveraged. As of March 31, 2003, the Authority had a total of approximately
$1.13 billion of indebtedness outstanding. On March 25, 2003, the Authority
closed a new $391.0 million bank credit facility. At March 31, 2003 the
Authority has approximately $170 million available for borrowing under the bank
credit facility. Pursuant to the terms of the bank credit facility, the
Authority may incur additional indebtedness, including senior secured
indebtedness. Substantially all of the Authority's assets secure its bank credit
facility.
The Company's agreements with the Authority do not prohibit the Authority from
incurring indebtedness. In addition to its bank credit facility, the Authority
had the following indebtedness outstanding:
a) $200.0 million of 8.125% senior notes due 2006;
b) $300.0 million of 8.75% senior subordinated notes due 2009;
c) $150.0 million of 8.375% senior subordinated notes due 2011; and
d) $250.0 million of 8.0% senior subordinated notes due 2012.
The degree to which the Authority is leveraged could have significant
consequences for the holders of the $125 Million Senior Notes, including,
without limitation, the following:
a) making it more difficult for the Authority to pay the fees owed
to Trading Cove under the Relinquishment Agreement; and
b) the Authority's high degree of leverage may make it vulnerable to
an economic downturn, which may hamper the Mohegan Sun's ability
to meet expected operating results.
3 - Subordination - Trading Cove's right to receive the relinquishment payments
from the Authority is junior to certain payments by the Authority to the Mohegan
Tribe and holders of its indebtedness.
The senior and junior relinquishment payments from the Authority to Trading Cove
rank behind all of the Authority's obligations to pay the minimum priority
distributions to the Mohegan Tribe and all of the Authority's existing and
future senior secured indebtedness, including the Authority's bank credit
facility.
As a result, upon any distribution by the Authority to its creditors in a
bankruptcy, liquidation, reorganization or similar proceeding relating to the
Authority or its property, the priority distributions owed to the Mohegan Tribe
and the holders of the Authority's senior secured indebtedness will be entitled
to be paid in full and in cash before any senior or junior relinquishment
payments may be made to Trading Cove. In addition, the junior relinquishment
payments rank behind all of the Authority's existing and future senior
indebtedness. As a result, in any such proceedings, the holders of the
Authority's senior indebtedness will be entitled to be paid in full and in cash
before any junior relinquishment payments may be made to Trading Cove.
In addition, all relinquishment payments will be blocked in the event of a
payment default on senior secured indebtedness of the Authority, and all junior
relinquishment payments will be blocked in the event of a payment default on
senior indebtedness of the Authority and, in each case, may be blocked for up to
179 of 360 consecutive days in the event of certain non-payment defaults on
senior secured indebtedness or senior indebtedness of the Authority, as
applicable.
In the event of a bankruptcy, liquidation, reorganization or similar proceeding
relating to the Authority, Trading Cove will receive distributions (if at all)
on a pari passu basis with all other holders of the Authority's senior unsecured
indebtedness with respect to the senior relinquishment payments from the assets
remaining after the Authority has paid all of its senior secured indebtedness
and with all other holders of subordinated indebtedness with respect to the
junior relinquishment payments from the assets remaining after the Authority has
paid all of its senior indebtedness. However, the Relinquishment Agreement
requires that amounts otherwise payable to Trading Cove in a bankruptcy or
similar proceeding of the Authority be paid to holders of senior secured
indebtedness, with respect to the senior relinquishment payments, and to holders
of senior indebtedness until they are paid in full, with respect to junior
relinquishment payments, instead of to Trading Cove. For that reason, Trading
Cove may receive less, ratably, than holders of senior unsecured indebtedness of
the Authority in any such proceeding. In any of these cases, the Authority may
not have sufficient funds to pay all of its creditors and Trading Cove may
receive less, ratably, than the holders of the Authority's senior indebtedness.
As of March 31, 2003, the senior relinquishment payments are subordinated to
$221.0 million of senior secured indebtedness of the Authority and the junior
relinquishment payments are subordinated to $421.0 million of senior
indebtedness of the Authority. In addition, at March 31, 2003, the Authority has
approximately $170 million available for borrowing under its bank credit
facility. For the year ending September 30, 2002, the annual minimum priority
distribution to the Mohegan Tribe was $15.1 million. The minimum priority
distribution is adjusted annually to reflect the cumulative increase in the
consumer price index. The Authority will be permitted to borrow substantial
additional indebtedness, including senior secured indebtedness, in the future.
19
4 - Risks Associated with Trading Cove and the Trading Cove Partnership
Agreement - The Company would not be a creditor of Trading Cove and we have no
rights to the assets of the Authority in the event of a bankruptcy or similar
proceeding against either. The Company does not have the power under Trading
Cove's partnership agreement to cause Trading Cove to make any distributions to
the Company.
If Trading Cove becomes the debtor in a bankruptcy or similar proceeding, the
Company would have the status of an equity holder, not a creditor, and would not
be entitled to receive any distributions until all of Trading Cove's creditors
were paid in full.
If the Authority became the debtor in a bankruptcy or similar proceeding,
Trading Cove's rights and recovery would depend on numerous factors, including
the type and outcome of the proceeding. If the Authority ceased operations and
liquidated, under chapter 7 of the Bankruptcy Code or otherwise, Trading Cove's
claim would likely be limited to the amount of unpaid relinquishment fees as of
the time of liquidation. If the Authority reorganized under chapter 11 of the
Bankruptcy Code, Trading Cove's claim would likely be based on an estimate of
the Mohegan Sun's future revenues for the term of the Relinquishment Agreement.
In any event, any recovery by Trading Cove on its claims for senior or junior
relinquishment fees would be subject to the prior payment in full of all
indebtedness senior thereto.
As a result, the Company cannot give any assurance that, in the event of
bankruptcy or financial difficulty of either Trading Cove or the Authority, it
would ultimately recover sufficient (or any) funds to pay amounts outstanding
under the $125 Million Senior Notes.
The $125 Million Senior Notes are not secured by a pledge of the Company's
partnership interest in Trading Cove. Accordingly, in the event of an
acceleration under the Indenture, the trustee under the Indenture will not be
able to foreclose upon the equity in Trading Cove.
The partnership agreement with respect to Trading Cove requires consent by both
partners in order to take any action. Accordingly, neither the Company nor
Kerzner Investments has the authority to cause Trading Cove to make any
distributions, and Kerzner Investments has the ability to block any action taken
by Trading Cove. Although the partnership agreement requires Trading Cove to
make distributions of excess cash, the distributions are reduced by certain
undefined, discretionary amounts, including foreseeable needs of cash,
obligations to third parties, adequate working capital and reserves and the
amount needed by the partnership to conduct its business and carry out its
purposes. A dispute between the partners as to the appropriate amount of such
reductions could result in no or limited distributions by Trading Cove, which
could have a material adverse effect on the Company's ability to make required
payments of interest, principal and premium on the $125 Million Senior Notes.
Under the partnership agreement and certain other existing agreements, Trading
Cove must make certain payments and pay expenses prior to making distributions
to its members, including Waterford. Such payments and expenses include
(1) the development fee to be paid to Kerzner Investments,
Construction, and The Slavik Company and related development
expenses equal to 3% of the total cost of the Project Sunburst
expansion, excluding capitalized interest, less Trading Cove's
actual costs relating to the Project Sunburst expansion (the
remaining development fee payment, expected to be approximately
$9.2 million, is expected to be made in July 2003), and
(2) a $5.0 million annual payment to Kerzner Investments, payable
quarterly until December 31, 2006.
In addition, Trading Cove will pay its operating expenses prior to making any
distributions to its partners. To the extent its operating expenses are less
than $2.0 million, Trading Cove is required to pay the difference to each of
Kerzner Investments and the principals of the Company. All of these amounts
reduce the amounts distributable to the Company. Finally, the Company and
Trading Cove are party to litigation with a former partner of Trading Cove,
which, if adversely determined, could materially and adversely affect its future
distributions from Trading Cove.
5 - Risks Associated with the Buy/Sell Option Under Trading Cove Partnership
Agreement - If a dispute occurs between the Company and Kerzner Investments, the
buy/sell provision of the partnership agreement could be invoked. If the
buy/sell provision is invoked, the Company cannot assure you that it would have
sufficient funds to buy out Kerzner Investments or, if the Company agreed to
sell to Kerzner Investments, that the selling price would be sufficient to pay
all amounts due on the $125 Million Senior Notes.
In the event of any dispute between the partners in Trading Cove, either partner
could invoke the buy/sell provision contained in the partnership agreement.
Pursuant to the buy/sell provision, the party invoking the buy/sell provision
would deliver a notice to the other party requiring it to sell its interest or
buy the invoking party's interest, in each case at the price set forth in such
notice. The party receiving the notice must make the election within 45 days of
receipt of the notice or be deemed to have accepted the offer to sell. If the
offer to buy is elected, the party must close the purchase within 75 days of the
end of the 45-day period. Any party may terminate the option at any time prior
to closing by accepting the position of the other party. In the event Kerzner
Investments were to invoke the buy/sell provision, the Company could:
a) buy Kerzner Investments' interest;
b) sell its interest; or
c) agree with Kerzner Investments on the point of dispute.
The Company may transfer it right to buy under the buy/sell provision of the
partnership agreement to the Waterford Group or the Waterford Group may fund the
purchase of Kerzner Investment' partnership interest. If the Company were to
elect to buy Kerzner Investments' partnership interest other than with funds
provided by the Waterford Group, the Indenture requires the Company to redeem
the $125 Million Senior Notes; however the Company cannot assure you that it
would be able to raise funds sufficient for us to redeem the $125 Million Notes
on satisfactory terms, or at all.
If the Company were to sell its partnership interest in Trading Cove, it is
possible that the amount we receive would be insufficient to pay all amounts due
on the $125 Million Senior Notes. If the Company were to concur with Kerzner
Investments with respect to the point of dispute, it cannot assure you that
Kerzner Investments' position would not have a material adverse effect on the
Company's ability to pay principal, interest and premium on the $125 Million
Senior Notes.
20
6 - Difficulties in Enforcing Obligations Against the Authority - The ability to
enforce obligations against the Authority and the Mohegan Tribe is limited by
the Mohegan Tribe's sovereign immunity.
Although the Mohegan Tribe and the Authority have sovereign immunity and may not
be sued without their consent, both the Mohegan Tribe and the Authority have
granted a limited waiver of sovereign immunity and consent to suit in connection
with the Relinquishment Agreement, including suits against the Authority to
enforce the obligation to pay fees due under the Relinquishment Agreement. In
the event that such waiver of sovereign immunity is held to be ineffective,
Trading Cove could be precluded from judicially enforcing its rights and
remedies. Generally, waivers of sovereign immunity have been held to be
enforceable against Indian tribes such as the Mohegan Tribe. In addition, the
Company has no standing to enforce the Relinquishment Agreement and therefore
would have to rely on Trading Cove to enforce such agreements.
The Relinquishment Agreement provides that disputes shall be resolved in any
court of competent jurisdiction including the Gaming Disputes Court of the
Mohegan Tribe, which was established under the Mohegan Tribe's constitution to
rule on disputes with respect to the Mohegan Sun. Appeals of the decisions of
the Trial Division are heard by the Appellate Branch of the Gaming Disputes
Court. Matters as to which applicable federal or state courts have jurisdiction
may be brought in such courts. However, the federal courts may not have
jurisdiction over disputes not arising under federal law, and the state courts
may not have jurisdiction over any disputes arising on the Mohegan reservation.
Moreover, the federal and state courts, under the doctrines of comity and
exhaustion of tribal remedies, may be required to (1) defer to the jurisdiction
of the Gaming Disputes Court or (2) require that any plaintiff exhaust its
remedies in the Gaming Disputes Court before bringing any action in the federal
or state court. Thus, there may be no federal or state court forum with respect
to a dispute with the Authority or the Mohegan Tribe relating to the
Relinquishment Agreement. In addition, the Authority may not be subject to the
federal bankruptcy laws. Thus, no assurance can be given that, if an event of
default occurs, any forum will be available other than an arbitration panel of
the Gaming Disputes Court. In the Gaming Disputes Court, there are few guiding
precedents for the interpretation of Mohegan Tribal law. Any execution of a
judgment of the Gaming Disputes Court will require the cooperation of the
Mohegan Tribe's officials in the exercise of their police powers. Thus, to the
extent that a judgment of the Gaming Disputes Court must be executed on Mohegan
Tribal lands, the practical realization of any benefit of such a judgment will
be dependent upon the willingness and ability of the Mohegan Tribal officials to
carry out such judgment. In addition, the land under the casino facility is
owned by the United States in trust for the Mohegan Tribe, and creditors of the
Authority or the Mohegan Tribe may not force or obtain title to the land.
The Mohegan Tribe is permitted to amend the provisions of its constitution that
establish the Authority and the Gaming Disputes Court with the approval of
two-thirds of the members of the Tribal Council and a ratifying vote of a
two-thirds majority of all of the members of the Mohegan Tribe, with at least
40% of the registered voters of the Mohegan Tribe voting. However, prior to the
enactment of any such amendment by the Tribal Council, any non-tribal party will
have the opportunity to seek a ruling from the Appellate Branch of the Gaming
Disputes Court that the proposed amendment would constitute an impermissible
impairment of contract. Further, the Mohegan Tribe's constitution prohibits the
Mohegan Tribe from enacting any law that would impair the obligations of
contracts entered into in furtherance of the development, construction,
operation and promotion of gaming on Mohegan Tribal lands. Amendments to this
provision of the Mohegan Tribe's constitution require the affirmative vote of
75% of all registered voters of the Mohegan Tribe. As of September 30, 2002, the
Mohegan Tribe had approximately 934 registered voters. Amendment to any of such
provisions of the Mohegan Tribe's constitution could adversely affect the
ability of Trading Cove to enforce the obligations of the Authority, which, in
turn would adversely affect the Company's ability to pay principal, interest and
premium on the $125 Million Senior Notes.
7 - Future Expansion of the Mohegan Sun - In the event that the Mohegan Tribe
decides to expand the Mohegan Sun, Trading Cove has no rights associated with
such expansion.
The Mohegan Tribe may in the future decide to expand the Mohegan Sun. Under the
terms of the Relinquishment Agreement, Trading Cove is entitled to 5% of all
revenues derived directly or indirectly from the Mohegan Sun, including the
Project Sunburst expansion but excluding revenues derived from any future
expansions and from bingo. If the Mohegan Sun is further expanded, Trading Cove,
under the terms of the Relinquishment Agreement will not be entitled to any of
the revenues generated by the incremental expansion. The Relinquishment
Agreement does not describe how the Authority would allocate which revenues were
covered by the Relinquishment Agreement and which revenues were not. In
addition, Trading Cove has no rights to act as developer of any such expansion.
The Company cannot assure you that any future expansion of the Mohegan Sun will
not have a material adverse affect on the Authority, including by disrupting the
current operations of the Mohegan Sun thereby affecting revenues and the
Authority's ability to pay Relinquishment Fees to Trading Cove. In addition, the
Company cannot assure you that any future expansion will not draw guests to
those portions of the Mohegan Sun from which Trading Cove is not entitled to a
percentage of revenues, thereby impacting the Relinquishment Fees. If the
Mohegan Tribe were to take any action that would prejudice or have a material
adverse effect on the rights of Trading Cove under the Relinquishment Agreement,
Trading Cove could sue the Mohegan Tribe for breach of contract. The Company
cannot assure you that any such lawsuit would be successful. See "Difficulties
in Enforcing Obligations Against the Authority."
21
8 - Competition from Other Gaming Operations -The Mohegan Sun may face
significant competition from other persons who may receive approval to engage in
gaming in the region.
The gaming industry is highly competitive. The Mohegan Sun currently competes
primarily with the Foxwoods Resort Casino and, to a lesser extent, with casinos
in Atlantic City, New Jersey and upstate New York. Foxwoods, which is located
approximately 10 miles from the Mohegan Sun, recently announced its intention to
build a $99 million casino expansion. With the completion of the Project
Sunburst expansion of the Mohegan Sun, the two facilities are comparable in
gaming space as well as in amenities such as hotel accommodations and non-gaming
entertainment.
Currently, other than Atlantic City, New Jersey, casino gaming in the
Northeastern United States is conducted only by federally recognized Indian
tribes operating under federal Indian gaming law. The New York State legislature
authorized certain limited machine gaming at several racetracks in the state but
not full-scale casino gaming. To date, none of the racetracks have installed
these machines. The legislature also authorized three Indian casinos in the
Catskills region of New York (Sullivan and Ulster counties) and three casinos to
be operated by the Seneca Nation of Indians in the Niagara/Buffalo area. The
Seneca Nation opened a facility in Niagara Falls in late December 2002. The
validity of the New York State statute is currently being litigated in state
court.
The Oneida Indian Nation operates Turning Stone Casino Resort in Verona, New
York, approximately 270 miles from the Mohegan Sun. The St. Regis Mohawk Tribe
in Hogansburg, New York has entered into a gaming compact with the State of New
York to conduct gaming on its reservation near the Canadian border. There are
several proposals to develop casinos in the Catskills region of New York. To
date, only three tribes, the St. Regis Mohawk Tribe, the Cayuga Tribe and the
Stockbridge-Munsee Community, Band of Mohican Indians (the "Stockbridge-Munsee
Tribe"), have submitted Land into Trust Applications to the United States
Department of the Interior. In addition, public reports indicate that several
other tribes have expressed interest in developing a casino in the Catskills
region. The St. Regis Mohawk Tribe recently signed a memorandum of understanding
with the State of New York to conduct full scale gaming in the Catskills region.
Federal and state approvals are still needed for all projects in the Catskills
region. In addition, several other federally recognized tribes in New England
are seeking to establish gaming operations, including the Historic Eastern
Pequot Tribe of Connecticut (whose status is being challenged), the Narragansett
Tribe of Rhode Island, the Aquinnah Wampanoag Tribe of Massachusetts and all
four of the tribes in the State of Maine: the Penobscot, Passamaquoddy, Houlton
Band and Micmac Tribes.
There are several other groups in New England seeking federal recognition as
tribes. If successful, these groups will most likely seek to establish casino
operations. In Connecticut, these include the Schaghticoke Nation and the Golden
Hill Paugussett Tribe; in Massachusetts, the groups include the Mashpee
Wampanoag and the two Nipmuck Bands that border on the State of Connecticut -
the Hassanamisco Band and the Chaubunagungamaug Band. Both the Golden Hill and
the Schaghticoke groups have received proposed negative determinations and are
in the 180-day response period after which the Department of the Interior will
issue its final determination. The Nipmuck Bands both received proposed negative
findings and are awaiting final determinations from the Department of the
Interior; the Mashpee is awaiting a proposed finding.
A number of states in the region are projecting budget shortfalls and are
considering permitting forms of gaming to provide state revenues. In an effort
to address its state budget shortfalls, the Governor of Massachusetts and other
leaders in that state have indicated interest in both Indian gaming and
non-Indian commercial gaming.
The Mohegan Sun also competes with other forms of gaming, including on-track and
off-track wagering, state lotteries and Internet gaming, as well as with
non-gaming leisure activities.
9 - Effect of General Economic Conditions - The U.S. economy is experiencing a
downturn, which could have an adverse impact on the financial performance of the
Mohegan Sun.
The Mohegan Sun is affected by general economic conditions. The events of
September 11th and the war in Iraq further exacerbated difficult conditions in
the U.S. economy and the gaming industry generally. The effects of these events
have included a decline in vacation travel and tourism due to, among other
factors, fears regarding additional acts of terrorism. The magnitude and
duration of these effects or any future acts of terrorism is unknown and cannot
be predicted. In addition, the recent outbreak of severe acute respiratory
syndrome (SARS) has affected international air travel. Worsening economic
conditions or a prolonged recession could hamper the Mohegan Sun's ability to
meet expected operating results.
22
10 - Dependence on Key Personnel; Significant Change in Tribal Management - The
loss of any key management member or any significant change in the makeup of the
Tribal Council could have a material adverse effect on the Mohegan Sun.
The Mohegan Suns success depends in large part on the continued service of
certain key management personnel, particularly William Velardo, the Authority's
President and Chief Executive Officer, Mitchell Etess, the Authority's Executive
Vice President of Marketing, and Jeffrey Hartmann, the Authority's Executive
Vice President, Finance and Chief Financial Officer. The loss of the services of
one or more of these individuals or other key personnel could have a material
adverse effect on the Authority's business, operating results and financial
condition which, in turn, would have a material adverse effect on the Company's
ability to meet its obligations under the $125 Million Senior Notes.
Additionally, Mark F. Brown serves as Chairman of the Tribal Council of the
Mohegan Tribe and Chairman of the Management Board of the Authority. The Members
of the Tribal Council, including the Chairman, are elected by the Mohegan Tribe
every five years. The next election is in October 2005. The loss of Mr. Brown's
services, as well as a significant change in the composition of the Tribal
Council, could have a material adverse effect on the Authority which, in turn,
would have a material adverse effect on the Company's ability to meet its
obligations under the $125 Million Senior Notes.
11 - Highly Regulated Industry - Changes in the law could have a material
adverse effect on the Authority's ability to conduct gaming.
Gaming on the Mohegan Tribe's reservation is extensively regulated by federal,
state and tribal regulatory bodies, including the National Indian Gaming
Commission and agencies of the State of Connecticut (for example, the Division
of Special Revenue, the State Police and the Department of Liquor Control). As
is the case with any casino, changes in applicable laws and regulations could
limit or materially affect the types of gaming that the Authority can conduct
and the revenues they realize. Congress has regulatory authority over Indian
affairs and can establish and change the terms upon which Indian tribes may
conduct gaming. Currently, the operation of all gaming on Indian lands is
subject to the Indian Gaming Regulatory Act of 1988. For the past several years,
legislation has been introduced in Congress with the intent of modifying a
variety of perceived problems with the Indian Gaming Regulatory Act. Certain
bills have also been proposed which would have the effect of repealing many of
the key provisions of the Indian Gaming Regulatory Act and prohibiting the
continued operation of certain classes of gaming on certain Indian reservations
in states where such gaming is not otherwise allowed on a commercial basis.
However, none of the substantive proposed amendments to the Indian Gaming
Regulatory Act have proceeded out of committee hearings to a vote by either the
House or the Senate.
In the event that Congress passes prohibitory legislation that does not include
any grandfathering exemption for existing tribal gaming operations, and if such
legislation is sustained in the courts against tribal challenge, the Authority's
ability to meet its obligations to creditors, such as Trading Cove under the
Relinquishment Agreement, would be doubtful. If the Authority were unable to
meet its obligations, it would have a material adverse effect on the Company's
ability to make payments of principal, interest and premiums on the $125 Million
Senior Notes.
Under federal law, gaming on Indian land is dependent on the permissibility
under state law of certain forms of gaming or similar activities. If the State
of Connecticut were to make various forms of gaming illegal or against public
policy, such action may have an adverse effect on the ability of the Authority
to conduct gaming. In fact, the State of Connecticut repealed the Las Vegas
Casino Nights statute earlier this year, but the state attorney general has
opined that this will not affect the two existing Indian gaming compacts.
12 - Possible Environmental Liabilities - Risks of material environmental
liability may exist as a result of possibly incomplete remediation of known
environmental hazards and the existence of unknown environmental hazards.
The site on which the Mohegan Sun is located was formerly occupied by United
Nuclear Corporation, a naval products manufacturer of, among other things,
nuclear reactor fuel components. Prior to the decommissioning of United Nuclear
Corporation facilities on the site, extensive remediation of contaminated soils
and additional investigations were completed. The site currently meets federal
and state remediation requirements. Notwithstanding the foregoing, the Company
cannot assure you that:
a) the various environmental reports or any other existing environmental
studies revealed all environmental liabilities;
b) any prior owners or tenants did not create any material environmental
condition not known to the Company;
c) future laws, ordinances or regulations will not impose any material
environmental liability; or
d) a material environmental condition does not otherwise exist on the
site.
23
13 - Possible Environmental Liabilities - Risks of material environmental
liability may exist as a result of possibly incomplete remediation of known
environmental hazards and the existence of unknown environmental hazards.
The site on which the Mohegan Sun is located was formerly occupied by United
Nuclear Corporation, a naval products manufacturer of, among other things,
nuclear reactor fuel components. Prior to the decommissioning of United Nuclear
Corporation facilities on the site, extensive remediation of contaminated soils
and additional investigations were completed. The site currently meets federal
and state remediation requirements. Notwithstanding the foregoing, the Company
cannot assure you that:
a) the various environmental reports or any other existing environmental
studies revealed all environmental liabilities;
b) any prior owners or tenants did not create any material environmental
condition not known to the Company;
c) future laws, ordinances or regulations will not impose any material
environmental liability; or
d) a material environmental condition does not otherwise exist on the
site.
Taxation of Indian Gaming - A change in the Authority's current tax-exempt
status could have a material adverse effect on the Authority's ability to make
capital improvements and repay its indebtedness.
Based on current interpretations of the Internal Revenue Code of 1986, as
amended (the "Code"), neither the Mohegan Tribe nor the Authority is a taxable
entity for purposes of federal income taxation. There can be no assurance that
Congress will not reverse or modify the exemption for Indian tribes from federal
income taxation.
Efforts were made in Congress in the mid-1990s to amend the Code to provide for
taxation of the net income of tribal business entities. These have included a
House bill which would have taxed gaming income earned by Indian tribes as
unrelated business income subject to corporate tax rates. Although this
legislation was not enacted, future legislation in this area could materially
and adversely affect the Authority's ability to make capital improvements and
repay its indebtedness which, in turn, would have a material adverse effect on
the Company's ability to meet its obligations under the $125 Million Senior
Notes.
D - Significant Accounting Policies
- -----------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts of assets and liabilities
at the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
In the opinion of management, the Company does not have any individual
accounting policy that is critical in the preparation of its financial
statements. This is due to the definitive nature of the business in which the
Company is engaged. Also, in many cases, the Company must use an accounting
policy or method because it is the only policy or method permitted under
accounting principles generally accepted in the United States of America.
The following is a review of the more significant accounting policies and
methods used by the Company:
1 - Concentration of Credit Risk - The Company has one primary source of income:
Distributions from TCA. The Company anticipates regular distributions from TCA
based upon the operating results of the Authority and the related Relinquishment
Fees, and Development Fee, paid and to be paid by the Authority.
2 - Equity Investments - The Company's equity investment in TCA is accounted for
utilizing the equity method. Included in the investment is the purchase price
paid to a corporation for its 12.5% interest in TCA. This amount is amortized
over the terms of the related agreement. The Company receives distributions from
TCA in accordance with an Amended and Restated Omnibus Termination Agreement.
The amount of distributions relies upon the fees earned by TCA pursuant to the
Relinquishment Agreement and the Development Agreement with the Authority.
Distributions are recorded when received.
24
E - Contractual Obligations
The following table provides an overview of the Company's aggregate contractual
obligations as of March 31, 2003.
Payments Due By Period
Contractual Obligations
Total Less Than 1 1-3 Years 3-5 Years More than 5
Year Years
Long-Term Debt Obligations (1) (1) (1) (1) (1)
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations) 0 0 0 0 0
Purchase Obligations 0 0 0 0 0
Other Long-Term Liabilities on the 0 0 0 0 0
Registrant's
Balance Sheet under GAAP
Totals (1) (1) (1) (1) (1)
The Company's long-term debt consists of obligations under the $125 Million
Senior Notes. On March 31, 2003, approximately $102.3 million in aggregate
principal amount of $125 Million Senior Notes was outstanding. Interest on the
outstanding principal amount of $125 Million Senior Notes is payable by the
Company semi-annually in arrears on March 15 and September 15 at a rate of 9.50%
per annum. The outstanding principal amount of the $125 Million Senior Notes is
due and payable in full on March 15, 2010. In addition to making payments of
principal and interest as described in the preceding sentences, on March 15 and
September 15 of each year, the Company must redeem $125 Million Senior Notes
with any "Company Excess Cash" (as defined in the Indenture) at a redemption
price expressed as a percentage of the principal amount of notes being redeemed.
Such redemption price declines annually from 109.5% for redemptions made between
March 15, 1999 and May 14, 2000, to 100% for redemptions made after March 14,
2010. Any reduction in principal amount of $125 Million Senior Notes with
Company Excess Cash will lower the interest payments payable by the Company in
subsequent periods.
F - 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 distributions 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.
1 - Sources of Income and Cash Flows
- ------------------------------------
The Company has one primary source of income and cash flow: equity income and
distributions 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 to TCA.
2 - Distribution on the Company's Partnership Interest in TCA
- -------------------------------------------------------------
The Company's expects that TCA's major source of revenue for 2003 will be
Relinquishment Fees payable by the Authority.
On April 28, 2003 the Company received $2,876,707 from TCA as a distribution
which represents the Company's share under the Amended and Restated Omnibus
Termination Agreement of approximately $14,866,000 in Relinquishment Fees earned
by TCA pursuant to the Relinquishment Agreement for the period January 1 through
March 31, 2003 and $112,000 in Development Fee earned by TCA pursuant to the
Development Agreement for the same period. On April 26, 2002 the Company
received $1,821,000 from TCA as a distribution which represents the Company's
share under the Amended and Restated Omnibus Termination Agreement of
approximately $12,457,000 in Relinquishment Fees earned by TCA pursuant to the
Relinquishment Agreement for the period January 1 through March 31, 2002 and
$413,000 in Development Fee earned by TCA pursuant to the Development Agreement
for the same period.
25
3 - 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. The Amended and Restated Omnibus Termination Agreement (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 agreed to 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 during such year. Such annual fee
is payable in equal quarterly installments beginning March 31, 2000
and ending December 31, 2014. For the three months ended March 31,
2003 and 2002, $462,585 and $0 ($231,292 to Kerzner Investments and
$231,293 to affiliates of the Company), respectively, had been
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 March 31, 2003 these capital contributions aggregated
$7,100,000. From January 1, 2000 to March 31, 2003 $7,100,000 has been
repaid to the partners of TCA, 50% to the Company and 50% to Kerzner
Investments.
As of March 31, 2003, $0 in capital contributions remained outstanding.
(c) Third, to pay any accrued amounts for obligations performed prior to
January 1, 2000 under the Financing Arrangement Agreement. All such
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 such payments are required or due at March 31,
2003. The contingent obligation with respect to such payments at March
31, 2003 was approximately $10,197,000.
(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. On April 28, 2003 and
April 26, 2002, $1,250,000 was distributed 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. The final required
payments under this priority 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 as
distributions. On April 28, 2003 and April 26, 2002, $5,753,415
($2,876,708 to Kerzner Investments and $2,876,707 to the Company) and
$3,242,000, ($1,621,000 to Kerzner Investments and $1,621,000 to the
Company), respectively, was distributed by TCA in terms of the seventh
priority.
(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.
G - Results of Operations
- -------------------------
Comparison of Operating Results for the Quarters ended March 31, 2003
- ---------------------------------------------------------------------
and 2002
- --------
Total expenses for the three months ended March 31, 2003 was $3,380,773 compared
with $3,492,071 for the three months ended March 31, 2002. Interest expense
decreased by $119,737 due primarily to the redemption of the $125 Million Senior
Notes in the principal amounts of $3,396,000 and $5,658,000 on September 15,
2002 and March 15, 2003, respectively, salaries-related parties increased by
$24,094 due to the increase in Revenues of the Mohegan Sun and general and
administrative costs decreased by $15,655 (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 $8,700, a decrease in bank sweep fees of approximately $11,500 and
offset by an increase in insurance expense of approximately $3,000 and by an
increase in rating agency fees of approximately $2,000).
Equity in income of Trading Cove Associates for the three months ended March 31,
2003 was $6,422,310 compared with $4,831,778 for the three months ended March
31, 2002. The Company has included amortization of purchased interests of
$110,007 in each quarter's equity income. The Company's share of TCA's results
fluctuates based upon revenues earned by TCA under the Relinquishment Agreement
and distributions and payments made by TCA under the Amended and Restated
Omnibus Termination Agreement.
As a result of the foregoing factors, Waterford experienced net income of
$3,094,140 for the three months ended March 31, 2003 compared with net income of
$1,534,434 for the three months ended March 31, 2002.
26
H - 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 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 member Waterford Group.
During 1999, 2000, 2001, 2002, on January 13, 2003 and April 10, 2003 the
Company distributed $886,285, $3,059,393, $1,739,660, $3,520,562, $1,290,900 and
$1,947,341 respectively to Waterford Group as tax distributions, in accordance
with the terms of the Indenture.
On November 1, 2002, the Company distributed $15,000,000 to Waterford Group, as
a permitted dividend, 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 $75,159,000 and $70,357,000
at March 31, 2003 and 2002, respectively.
For the three months ended March 31, 2003 and 2002, net cash provided by
operating activities (as shown in the Condensed Statements of Cash Flows) was
$5,264,869 and $2,409,633, respectively.
Current assets decreased from $15,010,697 at December 31, 2002 to $13,602,031 at
March 31, 2003. The decrease was primarily attributable to the scheduled
semi-annual payment of interest on March 15, 2003 on the $125 Million Senior
Notes in the amount of approximately $5,130,000, the redemption on March 15,
2003 of $125 Million Senior Notes in the principal amount of $5,658,000 and
offset by approximately $5,265,000 of cash provided by operations and by
distributions by TCA in terms of the Amended and Restated Omnibus Termination
Agreement.
Current liabilities decreased from $3,133,192 at December 31, 2002 to $592,482
at March 31, 2003. The decrease was primarily attributable to a decrease in
accrued interest on senior notes payable of approximately $2,589,000 and offset
by an increase in accrued expenses and accounts payable of approximately $48,000
(primarily attributable to an increase in the amount due for salaries-related
parties of approximately $54,700, by an increase in the amount due for
accounting services of approximately $1,200 and offset by a decrease in legal
fees of approximately $7,000).
For the three months ended March 31, 2003 and 2002 net cash provided by
investing activities (as shown in the Condensed Statements of Cash Flows) was
$812,955 and $1,120,848, respectively. The net cash provided by investing
activities in 2003 was primarily the result of sales and (purchases) of
restricted investments-net of approximately $613,000 and distributions from TCA
of $200,000. The net cash provided by investing activities in 2002 was primarily
the result of sales and (purchases) of restricted investments-net of
approximately $571,000, distributions from TCA of $750,000 and offset by
contributions to TCA of $200,000 (to fund certain of TCA's development expenses
in connection with the Project at Mohegan Sun).
The Company anticipates that up to $550,000 in additional contributions may have
to be made by the Company to TCA (to fund certain of TCA's development expenses
in connection with the Project at the Mohegan Sun). As of March 31, 2003
$4,550,000 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 three months ended March 31, 2003 and 2002, net cash used in financing
activities (as shown in the Condensed Statements of Cash Flows) was $6,948,900
and $5,447,900, respectively. The net cash used in financing activities in 2003
was primarily the result of the redemption of the $125 Million Senior Notes in
the principal amounts of $5,658,000 on March 15, 2003, and distributions to the
Company's sole member Waterford Group of $1,290,900. 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 on March 15,
2002 and distributions to the Company's sole member Waterford Group of
$1,416,900.
27
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,
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%.
On February 1, 2003, the Company and Finance had Company Excess Cash, as
defined, available for mandatory redemption of the $125 Million Senior Notes
totaling approximately $11,131,000 and accordingly on March 15, 2003 the Company
and Finance made a mandatory redemption of the $125 Million Senior Notes in the
principal amount of $5,658,000 at the redemption price of 106.045%.
The Company expects to fund its operating, debt service and capital needs from
cash flows from the Company's distributions 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 March 31, 2003 and December 31, 2002. The fair market
value of the Company's long-term debt at March 31, 2003 and December 31, 2002 is
estimated to be approximately $105,931,000 and $111,787,000, 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 March 31, 2003 are
principally comprised of an investment in a Federal Home Loan Bank Discount Note
which was purchased at a discount of 1.1%, has a face value of $9,777,000 and
matures September 12, 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.
28
Item 4 -- Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports filed
with, or furnished to, the Commission, pursuant to the Securities Exchange Act
of 1934, is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based on the definition of "disclosure
controls and procedures" in Rule 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing evaluation,
the Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation of those controls by the Chief Executive Officer and Chief
Financial Officer, including any corrective actions with regard to any
significant deficiencies and material weaknesses. The Company believes that its
internal controls and procedures are effective.
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, TCA, the Company, LMW Investments, Inc., and
Slavik Suites, Inc. entered into a settlement and release agreement. Pursuant to
this settlement and release agreement, the Company bought Leisure's beneficial
interest in TCA.
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. Leisure moved for summary judgement seeking dismissal of the counter
claims in full. This motion for summary judgement was denied.
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 possible
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
29
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)
30
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)
99.1 Quarterly Report, for the period ended
March 31, 2003, on Form 10-Q of the Mohegan Tribal
Gaming Authority (the "Authority") dated May 14,
2003, incorporated by reference to the Authority's
electronic filing of such report on Form 10-Q,
Securities and Exchange Commission file reference
No. 033-80655.
(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.
31
(b) Reports on Form 8-K
-------------------
(i) Form 8-K filed on March 31, 2003
Item 5.
On March 27, 2003, the Mohegan Tribal Gaming Authority (the
"Authority") filed a copy of an Amended and Restated Loan Agreement
(the "Loan Agreement") 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. On March 25,
2003, the Authority entered into a Loan Agreement for up to $391
million from a syndicate of 12 institutions and commercial banks with
Bank of America, N.A. serving as Administrative Agent. The Loan
Agreement replaces the Authority's existing $300 million senior
secured credit facility and is comprised of a revolving loan of up to
$291 million and a $100 million term loan, both of which mature on
March 31, 2008.
Date of Report: March 27, 2003
(ii) Form 8-K filed on April 22, 2003
Item 5.
On April 21, 2003, the Mohegan Tribal Gaming Authority (the
"Authority") filed a copy of its Slot Machine Statistical Report 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: April 21, 2003
(iii) Form 8-K filed on May 7, 2003
Item 5.
On May 5, 2003, the Mohegan Tribal Gaming Authority (the "Authority")
filed a press release report on Form 8-K, announcing its second
quarter ended March 31, 2003 operating results, 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: May 5, 2003
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: May 21, 2003 By: /s/Len Wolman
Len Wolman, Chief Executive Officer
Date: May 21, 2003 By: /s/Alan Angel
Alan Angel, Chief Financial Officer
33
CERTIFICATION
I, Len Wolman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waterford Gaming,
L.L.C.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 21, 2003 By: /s/Len Wolman
Len Wolman, Chief Executive Officer
34
CERTIFICATION
I, Alan Angel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waterford Gaming,
L.L.C.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 21, 2003 By: /s/Alan Angel
Alan Angel, Chief Financial Officer
35