UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860) 442-4559
Securities registered pursuant to Section 12(b) of the Act: NONE
Title of each class Name of each exchange on which registered
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes /X/ No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: Not applicable.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes / / No /X/
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. - Not applicable
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). - Not Applicable
WATERFORD GAMING, L.L.C.
INDEX TO FORM 10-K
PAGE
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS 14
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 26
ITEM 9A. CONTROLS AND PROCEDURES 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 27
ITEM 11. EXECUTIVE COMPENSATION 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28
ITEM 14. PRINCPAL ACCOUNTANT'S FEES AND SERVICES 30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 31
Signatures 36
CERTAIN FORWARD LOOKING STATEMENTS
This annual report on Form 10-K contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"SECURITIES ACT") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), including, in particular, the statements about
Waterford Gaming, L.L.C. (the "COMPANY"), Trading Cove Associates ("TCA" or
"TRADING COVE") and the Mohegan Sun Casino's (the "MOHEGAN SUN") 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - 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, TCA'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 its 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 annual
report on Form 10-K.
PART I
Item 1. BUSINESS
A. THE COMPANY
The Company was formed solely for the purpose of holding its partnership
interest in Trading Cove Associates, a Connecticut general partnership. Trading
Cove is the former manager and original developer of the Mohegan Sun located in
Uncasville, Connecticut, a casino owned by the Mohegan Tribe of Indians of
Connecticut (the "MOHEGAN TRIBE" or the "TRIBE"). The Company's interest in TCA
is its principal asset and source of income and cash flow.
Trading Cove developed the Mohegan Sun and managed the property from its opening
in 1996 until December 31, 1999. On January 1, 2000, Trading Cove turned over
management of the Mohegan Sun to the Mohegan Tribal Gaming Authority (the
"AUTHORITY"). TCA and the Company's principals assisted the Mohegan Tribe in
obtaining federal recognition, negotiating the tribal-state compact with the
State of Connecticut, obtaining numerous governmental approvals, raising debt
financing for the initial construction and development of the Mohegan Sun, and
developing the Project Sunburst expansion (the "PROJECT SUNBURST EXPANSION"), an
approximately $1.0 billion expansion at the Mohegan Sun, the final phase of
which opened in June 2002.
The Company is a wholly owned subsidiary of Waterford Group, L.L.C. ("WATERFORD
GROUP"). The Limited Liability Company Agreement of the Company (the "LLC
AGREEMENT") is effective until September 30, 2020 and may be terminated by the
Company's sole member or upon the occurrence of certain events as stated in the
LLC Agreement.
The LLC Agreement provides for the property, affairs and business of the Company
to be managed by a four-member Board of Directors (the "BOARD OF DIRECTORS"),
which consists of two directors appointed by Slavik Suites, Inc. ("SLAVIK") and
two directors appointed by LMW Investments, Inc. ("LMW"). A quorum for the Board
of Directors requires all four members. LMW and Slavik initially contributed
capital to the Company consisting of all of their respective interests in
Trading Cove.
Prior to the offering of the Company's $65 Million 12.75% Senior Notes (the
"12.75% SENIOR NOTES"), Slavik and LMW were partners of Trading Cove. In
connection with the formation of the Company, Slavik and LMW each contributed to
the Company its interests in Trading Cove in exchange for a 66-2/3 percent and
33-1/3 percent ownership interest, respectively, of the Company. Upon
consummation of the offering of the 12.75% Senior Notes, (i) $6.7 million of the
proceeds of such offering were distributed directly to Slavik for the purpose of
redeeming certain ownership interests in Slavik, and (ii) $3.3 million of the
proceeds were distributed to LMW, which in turn loaned such proceeds to Len and
Mark Wolman, as individuals, who used such funds to purchase certain interests
in Slavik. The Company used $10.6 million of the proceeds from the offering of
the 12.75% Senior Notes to purchase RJH Development Corp.'s ownership interest
in Trading Cove. As a result of these transactions (collectively the
"REORGANIZATION"), Slavik and LMW owned 67.7967 percent and 32.2033 percent of
the Company, respectively. The Company is a managing general partner of Trading
Cove. As a result of the Reorganization, the only two partners of Trading Cove
are the Company and Kerzner Investments Connecticut, Inc. ("KERZNER
INVESTMENTS"), formerly Sun Cove Limited.
1
In connection with the issuance on March 17, 1999 of the $125 Million 9.50%
Senior Notes (the "9.50% SENIOR NOTES"), each of Slavik and LMW contributed
their respective interests in the Company concurrently to Waterford Group.
Waterford Group is now the sole member of the Company. Slavik and LMW own
Waterford Group in the same respective interest as they had in the Company,
which are as follows:
Slavik Suites, Inc. 67.7967%
LMW Investments, Inc. 32.2033%
-----------
100.0000%
===========
Additional capital contributions may be made to the Company by its member,
Waterford Group. If it is determined that the Company requires additional funds,
such funds may be loaned to the Company by its member pursuant to the terms set
forth in the LLC Agreement; however, the indenture governing the $155 Million
8.625% Senior Notes (the "8.625% SENIOR NOTES"), prohibits the Company from
incurring additional indebtedness. The LLC Agreement also provides that any
disputes which arise under the LLC Agreement and which remain unresolved after
30 days will be settled through arbitration.
LMW, one of the two members of Waterford Group, is a development firm based in
southeastern Connecticut. LMW is owned by Len Wolman and Mark Wolman. The other
member of Waterford Group, Slavik, is based in Detroit, Michigan. The directors
of Slavik are Del J. Lauria, Len Wolman, Mark Wolman and Stephan F. Slavik.
For the fiscal years 2003, 2002 and 2001, the Company had net income of
$3,891,633, $12,033,310 and $6,574,572, respectively. At the end of fiscal years
2003, 2002 and 2001, the Company had total assets of $36,219,560, $34,178,108
and $48,359,724, respectively.
As of December 31, 2003, the Company employed one full-time employee and no
part-time employees. The Company's employee is not covered by a collective
bargaining agreement.
B. $155 MILLION 8.625% SENIOR NOTES PAYABLE:
On June 11, 2003, the Company and Waterford Gaming Finance Corp. ("FINANCE")
issued the 8.625% Senior Notes. Payment of the principal of, and interest on,
the 8.625% Senior Notes is pari 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 collateralized
and subordinated debts.
The 8.625% Senior Notes bear interest at a rate of 8.625% per annum, payable
semi-annually in arrears on March 15 and September 15 of each year, commencing
September 15, 2003. The principal amount due on the 8.625% Senior Notes is
payable on September 15, 2012.
The Company and Finance may elect to redeem all or any of the 8.625% Senior
Notes at any time on or after September 15, 2008 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 September 14, 2008 but
on or before September 14, 2009 103.551%
after September 14, 2009 but
on or before September 14, 2010 102.537%
after September 14, 2010
but on or before September 14, 2011 101.522%
after September 14, 2011 but
on or before September 14, 2012 100.507%
after September 14, 2012 100.000%
The 8.625% Senior Notes provide that upon the occurrence of a Change of Control
as defined in the indenture governing the 8.625% Senior Notes (the "8.625%
SENIOR NOTES INDENTURE"), the holders thereof will have the option to require
the redemption of the 8.625% Senior Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued interest.
2
Pursuant to the terms of the 8.625% Senior Notes Indenture, if the Company and
Finance have any Company Excess Cash, as defined in the 8.625% Senior Notes
Indenture, on February 1 or August 1 of any year, they must use such Company
Excess Cash less all Required IRA True-Up Payments, as defined in the 8.625%
Senior Notes Indenture, and less any amount set aside for the payment of accrued
and unpaid interest on the interest payment date that corresponds to the
redemption date for which the determination is being made, to redeem the 8.625%
Senior Notes on the March 15 or September 15 following such dates. Any such
redemption will be made at a price equal to a percentage of the principal amount
being redeemed. Such percentage is set forth in the following table:
If notes are redeemed with Redemption Price (expressed as a percentage
Company Excess Cash of the principal amount being redeemed)
------------------------- --------------------------------------------
after September 14, 2003 but
on or before September 14, 2004 108.625%
after September 14, 2004 but
on or before September 14, 2005 107.610%
after September 14, 2005 but
on or before September 14, 2006 106.596%
after September 14, 2006 but
on or before September 14, 2007 105.581%
after September 14, 2007 but
on or before September 14, 2008 104.566%
after September 14, 2008 but
on or before September 14, 2009 103.551%
after September 14, 2009 but
on or before September 14, 2010 102.537%
after September 14, 2010
but on or before September 14, 2011 101.522%
after September 14, 2011 but
on or before September 14, 2012 100.507%
after September 14, 2012 100.000%
On August 1, 2003 the Company and Finance had Company Excess Cash (which totaled
$5,568,186), as defined in the 8.625% Senior Notes Indenture, and after
deducting (i) all Required IRA True-Up Payments, as defined in the 8.625% Senior
Notes Indenture, (which totaled $0) and (ii) the amount set aside for the
payment of accrued and unpaid interest on the interest payment date that
corresponds to the redemption date for which the determination is being made
(which totaled $3,490,729), the amount available for a mandatory redemption of
the 8.625% Senior Notes totaled $2,077,457, and accordingly on September 15,
2003 the Company and Finance made a mandatory redemption of the 8.625% Senior
Notes in the principal amount of $1,912,000 at the redemption price of 108.625%.
Such redemption price is expressed as a percentage of the principal amount being
redeemed.
On February 1, 2004 the Company and Finance had Company Excess Cash (which
totaled $14,533,996), as defined in the 8.625% Senior Notes Indenture, and after
deducting (i) all Required IRA True-Up Payments, as defined in the 8.625% Senior
Notes Indenture, (which totaled $0) and (ii) the amount set aside for the
payment of accrued and unpaid interest on the interest payment date that
corresponds to the redemption date for which the determination is being made
(which totaled $6,601,920), the amount available for a mandatory redemption of
the 8.625% Senior Notes totaled $7,932,076, and accordingly on March 15, 2004
the Company and Finance made a mandatory redemption of the 8.625% Senior Notes
in the principal amount of $7,302,000 at the redemption price of 108.625%. Such
redemption price is expressed as a percentage of the principal amount being
redeemed.
In certain circumstances, if either the Company or Kerzner Investments, the
Company's partner in TCA, exercises the option to buy or sell partnership
interests in TCA, the Company and Finance must redeem the 8.625% Senior Notes.
The 8.625% Senior Notes 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) make distributions on
its equity interests or 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 8.625%
Senior Notes Indenture also provides for customary events of default and the
establishment of a restricted investment account with a trustee for interest
reserves ("IRA"). The IRA consists of an amount of funds equal to the interest
payment due on the 8.625% Senior Notes on the following interest payment date.
The IRA will be released and the Company can make a permitted distribution to
Waterford Group once the Leverage Ratio, as defined in the 8.625% Senior Notes
Indenture, is less than or equal to 3.0 to 1.0.
3
The fair market value of the Company's long term debt at December 31, 2003 and
2002 is estimated to be approximately $163,804,000 and $111,787,000,
respectively, based on the quoted market price for the 8.625% Senior Notes and
the 9.50% Senior Notes, respectively.
The 8.625% Senior Notes Indenture is filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2003 (Securities and
Exchange Commission (the "COMMISSION") File No. 333-17795) as accepted by
Commission on August 12, 2003 and is incorporated herein by reference.
C. TRADING COVE ASSOCIATES
TCA was organized on July 27, 1993. The primary purpose of TCA has been,
- - to assist the Tribe and the Authority in obtaining federal recognition, - to
negotiate the tribal-state compact with the State of Connecticut
on behalf of the Tribe,
- - to obtain financing for the development of the Mohegan Sun,
- - to negotiate the Amended and Restated Gaming Facility Management
Agreement (the "MANAGEMENT AGREEMENT"),
- - to oversee all operations of the Mohegan Sun pursuant to the terms of
the Management Agreement until midnight December 31, 1999, and
- - to participate in the design and development of the Mohegan Sun.
The Mohegan Sun commenced operations on October 12, 1996. From the opening of
the Mohegan Sun until midnight December 31, 1999, TCA oversaw the Mohegan Sun's
day-to-day operations.
TCA's partnership agreement (the "TCA PARTNERSHIP AGREEMENT") will terminate on
December 31, 2040, or earlier, in accordance with its terms. The Company has a
50 percent partnership interest in TCA. The remaining 50 percent interest is
owned by Kerzner Investments, an affiliate of Kerzner International Limited
("KERZNER INTERNATIONAL").
TCA's sole source of revenue is payment under the Relinquishment Agreement and
Development Agreement, each as described below.
D. TRADING COVE ASSOCIATES MATERIAL AGREEMENTS
1 - 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 (described below) 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
percent 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.
The Relinquishment Fees are divided into senior relinquishment payments and
junior relinquishment payments, each of which equals 2.5 percent of "Revenues."
Revenues are defined in the Relinquishment Agreement as gross gaming revenues
(other than Class II gaming revenue) 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 Authority's senior obligations, as defined
in the Relinquishment Agreement. See section below titled "Risk Factors -
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."
4
A summary of relinquishment payments received by TCA for 2003, 2002 and 2001 is
as follows:
DATE SENIOR JUNIOR TOTAL
- ------------------------------------- ------------- ------------- -------------
April 25, 2003 $ 7,433,160 $ -- $ 7,433,160
July 25, 2003 8,101,075 15,534,235 23,635,310
October 27, 2003 8,691,811 -- 8,691,811
January 26, 2004 8,323,731 17,015,541 25,339,272
------------- ------------- -------------
Relinquishment Fees for the year
ended December 31, 2003 $ 32,549,777 $ 32,549,776 $ 65,099,553
============= ============= =============
April 25, 2002 $ 6,228,559 $ -- $ 6,228,559
July 25, 2002 7,104,939 13,333,500 20,438,439
October 25, 2002 8,171,882 -- 8,171,882
January 27, 2003 7,748,971 15,920,852 23,669,823
------------- ------------- -------------
Relinquishment Fees for the year
ended December 31, 2002 $ 29,254,351 $ 29,254,352 $ 58,508,703
============= ============= =============
April 25, 2001 $ 5,090,622 $ -- $ 5,090,622
July 25, 2001 5,472,900 10,563,521 16,036,421
September 7, 2001 68,233 68,234 136,467
October 25, 2001 5,765,232 -- 5,765,232
January 25, 2002 6,460,672 12,225,904 18,686,576
------------- ------------- -------------
Relinquishment Fees for the year
ended December 31, 2001 $ 22,857,659 $ 22,857,659 $ 45,715,318
============= ============= =============
The amount of Relinquishment Fees reported in this annual report on Form 10-K
are based upon Revenues reported to TCA by the Authority.
The senior and junior relinquishment payments rank behind the Authority's
obligation to pay an annual minimum priority distribution to the Mohegan Tribe
and all of the Authority's existing and future senior secured indebtedness,
including the Authority's bank credit facility under which the Authority has the
ability to incur up to $500.0 million of indebtedness. 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 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 until they are paid in full, with respect to the senior
relinquishment payments, and to holders of senior secured indebtedness, with
respect to junior relinquishment payments, instead of to Trading Cove. For that
reason Trading Cove may receive less, ratably, than holders of senior
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.
In the event of an acceleration of any indebtedness of the Authority, the senior
and junior relinquishment payments that are not yet due under the Relinquishment
Agreement would be effectively subordinated to the Authority's indebtedness
since the payment obligations under the Relinquishment Agreement cannot be
accelerated by their terms and have no blockage rights as designated senior debt
of the Authority.
5
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, there is no assurance that, in the event of bankruptcy or financial
difficulty of either Trading Cove or the Authority, the Company would ultimately
recover sufficient (or any) funds to pay amounts outstanding under the 8.625%
Senior Notes.
Under the Relinquishment Agreement, the Authority makes certain covenants for
the benefit of Trading Cove, including the following:
(1) PAYMENTS TO THE MOHEGAN TRIBE. Except for payments of the minimum priority
distributions and reasonable charges for utilities or other governmental
services supplied by the Mohegan Tribe to the Authority, the Authority may not
make any distributions to the Mohegan Tribe or its members at any time any
relinquishment payments are outstanding.
(2) AFFILIATE TRANSACTIONS. Except for payments of the minimum priority
distributions and reasonable charges for utilities or other governmental
services supplied by the Mohegan Tribe to the Authority, the Authority agrees to
abide by certain restrictions on transactions with the Mohegan Tribe and its
members, all as set forth in the Relinquishment Agreement.
(3) REPLACEMENT/RESTORATION OF THE MOHEGAN SUN. If any portion of the Mohegan
Sun facilities is damaged by fire or other casualty, the Authority shall replace
or restore such facilities to substantially the same condition as prior to such
casualty, but only to the extent insurance proceeds are available to do so. If
sufficient insurance proceeds are not available, the Authority will use
reasonable efforts to obtain the required financing, on commercially reasonable
terms, to undertake and complete such replacement or restoration.
(4) BUSINESS PURPOSE. The Authority has agreed that during the term of the
Relinquishment Agreement it will engage only in the casino gaming and resort
business (and any incidental business or activity) and will continue to operate
the Mohegan Sun as currently operated.
Under the Relinquishment Agreement, the Authority and Trading Cove have each
agreed not to solicit any employee of the other party or any affiliate of the
other party for five years.
With certain limitations set forth in the Relinquishment Agreement, both the
Mohegan Tribe and the Authority waive immunity from uncontested suit for certain
enforcement rights of Trading Cove arising under the Relinquishment Agreement.
The Company's right to receive a portion of the relinquishment payments from
Trading Cove is governed by the Amended and Restated Omnibus Termination
Agreement discussed below.
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, and is
incorporated herein by reference.
2 - DEVELOPMENT AGREEMENT AND 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 Sunburst expansion 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 Sunburst
expansion and that TCA has no further obligations relating to the staffing of
the Project Sunburst expansion.
The first phase of the Project Sunburst expansion, 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 approximately 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 approximately 1,200-hotel rooms opened during June 2002. At December 31,
2003 the Project Sunburst expansion was substantially completed.
6
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 Sunburst expansion 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 Sunburst
expansion. 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 Development 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
October 30, 2003 56,000
-------------
$ 14,000,000
=============
The Development Agreement terminates after the earlier of the completion of the
Project Sunburst expansion 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
Development Agreement to arbitration and each has 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.
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, who 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. KIML 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 percent of the development costs of the Project Sunburst expansion,
excluding capitalized interest, less all costs incurred by TCA in connection
with the Project Sunburst expansion. 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 Sunburst
expansion 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 described below. The total of the Development Services Fee
Phase II and TCA's costs related to the development of the Project Sunburst
expansion will exceed the related revenue received by TCA under the Development
Agreement by approximately $15,964,000.
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 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 percent of the Development
Services Fee Phase II as and when Kerzner Investments receives payment from TCA
pursuant to the Development Services Agreement Phase II.
Pursuant to a Letter Agreement, Construction has subcontracted with The Slavik
Company, an affiliate of the Company, to provide certain services under the
Local Construction Services Agreement. In exchange for providing such services,
Construction agreed that The Slavik Company would be paid a fee equal to 14.30
percent of its fee under the Local Construction Services Agreement.
7
On April 26, 2000, July 26, 2000, January 26, 2003 and July 28, 2003 TCA paid
$3,095,000, $1,238,000, $6,474,000 and $9,157,000, respectively, as partial
payment of the Development Services Fee Phase II. Construction received
$644,688, $257,875, $1,348,534 and $1,907,403, respectively, and Construction
paid The Slavik Company $92,190, $36,876, $192,840 and $259,121 on April 26,
2000, July 26, 2000, January 26, 2001 and July 28, 2003, respectively.
At December 31, 2003 TCA's accrued liability to Kerzner Investments with respect
to such fee was approximately $507,000 pursuant to the Development Service
Agreement Phase II.
The Development Services 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, and is incorporated herein by reference.
3 - TCA PARTNERSHIP AGREEMENT
In September 1994, Kerzner Investments, RJH Development Corp., a New York
corporation, Leisure Resort Technology, Inc. ("LEISURE"), Slavik and LMW entered
into an amended and restated partnership agreement to, among other things: (i)
admit Kerzner Investments as a partner to the Trading Cove partnership; (ii) act
as the exclusive agent of the Mohegan Tribe to manage and develop an
entertainment and gaming facility on the Mohegan Tribal Reservation; and (iii)
engage in any other activities incidental or related to the foregoing.
In February 1995, the parties entered into an acknowledgment and release
agreement whereby Leisure withdrew from Trading Cove for all purposes, except
that Leisure retained a 5 percent "beneficial interest" in Trading Cove.
Leisure's beneficial interest is defined as the right to receive certain
distributions of excess cash and the organizational and administrative fee on
the earlier to occur of (i) 14 years from the date of commencement of the
management agreement and (ii) the termination of the Management Agreement.
On January 6, 1998, pursuant to the Settlement and Release Agreement described
in Item 3 (Legal Proceedings) the Company paid $5.0 million to Leisure and,
among other things, Leisure gave up (a) its beneficial interest of 5 percent in
certain fees and excess cash flows, as defined, of Trading Cove and (b) any
other claims it may have had against the Company, Kerzner Investments and
Trading Cove's partners and former partner.
As a result of (i) a First Amendment to the Amended and Restated Partnership
Agreement of Trading Cove, dated October 22, 1996 and (ii) an Agreement for
Purchase and Sale of Partnership Interest, dated September 12, 1996 whereby RJH
Development Corp. agreed to sell and the Company agreed to buy RJH Development
Corp.'s partnership interest for $10.6 million, the Company and Kerzner
Investments are the only partners in Trading Cove.
Pursuant to the TCA Partnership Agreement, Trading Cove will continue to exist
until the first to occur of: (i) December 31, 2040; (ii) a final disposition of
Trading Cove's interest in the Mohegan Sun (or any alternative facility that may
be developed or acquired pursuant to the terms of the TCA Partnership
Agreement); (iii) the decision of the managing partners to terminate Trading
Cove; and (iv) any other event which results in dissolution of Trading Cove.
In connection with its entry into the partnership, Kerzner Investments made a
capital contribution in an amount sufficient to equal a 50 percent partnership
interest. The TCA Partnership Agreement provides for additional capital
contributions. In the event that Trading Cove requires additional funds, and
subject to unanimous approval by the partners, the partners may make loans on a
PRO RATA basis, based on their respective partnership interests. Such loans are
non-recourse and unsecured and bear interest at an annual rate of 2 percent
above the prime rate.
In the event that the Company and Kerzner Investments determine that additional
capital is required to fund TCA's obligations, either may make a capital call.
In the event that a capital call is made and Kerzner Investments does not make
the requested additional capital contribution within 30 days, generally Kerzner
Investments is automatically deemed to have withdrawn from Trading Cove. In such
event, Kerzner Investments is not entitled to any return of any of its previous
capital contributions or additional contributions, but it is generally entitled
to receive repayment of any loans.
In the event that a capital call is made and the Company elects not to make the
requested capital contribution, Kerzner Investments may, at its election, pay
such contributions, which payment shall be deemed, at the election of Kerzner
Investments, to be either (i) a loan to the Company or (ii) a capital
contribution by Kerzner Investments, thereby increasing Kerzner Investments'
partnership interest and diluting the Company's partnership interest. The 8.625%
Senior Notes Indenture limits the Company's ability to make further capital
contributions to TCA.
No partner is obligated to restore a capital account deficit.
8
The partners are required to bring to the attention of the partnership all
opportunities to manage or operate (1) any gaming activities on Native American
reservations and involving Native Americans or (2) any other gaming activity
within 100 miles of the Mohegan Sun. Any such opportunities will be pursued by
an affiliate of Trading Cove, in which the Company will not have any economic
interest. The Company and Kerzner Investments are the managing partners of
Trading Cove, and as such, have the full, exclusive and absolute right, power
and authority to manage and control the partnership and the property, assets and
business thereof. All decisions relating to the management of Trading Cove
require unanimous agreement between the Company and Kerzner Investments.
The TCA Partnership Agreement provides that Howard Kerzner will serve as the
designated representative of Kerzner Investments in its capacity as managing
partner. In the absence of Mr. Kerzner, John Allison will serve as Kerzner
Investments' designated representative. Each designated representative has the
right, power and authority to act for and on behalf of and to bind Kerzner
Investments with respect to all matters relating to the partnership. The TCA
Partnership Agreement grants Mr. Kerzner the right to appoint a proxy upon
written notice to the Company. Len Wolman serves as the designated
representative of the Company.
In the event that a dispute arises under the TCA Partnership Agreement, upon
notice by one disputing party to the other, the parties have ten days to resolve
the dispute. If the dispute is not resolved in such ten-day period then, in
accordance with specific notice procedures set forth in the TCA Partnership
Agreement, either party has the right to deliver a buy-out notice to the other
to require such party to elect to either (i) sell their partnership interest to
the party delivering the notice (at a price and under the terms set forth in
such buy-out notice), or (ii) have the other party or its designee purchase the
interest of the party giving notice at the buy-out price. In the event that the
party receiving the buy-out notice fails to respond, such party is deemed to
have agreed to sell its partnership interest to the party delivering such notice
at the buy-out price specified therein. See "Risk Factors--Risks Associated with
the Buy/Sell Option Under Trading Cove Partnership Agreement."
Subject to the following exceptions, Kerzner Investments is generally prohibited
from assigning its partnership interest. Kerzner Investments may assign its
interest to (1) certain of its affiliates and (2) to any party making a bona
fide written offer to purchase any or all of Kerzner Investments' partnership
interest if, after offering its interest to the Company at the same price and on
the same terms and conditions as set forth in such written offer, the Company
elects not to purchase Kerzner Investments' partnership interest.
The Company is generally prohibited from assigning its partnership interest. The
Company may not assign its interest except (1) to an affiliate of the Company,
(2) to any party making a bona fide written offer to purchase all, but not less
than all, of the Company's partnership interest if, after offering its interest
to Kerzner Investments at the same price and on the same terms and conditions as
set forth in such written offer, Kerzner Investments elects not to purchase the
Company's partnership interest.
Except as otherwise permitted by the TCA Partnership Agreement, no partner may
withdraw from the partnership without the consent of the remaining partners. In
the event that a partner withdraws from the partnership in violation of the TCA
Partnership Agreement, such partner will be liable to the remaining partners for
all damages caused by such withdrawal and shall immediately cease to have any
rights (including rights to receive any monies) in the partnership.
The Amended and Restated Partnership Agreement of Trading Cove Associates, dated
as of September 21, 1994, among Sun Cove Limited (now, Kerzner Investments
Connecticut, Inc.), RJH Development Corp., Leisure Resort Technology, Inc.,
Slavik Suites, Inc., and LMW Investments, Inc., and the First Amendment to
Amended and Restated Partnership Agreement of Trading Cove Associates, dated as
of October 22, 1996, among Sun Cove Limited (now, Kerzner Investments
Connecticut, Inc.), Slavik Suites, Inc., RJH Development Corp., LMW Investments,
Inc. and Waterford Gaming, L.L.C. are filed as exhibits to the Company's
Registration Statement on Form S-4, filed with the Commission (File No.
333-17795) and declared effective on May 15, 1997, and each is incorporated
herein by reference.
4 - MANAGEMENT AGREEMENT
On August 30, 1995, TCA and the Tribe entered into the Management Agreement.
After entering into the Management Agreement, the Tribe assigned it to the
Authority.
9
Until midnight December 31, 1999, TCA was the exclusive manager of the Mohegan
Sun. Under the Management Agreement, the Tribe had granted to TCA the exclusive
right and obligation to develop, manage, operate and maintain the Mohegan Sun
and all other related facilities that are owned by the Tribe or any of its
instrumentalities, including the Authority, and to train members of the Tribe
and others in the management of the Mohegan Sun.
Until January 1, 2000 TCA's primary source of revenue was management fees under
the Management Agreement (the "MANAGEMENT Fees"). The Management Fees were paid
monthly and were calculated in three tiers based upon Net Revenues, as defined
in the Management Agreement, of the Mohegan Sun set forth below (in thousands):
I II III
------------------------- ------------------ ---------------------
Revenues in Tier I Revenues in Tiers I &
plus 35% of Net II plus 30% of Net
40% of Net Revenues up to Revenues between Revenues above
------------------------- ------------------ ---------------------
Year 1 $ 50,546 $50,547-$63,183 $ 63,183
Year 2 $ 73,115 $73,116-$91,394 $ 91,394
Year 3 $ 91,798 $91,799-$114,747 $ 114,747
Year 4 $ 95,693 $95,694-$119,616 $ 119,616
In addition, TCA was required to fund $1.2 million per year ($100,000 per month)
from its Management Fees into a capital replacement reserve. The capital
replacement reserve is the property of the Authority.
The Management Agreement is filed as an exhibit to the Company's Registration
Statement on Form S-4, filed with the Commission (File No. 333-17795) and
declared effective on May 15, 1997, and is incorporated herein by reference.
5 - 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 years ended December 31, 2003 and 2002, $1,840,346 ($920,173 to each of
Kerzner Investments and affiliates of the Company)and $0, 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. The Company does not anticipate TCA making further
capital calls to fund expenses related to the development of the Project
Sunburst expansion. From January 1, 2000 to December 31, 2003, these capital
contributions aggregated $8,000,000. From January 1, 2000 to December 31, 2003,
$8,000,000 has been repaid to the partners of TCA, 50 percent to the Company and
50 percent to Kerzner Investments.
As of December 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 December 31, 2003. The
accrued liability to Kerzner Investments with respect to such fee at December
31, 2003 was approximately $507,000.
(e) Fifth, to pay Kerzner Investments an annual fee (in the form of a priority
distribution) of $5.0 million payable in equal quarterly installments of $1.25
million beginning March 31, 2000 and ending December 31, 2006. On January 27,
2004 and on January 28, 2003, $1,250,000 was distributed in terms of the fifth
priority.
10
(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 sixth 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 January 27, 2004 and
January 28, 2003, $12,669,636 ($6,334,818 to each of Kerzner Investments and the
Company) and $22,043,000 ($11,025,500 to each of Kerzner Investments and the
Company), respectively, was distributed by TCA in terms of the seventh priority.
(h) Eighth, to distribute all excess cash. On January 27, 2004, $10,926,597
($5,463,298 to Kerzner Investments and $5,463,299 to the Company) was
distributed as excess cash.
In addition, TCA will 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 TCA 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.
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) as accepted by the Commission on May 14, 2001,
and is incorporated herein by reference.
6 - AMENDED AND RESTATED OMNIBUS FINANCING AGREEMENT
Until January 1, 2000 TCA's primary source of revenue was Management Fees. Those
fees were utilized by TCA pursuant to the Amended and Restated Omnibus Financing
Agreement which was terminated effective January 1, 2000.
The Amended and Restated Omnibus Financing 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), as accepted by the Commission on November
14, 1997, and is incorporated herein by reference.
E. THE MOHEGAN TRIBAL GAMING AUTHORITY
The Tribe is a federally recognized Indian tribe with an approximately 405-acre
reservation located in southeastern Connecticut. The Tribe established the
Authority on July 15, 1995 with the exclusive power to conduct and regulate
gaming activities for the Tribe. Under the Indian Gaming Regulatory Act of 1988,
as amended ("IGRA"), federally recognized Indian tribes are permitted to conduct
full-scale casino gaming operations on tribal-land, subject to, among other
things, the negotiation of a tribal state compact with the affected state. The
Tribe and the State of Connecticut have entered into such a compact (the
"MOHEGAN COMPACT") that has been approved by the U.S. Secretary of the Interior.
The Authority is governed by a management board (the "MANAGEMENT BOARD"), which
consists of the nine members of the Tribal Council (the governing body of the
Tribe).
Under the terms of the Relinquishment Agreement, at midnight December 31, 1999,
the Management Agreement terminated, and on January 1, 2000 the Tribe assumed
day-to-day management of the Mohegan Sun.
The Tribe and the Authority have entered into a land lease ("LEASE") pursuant to
which the Tribe is leasing to the Authority the land on which the Mohegan Sun is
located (the "SITE"). The Site is part of the Tribe's approximately 405-acre
reservation which was acquired and is held in trust for the Tribe by the United
States of America with the Tribe retaining perpetual rights to the use of the
Site.
F. THE MOHEGAN SUN
The Authority owns and operates the Mohegan Sun, an approximately 3.0 million
square foot full-service gaming and entertainment complex on a 240-acre site
overlooking the Thames River on the Tribe's reservation in southeastern
Connecticut. The Mohegan Sun is located approximately one mile from the
interchange of Interstate 395 and Route 2A in Uncasville, Connecticut. The
Authority constructed a four-lane access road and entrance/exit ramps off of
Route 2A, providing guests direct access to Interstate 395 and Interstate 95,
the main highways connecting Boston, Providence and New York City. The Mohegan
Sun opened in October 1996. The Mohegan Sun is one of two legally authorized
gaming operations in New England offering both traditional slot machines and
table games.
11
The full-service gaming and entertainment complex includes the following:
CASINO OF THE EARTH. The Casino of the Earth, the original casino at the Mohegan
Sun, has approximately 176,500 square feet of gaming space and offers
approximately 3,640 slot machines and 160 table games (including, but not
limited to, blackjack, roulette, craps and baccarat). Food and beverage
amenities, include three full-service themed fine dining restaurants with a
fourth area featuring cuisine from all three themes, a 610-seat buffet, a New
York style delicatessen, a coffee shop, a ten-station food court featuring
international and domestic cuisine and multiple service bars for a total of
approximately 1,800 restaurant seats. An approximately 10,000 square foot,
410-seat lounge features live entertainment seven days a week. There is an
approximately 9,000 square foot simulcasting race book facility, and four retail
shops providing shopping opportunities ranging from Mohegan Sun logo souvenirs
to cigars.
CASINO OF THE SKY. The Casino of the Sky has approximately 119,000 square feet
of gaming space and offers approximately 2,400 slot machines and 110 table games
(including, but not limited to, blackjack, roulette, craps and baccarat). Food
and beverage amenities, include two full-service restaurants, two quick-service
restaurants, a 24-hour coffee shop, a 320-seat buffet, a six station food court
featuring international and domestic cuisine and five lounges and bars operated
by the Mohegan Sun, as well as four full-service and three quick-service
restaurants operated by third-parties, for a total of approximately 2,200
restaurant seats, Mohegan After Dark, consisting of a nightclub, a lounge and a
pub, which are all operated by a third party, the Mohegan Sun Arena with seating
for up to 10,000, a 300-seat cabaret, a child care facility and an arcade-style
recreation area operated by a third party, The Shops at Mohegan Sun containing
approximately 29 different retail shops, four of which are owned by the
Authority, an approximately 1,200-room luxury hotel with room service, a 20,000
square foot spa operated by a third party and approximately 100,000 square feet
of convention space.
As of September 30, 2003, Mohegan Sun had parking spaces for approximately
13,000 guests and 3,100 employees. In addition, the Authority operates an
approximately 4,000 square foot, 20-pump gasoline station and convenience center
located adjacent to the Mohegan Sun.
The Authority formed the Mohegan Basketball Club, ("MBC") , for the purpose of
holding a membership in the Women's National Basketball Association ("WNBA") and
owning and operating a professional basketball team in the WNBA. In January
2003, MBC entered into a membership agreement with the WNBA permitting it to
operate the Connecticut Sun basketball team. The team plays its home games in
the Mohegan Sun Arena.
The information concerning Kerzner International, the Tribe and the Authority
has been derived from publicly filed information.
G. CONTACT INFORMATION; INTERNET ADDRESS
The principal executive offices of the Company is located at 914 Hartford
Turnpike, Waterford, Connecticut 06385 and its telephone number is (860)
442-4559. The Company's internet address is http://www.waterfordgroup.net. In
light of the limited trading market for the Company's securities, the Company
does not currently make its periodic and current reports available, free of
charge, on its website. The Company's periodic and current reports are
available, however, free of charge, on the Commission's website, at www.sec.gov.
The Company will provide electronic or paper copies of its filings free of
charge upon request.
Item 2. PROPERTIES
The Company does not own or lease any real property.
Item 3. 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 State Court 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.
12
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 moved for summary judgment seeking dismissal of the counter
claims in full, which motion was denied on April 14, 2003.
Discovery has commenced and is ongoing. Jury selection is scheduled to commence
on October 19, 2004, with presentation of evidence to begin on October 26, 2004.
The Company believes that it has meritorious defenses and intends vigorously to
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders for a vote for the
fiscal year ended December 31, 2003.
13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Not applicable. The Company did not sell any of its equity securities during the
period covered by this report.
Item 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
(UNAUDITED)
------------- ------------- ------------- ------------- -------------
Revenue
Organizational and
administrative
fee income-
Trading Cove
Associates $ -- $ -- $ -- $ -- $ 15,431,038
25% of
relinquishment
payments-
Trading Cove
Associates -- -- -- -- --
Interest and
dividend income -- -- -- -- --
Subordinated notes
fee income-
Trading Cove
Associates -- -- -- -- 4,424,588
Management
services income-
Trading Cove
Associates -- -- -- -- 1,664,699
Completion
guarantee notes
fee income-
Trading Cove
Associates -- -- -- -- 1,119,063
------------- ------------- ------------- ------------- -------------
Total revenue -- -- -- -- 22,639,388
Total expenses (24,751,861) (13,102,082) (13,579,600) (13,490,367) (24,789,253)
Interest and
dividend income 123,634 534,012 1,330,711 1,894,738 6,144,502
Equity in income
(loss) of Trading
Cove Associates 28,519,860 24,601,380 18,823,461 14,068,067 (1,552,494)
------------- ------------- ------------- ------------- -------------
Net income $ 3,891,633 $ 12,033,310 $ 6,574,572 $ 2,472,438 $ 2,442,143
============= ============= ============= ============= =============
OTHER DATA
Interest expense $ 19,481,783 $ 11,080,139 $ 11,560,994 $ 11,641,049 $ 19,045,076
Net increase
(decrease) in cash and cash
equivalents $ 233,470 $ 1,087,653 $ (453,072) $ (56,313,596) $ 57,554,273
14
FOR THE YEAR ENDED
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
(UNAUDITED)
------------- ------------- ------------- ------------- -------------
YEAR-END STATUS
Total current assets $ 11,523,049 $ 15,010,697 $ 29,769,455 $ 46,519,473 $ 97,093,319
Trading Cove
Associates-equity
investment 16,965,487 11,972,338 10,639,562 (7,362,921) (20,907,876)
Beneficial
Interest-Leisure
Resort
Technology, Inc. 4,162,049 4,540,039 4,918,029 5,296,019 5,674,009
Deferred financing
costs net of
accumulated
amortization 3,568,059 2,643,338 3,010,202 3,377,066 3,781,051
Fixed assets, net
of accumulated
depreciation 916 11,696 22,476 33,256 44,036
------------- ------------- ------------- ------------- -------------
Total assets $ 36,219,560 $ 34,178,108 $ 48,359,724 $ 47,862,893 $ 85,684,539
============= ============= ============= ============= =============
Total current
liabilities $ 4,038,332 $ 3,133,192 $ 3,400,556 $ 3,481,637 3,576,539
9.50% senior
notes payable -- 108,007,000 115,434,000 119,691,000 122,159,000
8.625% senior
notes payable 153,088,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total liabilities $ 157,126,332 $ 111,140,192 $ 118,834,556 $ 123,172,637 $ 125,735,539
------------- ------------- ------------- ------------- -------------
Member's
deficiency $(120,906,772) $ (76,962,084) $ (70,474,832) $ (75,309,744) $ (40,051,000)
============= ============= ============= ============= =============
15
Item 7. 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 financial statements and the notes thereto
included elsewhere herein.
A - DEVELOPMENT AND OPERATIONAL ACTIVITIES
The Company was formed solely for the purpose of holding its partnership
interest in Trading Cove. Trading Cove is the former manager and original
developer of the Mohegan Sun. The Company's interest in Trading Cove is its
principal asset and source of income and cash flow.
B - 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, activities incidental to the
issuance of the 8.625% Senior Notes and the making of restricted and temporary
investments. The Company is prohibited by the terms of the 8.625% Senior Notes
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 Authority. 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
8.625% 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.
The Company cannot assure you that its future operating cash flow will be
sufficient to cover its expenses, including interest on the 8.625% Senior Notes.
2 - LEVERAGE - The Company's and the Authority's substantial indebtedness could
adversely affect the Company's ability to fulfill its obligations under the
8.625% Senior Notes.
As of December 31, 2003, the Company has an aggregate long-term senior
indebtedness of $153,088,000, consisting of the 8.625% Senior Notes. On March
15, 2004, $7,302,00 of principal amount of 8.625% Senior Notes was redeemed at
the redemption price of 108.625%. The Authority is also highly leveraged. As of
December 31, 2003, the Authority had a total of approximately $1.087 billion of
indebtedness outstanding.
The degree to which the Authority is leveraged could have significant
consequences for the holders of the 8.625% 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.
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.
16
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 and junior relinquishment payments, and
to holders of senior indebtedness, with respect to junior relinquishment
payments, until they are paid in full, instead of to Trading Cove. For that
reason, Trading Cove may receive less, ratably, than holders of senior unsecured
indebtedness and junior 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.
For the year ending September 30, 2003, 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.
4 - RISKS ASSOCIATED WITH TRADING COVE AND THE TRADING COVE PARTNERSHIP
AGREEMENT - The Company would not be a creditor of Trading Cove and it has 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 the TCA
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 8.625% Senior Notes.
The 8.625% Senior Notes are not collateralized by a pledge of the Company's
partnership interest in Trading Cove. Accordingly, in the event of an
acceleration under the 8.625% Senior Notes Indenture, the trustee under the
8.625% Senior Notes Indenture will not be able to foreclose upon the equity in
Trading Cove.
The TCA Partnership Agreement 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 TCA 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 8.625% Senior Notes.
Under the TCA Partnership Agreement and certain other existing agreements,
Trading Cove must pay expenses and make certain payments and priority
distributions prior to making distributions to the Company. Such expenses,
payments and priority distributions include,
(1) operating expenses and to the extent operating expenses are less than $2.0
million annually, payment of the difference to each of Kerzner Investments and
the principals of the Company;
17
(2) the development fee to be paid to Kerzner Investments, Construction, and The
Slavik Company and related development expenses equal to 3 percent of the total
cost of the Project Sunburst expansion, excluding capitalized interest, less
Trading Cove's actual costs relating to the Project Sunburst expansion (Trading
Cove's accrued liability to Kerzner Investments with respect to such fee at
December 31, 2003 was approximately $507,00), and
(3) a $5.0 million annual payment to Kerzner Investments, payable quarterly
until December 31, 2006.
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 TCA 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 8.625% 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 TCA 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 TCA
Partnership Agreement to the Waterford Group or the Waterford Group may fund the
purchase of Kerzner Investments partnership interest. If the Company were to
elect to buy Kerzner Investments partnership interest other than with funds
provided by the Waterford Group, the 8.625% Senior Notes Indenture requires the
Company to redeem the 8.625% Senior Notes; however the Company cannot assure you
that it would be able to raise funds sufficient for the Company to redeem the
8.625% Senior 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 the Company receive's would be insufficient to pay all
amounts due on the 8.625% 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 8.625%
Senior Notes.
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.
18
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 Mohegan Sun 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
percent 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 percent of all registered voters of the Mohegan Tribe. As
of September 30, 2003, the Mohegan Tribe had approximately 960 voting members.
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 8.625% 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 percent 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 Class II gaming activities (including 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."
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 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.
19
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, but several of them reportedly intend to have devices in
operation by the beginning of 2004. 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. Last year
the New York courts rejected the validity of the St. Regis Mohawk compact
because it had not been approved by the legislature. Bills have been introduced
this year in both the New York State Senate and Assembly to approve the compact
but neither body has yet passed a bill. 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 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 signed a
memorandum of understanding with the State of New York to conduct full scale
gaming in the Catskills region. The agreement has three sections, one of which
is gaming. Because of a change in tribal leadership, all three parts are now
subject to renegotiation and all final agreements will be subject to tribal
referendum. The Cayuga Nation of New York recently partnered with Empire
Resorts, Inc. to develop a gaming business 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 Schaghticoke Tribal
Nation of Connecticut (whose status is subject to challenge), 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. A recent state wide referendum in Maine rejected any
off-reservation Indian casino gaming.
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 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. The Golden Hill received a proposed negative
determination and is in an extended response period (i.e. beyond the initial 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 have submitted responses. They are awaiting final determinations from the
Department of the Interior expected in May 2004; 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. Worsening economic conditions or a prolonged recession could
hamper the Mohegan Sun's ability to meet expected operating results.
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 Sun's 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 8.625% Senior Notes.
20
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 8.625% 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 8.625%
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 in 2003, 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.
13 - 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 8.625% Senior Notes.
21
C - SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted 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's interest in TCA is its
principal asset and source of income and cash flow. 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 percent interest in TCA. This amount is
amortized over the term 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 with the Authority.
Distributions are recorded when received.
D - TABLE OF CONTRACTUAL OBLIGATIONS
The following table provides an overview of the Company's aggregate contractual
obligations as of the latest fiscal year end balance sheet date.
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
- ----------------------- ----------------------
LESS THAN 1 MORE THAN
TOTAL YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
------- ------------- ----------- ----------- -------------
Long-Term Debt
Obligations(1)................. (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
Registrant's Balance
Sheet under GAAP .......... 0 0 0 0 0
Total.............................. (1) (1) (1) (1) (1)
(1) As of December 31, 2003, the Company's long-term debt consists of
obligations under its 8.625% Senior Notes. $145,786,000 in aggregate principal
amount of 8.625% Senior Notes is currently outstanding. At December 31, 2003,
the Company had an aggregate long-term senior indebtedness of $153,088,000. On
March 15, 2004, $7,302,000 of principal amount of 8.625% Senior Notes was
redeemed at the redemption price of 108.625%. Interest on the outstanding
principal amount of 8.625% Senior Notes is payable by the Company semi-annually
in arrears on March 15 and September 15 at a rate of 8.625% per annum. The
outstanding principal amount of 8.625% Senior Notes is due and payable in full
on September 15, 2012. 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 and Finance must redeem their 8.625% Senior Notes with any
"Company Excess Cash" (as defined in the 8.625% Senior Notes Indenture) at a
redemption price expressed as a percentage of the principal amount of notes
being redeemed. Such redemption price declines annually from 108.625% for
redemptions made between September 15, 2003 and September 14, 2004, to 100% for
redemptions made after September 14, 2012. Any reduction in principal amount of
the 8.625% Senior Notes with Company Excess Cash will lower the interest
payments payable by the Company in subsequent periods.
The Company does not have any material off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
22
E - 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 8.625% Million Senior Notes
and additional investments in TCA that may be required in connection with the
Project Sunburst expansion. 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 payments by the
Authority to TCA.
2 - PAYMENTS OF DISTRIBUTIONS ON THE COMPANY'S PARTNERSHIP INTEREST IN TCA
On April 28, 2003, July 28, 2003, October 28, 2003 and January 27, 2004, the
Company received $2,876,707, $6,365,797, $3,512,706 and $11,798,117,
respectively, from TCA as distributions, which represents the Company's share
under the Amended and Restated Omnibus Termination Agreement of approximately
(a) $65,100,000 in Relinquishment Fees earned by TCA pursuant to the
Relinquishment Agreement for the year January 1 through December 31, 2003, and
(b) $168,000 in Development Fee earned by TCA pursuant to the Development
Agreement for the same period.
On April 26, 2002, July 26, 2002, October 28, 2002 and January 28, 2003, the
Company received $1,821,000, $9,790,000, $3,550,000 and $11,221,500,
respectively, from TCA as distributions, which represents the Company's share
under the Amended and Restated Omnibus Termination Agreement of approximately
(a) $58,509,000 in Relinquishment Fees earned by TCA pursuant to the
Relinquishment Agreement for the year January 1 through December 31, 2002, and
(b) $1,316,000 in Development Fee earned by TCA pursuant to the Development
Agreement for the same period.
F - RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002
Total expenses for the twelve months ended December 31, 2003 were $24,751,861
compared with $13,102,082 for the twelve months ended December 31, 2002. (a)
Interest expense increased by $8,401,644 due primarily to the redemption of the
9.50% Senior Notes in the principal amount of $102,349,000 at the tender premium
of approximately $7,164,000 and the issuance of the 8.625% Senior Notes in the
principal amount of $155 million, (b) salaries-related parties increased by
$65,912 due to the increase in Revenues of the Mohegan Sun, (c) general and
administrative costs increased by $121,363 (primarily attributable to (1) an
increase in legal and other expenses related to the defense of the Leisure
litigation, as described in Item 3, of approximately $106,900, (2) an increase
in insurance expense of approximately $8,800, (3) an increase in Commission
filing expense of approximately $8,900, (4) an increase in accounting fees of
approximately $15,400 and (5) by an increase in rating agency fees of
approximately $9,600 and offset by (1) a decrease in bank sweep fees of
approximately $15,900 and (2) by a decrease in other legal expenses of
approximately $11,400), (d) 9.50% Senior Notes tender expense increased by
$509,414 due to the redemption of the 9.50% Senior Notes and (e) amortization on
deferred financing costs increased by $2,551,446 due primarily to the redemption
of the 9.50% Senior Notes, the issuance of the 8.625% Senior Notes and the
additional amortization due to the mandatory redemption of the 8.625% Senior
Notes on September 15, 2003.
Equity in income of Trading Cove Associates for the year ended December 31, 2003
was $28,519,860, compared with $24,601,380 for the year ended December 31, 2002.
The Company has included amortization of purchased interests of $440,028 in each
year's equity income. The Company's share of TCA's results fluctuates based upon
revenues earned by TCA under the Relinquishment Agreement and the Development
Agreement. In addition, interest and dividend income decreased by $410,378.
As a result of the foregoing factors the Company experienced net income of
$3,891,633 for the year ended December 31, 2003, compared with net income of
$12,033,310 for the year ended December 31, 2002.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001
Total expenses for the twelve months ended December 31, 2002 was $13,102,082
compared with $13,579,600 for the twelve months ended December 31, 2001. (a)
Interest expense decreased by $480,855 due primarily to the redemption of the
9.50% Senior Notes in the principal amounts of $4,031,000 and $3,396,000 on
March 15, 2002 and September 15, 2002, respectively, (b) salaries - related
parties increased by $127,933 due to the increase in Revenues of the Mohegan Sun
and (c) general and administrative costs decreased by $124,596 (primarily
attributable to a decrease in legal and other expenses related to the defense of
the Leisure litigation, as described in Item 3, totaling approximately $156,000,
and offset by (1) an increase in insurance expense of approximately $17,600, (2)
an increase in miscellaneous expense of approximately $6,400 and (3) an increase
in accounting fees of approximately $8,300).
23
Equity in income of Trading Cove Associates for the year ended December 31, 2002
was $24,601,380 compared with $18,823,461 for the year ended December 31, 2001.
The Company has included amortization of purchased interests of $440,028 in each
year's annual equity income. The Company's share of TCA's results fluctuates
based upon revenues earned by TCA under the Relinquishment Agreement and the
Development Agreement. In addition, interest and dividend income decreased by
$796,699.
As a result of the foregoing factors the Company experienced net income of
$12,033,310 for the twelve months ended December 31, 2002, compared with net
income of $6,574,572 for the twelve months ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The initial capital of the Company consists of the partnership interests in TCA
contributed by Slavik and LMW Investments, Inc. in forming the Company. In
connection with the offering of the 12.75% 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. In addition, the Company used approximately $10.6 million of the
proceeds from the 12.75% Senior Notes to purchase RJH Development Corp.'s
interests in TCA.
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 of 5 percent 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 9.50% Senior Notes, the Company used
approximately $72 million to repurchase the 12.75% Senior Notes, distributed
approximately $37 million to its new parent, Waterford Group, and paid the final
$2 million to Leisure.
On December 30, 1999, the Authority paid to the holders of the Authority
subordinated notes, an amount to satisfy all obligations of such Authority
subordinated notes. The Company received $44,403,517 from the Authority. On
December 30, 1999, TCA distributed $10,536,543 to its partners. The Company
received $5,268,272.
On January 4, 2000 in accordance with the terms of the 9.50% Senior Notes
indenture, dated as of March 17, 1999 between the Company and Finance, as
issuers, and State Street Bank and Trust Company, as trustee, 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 9.50% Senior Notes
indenture, the Company distributed $34,671,789 to its member Waterford Group.
On November 1, 2002, the Company distributed $15,000,000 to Waterford Group, as
a Permitted Dividend, in accordance with the terms of the 9.50% Senior Notes
indenture.
In connection with the offering of the 8.625% Senior Notes, the Company used
approximately $111.8 million to repurchase the 9.50% Senior Notes and
distributed $44.5 million to 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 applicable indentures.
On September 15, 2003 $98,080 was distributed to Waterford Group in accordance
with the terms of the 8.625% Senior Notes Indenture.
Accordingly, after taking into consideration net income (loss) since inception
the Company has a member's deficit of approximately $120,907,000 and $76,962,000
at December 31, 2003 and 2002, respectively.
For the years ended December 31, 2003 and 2002, net cash provided by operating
activities (as shown in the Statements of Cash Flows) was $3,111,417 and
$10,639,911, respectively.
24
Current assets decreased from $15,010,697 at December 31, 2002 to $11,523,049 at
December 31, 2003. The decrease was primarily attributable to the scheduled
semi-annual payment of interest on March 15, 2003 on the 9.50% Senior Notes in
the amount of approximately $5,130,000, by the redemption on March 15, 2003 of
9.50% Senior Notes in the principal amount of $5,658,000, by the redemption on
June 11, 2003 of 9.50% Senior Notes, by the redemption on September 15, 2003 of
8.625% Senior Notes in the principal amount of $1,912,000, by the distributions
to Waterford Group during the period of approximately $47,836,000 and offset by
approximately $3,111,400 of cash provided by operations, by distributions by TCA
in terms of the Amended and Restated Omnibus Termination Agreement and by
proceeds from the 8.625% Senior Notes issuance.
Current liabilities increased from $3,133,192 at December 31, 2002 to $4,038,332
at December 31, 2003. The increase was primarily attributable to an increase in
accrued interest on senior notes payable of approximately $866,600 and by an
increase in accrued expenses and accounts payable of approximately $38,500
(primarily attributable to an increase in amounts due for salaries-related
parties of approximately $3,600, by an increase in amounts due for accounting
services of approximately $14,300 and by an increase in legal and other expenses
related to the defense of the Leisure litigation, as detailed under Part I: Item
3 Legal Proceedings, of approximately $29,300 and offset by a decrease in other
legal fees of approximately $10,000).
For the years ended December 31, 2003 and 2002 net cash provided by investing
activities (as shown in the Statement of Cash Flows) was $3,720,405 and
$16,395,304, respectively. The net cash provided by investing activities in 2003
was primarily the result of maturities and (purchases) of restricted
investment-net of approximately $3,720,400 and distributions from TCA of
$450,000 and offset by contributions to TCA of $450,000 (to fund certain of
TCA's development expenses in connection with the Project Sunburst expansion at
the Mohegan Sun). The net cash provided by investing activities in 2002 was
primarily the result of maturities and (purchases) of restricted investments-net
of approximately $15,845,000, distributions from TCA of $1,550,000 and offset by
contributions to TCA of $1,000,000 (to fund certain of TCA's development
expenses in connection with the Project Sunburst expansion at the Mohegan Sun).
The Company anticipates that no additional contributions will have to be made by
the Company to TCA (to fund certain of TCA's development expenses in connection
with the Project Sunburst expansion at the Mohegan Sun). As of December 31, 2003
$5,000,000 had been contributed by the Company to TCA to fund certain of TCA's
development expenses in connection with the Project Sunburst expansion at the
Mohegan Sun.
For the twelve months ended December 31, 2003 and 2002, net cash used in
financing activities (as shown in the Statements of Cash Flows) was $6,598,352
and $25,947,562, respectively. The net cash used in financing activities in 2003
was primarily the result of the redemption of the 9.50% Senior Notes in the
principal amount of $5,658,000 on March 15, 2003, by the redemption of the 9.50%
Senior Notes on June 11, 2003 in the principal amount of $102,349,000, by the
redemption of the 8.625% Senior Notes on September 15, 2003 in the principal
amount of $1,912,000, by deferred financing costs of approximately $3,843,000
and by distributions to Waterford Group of $47,836,321 and offset by the
proceeds from the 8.625% Senior Notes issuance in the principal amount of
$155,000,000. The net cash used in financing activities in 2002 was primarily
the result of the redemption of the 9.50% Senior Notes in the principal amounts
of $4,031,000 and $3,396,000 on March 15, 2002 and September 15, 2002,
respectively, and by distributions to the Company's member Waterford Group of
approximately $18,521,000.
Pursuant to the terms of the 8.625% Senior Notes Indenture, if the Company and
Finance have any Company Excess Cash, as defined in the 8.625% Senior Notes
Indenture, on February 1 or August 1 of any year, they must use such Company
Excess Cash less all Required IRA True-Up Payments, as defined in the 8.625%
Senior Notes Indenture, and less any amount set aside for the payment of accrued
and unpaid interest on the interest payment date that corresponds to the
redemption date for which the determination is being made, to redeem the 8.625%
Senior Notes on the March 15 or September 15 following such dates. Any such
redemption will be made at a price equal to a percentage of the principal amount
being redeemed. On August 1, 2003 the Company and Finance had Company Excess
Cash of $5,568,186, as defined in the 8.625% Senior Notes Indenture, and after
deducting i) all required IRA True-Up Payments, as defined in the 8.625% Senior
Notes Indenture, (which totaled $0) and ii) the amount set aside for the payment
of accrued and unpaid interest on the interest payment date that corresponds to
the redemption date for which the determination is being made which totaled
$3,490,729, the amount available for a mandatory redemption of the 8.625% Senior
Notes totaled $2,077,457, and accordingly on September 15, 2003 the Company and
Finance made a mandatory redemption of the 8.625% Senior Notes in the principal
amount of $1,912,000 at the redemption price of 108.625%. Such redemption price
is expressed as a percentage of the principal amount being redeemed.
On February 1, 2004 the Company and Finance had Company Excess Cash (which
totaled $14,533,996), as defined in the 8.625% Senior Notes Indenture, and after
deducting (i) all Required IRA True-Up Payments, as defined in the 8.625% Senior
Notes Indenture, (which totaled $0) and (ii) the amount set aside for the
payment of accrued and unpaid interest on the interest payment date that
corresponds to the redemption date for which the determination is being made
(which totaled $6,601,920), the amount available for a mandatory redemption of
the 8.625% Senior Notes totaled $7,932,076, and accordingly on March 15, 2004
the Company and Finance made a mandatory redemption of the 8.625% Senior Notes
in the principal amount of $7,302,000 at the redemption price of 108.625%. Such
redemption price is expressed as a percentage of the principal amount being
redeemed.
On March 15, 2004 approximately $349,200 was distributed to Waterford Group in
accordance with the terms of the 8.625% Senior Notes Indenture.
25
The Company expects to fund its operating, debt service and capital needs from
cash flows from the Company's share of payments from TCA, and from the Company's
available cash. Based upon the Company's anticipated future operations,
management believes that available cash flow will be sufficient to meet the
Company's anticipated requirements for future operating expenses, future
scheduled payments of principal and interest on the 8.625% Senior Notes and
additional investments in TCA that may be required in connection with the
Project Sunburst expansion at the Mohegan Sun. No assurance, however, can be
given that the operating cash flow will be sufficient for that purpose.
Item 7A. 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 December 31, 2003 and 2002. The fair market value of
the Company's long-term debt at December 31, 2003 and 2002 is estimated to be
approximately $163,804,000 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 December 31, 2003 are
principally comprised of an investment in a Federal Home Loan Bank Discount Note
which was purchased at a discount of 1.01% and matured March 10, 2004 and an
investment in the First American Treasury Obligations Fund. 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and notes thereof are filed as part of this
report and appear in this annual report on Form 10-K beginning on page 34.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. 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 Exchange Act
reports, 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 for
timely decisions regarding required disclosure. In designing, and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired objectives, and management is
required to apply its judgment in evaluating the cost benefit relationship of
possible controls and procedures.
As required by the Commission Rule 13a-15(b), 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 as of the end of the period covered
by this report. 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 at the reasonable assurance level.
(b) Changes in Internal Controls
There has been no change in the Company's internal controls over financial
reporting during the Company's most recent quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal controls or
financial reporting.
26
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables set forth certain information with respect to persons who
are members of the Board of Directors of the Company or who are Executive
Officers of the Company.
NAME AGE POSITION
- ---- --- --------
Len Wolman 49 Chairman of the Board and Chief Executive
Officer
Alan Angel 47 Chief Financial Officer
Del J. Lauria 55 Director and Secretary
Mark Wolman 46 Director
Stephan F. Slavik 57 Director
Richard Slavik 53 Vice President
LEN WOLMAN. Mr. Len Wolman has been the Chairman of the Board of Directors and
the Chief Executive of the Company since its formation. Since 1986, Mr. Len
Wolman has been the Chairman of the Board of Directors and the Chief Executive
Officer of the Waterford Hotel Group, Inc. Mr. Len Wolman is the Company's
designated representative to TCA under the TCA Partnership Agreement. Mr. Len
Wolman was instrumental in the formation of the relationship between Trading
Cove and the Mohegan Tribe and had been actively working with the Mohegan Tribe
in connection with obtaining federal recognition, acquiring the site for the
Mohegan Sun and obtaining the financing to construct the Mohegan Sun. Mr. Len
Wolman was actively involved in the development, construction and operation of
the Mohegan Sun. Mr. Len Wolman has served as President and Chief Executive
Officer of Finance since its inception. Mr. Len Wolman is a Director and Officer
of Slavik, one of the Waterford Group's members. Mr. Len Wolman is the brother
of Mr. Mark Wolman. Mr. Len Wolman's wife and Mr. Angel's wife are sisters.
ALAN ANGEL. Mr. Angel became Chief Financial Officer of the Company in January
1999. Since 1997, Mr. Angel has been the Chief Financial Officer of Mystic
Suites, L.L.C. Mystic Suites, L.L.C. is a commercial development firm based in
Eastern Connecticut which currently holds an ownership interest in a number of
hotels managed by the Waterford Hotel Group, Inc. Prior to joining Mystic
Suites, L.L.C., Mr. Angel resided in South Africa and served as Chief Financial
Officer of Rowan & Angel cc. Mr. Angel is a certified public accountant and a
chartered accountant. Mr. Angel has over 20 years of accounting experience. Mr.
Angel's wife and Mr. Len Wolman's wife are sisters.
DEL J. LAURIA. Mr. Lauria became a Director, Chief Financial Officer and
Secretary of the Company upon its formation. Mr. Lauria was succeeded as Chief
Financial Officer in January 1999 by Mr. Alan Angel. Mr. Lauria is also an
Officer and Director of the Waterford Hotel Group, Inc. and is Executive Vice
President and Director of Slavik. Mr. Lauria first joined the Slavik
Organization in 1980 as the Chief Financial Officer of its real estate property
management division. The Slavik Organization is an affiliated group of full
service real estate companies first established in Michigan in the early 1950s.
Mr. Lauria rapidly advanced at the Slavik Organization and currently holds
various key managerial positions within the enterprise. Prior to joining the
Slavik Organization, Mr. Lauria was associated with the accounting firm now
known as Deloitte & Touche and is a certified public accountant. Mr. Lauria has
served as Treasurer and Secretary of Finance since its inception.
MARK WOLMAN. Mr. Mark Wolman became a Director of the Company upon its
formation. Mr. Mark Wolman is the president of Wolman Homes, Inc. Wolman Homes,
Inc. is a commercial development and construction firm based in Eastern
Connecticut. Mr. Mark Wolman has been working with the Mohegan Tribe since 1992
and had been instrumental in assisting the Mohegan Tribe in obtaining a number
of governmental approvals in connection with the development and construction of
the Mohegan Sun. Mr. Mark Wolman is a Director of Slavik. Mr. Mark Wolman is the
brother of Mr. Len Wolman.
STEPHAN F. SLAVIK. Mr. Slavik was appointed a Director of the Company on April
9, 2001. Mr. Slavik is the President of Michigan based Slavik Builders. Mr.
Slavik has over 30 years of experience with all phases of land planning, product
design, estimating and site construction in single family, multiple and
commercial design/build developments. Mr. Slavik is a Director and Vice
President of Slavik. Mr. Slavik is the brother of Mr. Richard Slavik.
MR. RICHARD SLAVIK. Mr. Richard Slavik was appointed a Vice President of the
Company on April 9, 2001. Mr. Richard Slavik is Chief Operating Officer of the
Fourmidable Group, Inc., a Michigan based real estate management firm. Mr.
Richard Slavik has over 20 years of constructing and operating commercial
residential real estate experience. Mr. Richard Slavik is President of Slavik.
Mr. Richard Slavik is the brother of Mr. Stephan F. Slavik.
In light of the Company's limited operations and the fact that the Company's
interest in TCA is its principal asset and source of income and cash flow, the
Company has not adopted a code of ethics that applies to the Company's principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions.
27
Item 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Directors and the
named Executive Officers of the Company.
NAME YEAR ENDED SALARY
- ---- ---------- ------
Len Wolman(1) 2003 $ 900,998
2002 $ 835,086
2001 $ 707,153
Del Lauria 2003 $ -
2002 $ -
2001 $ -
Stephan F. Slavik 2003 $ -
2002 $ -
2001 $ -
Mark Wolman 2003 $ -
2001 $ -
2001 $ -
(1) As detailed in Item 13, Mr. Len Wolman has an employment contract with the
Company. For the years ended December 31, 2003, 2002, and 2001, $900,998,
$835,086 and $707,153, respectively, was paid to Mr. Len Wolman pursuant to the
employment contract.
From January 1, 2000, the Company's Directors have also received compensation as
part of the operating expenses of TCA as detailed under point a) of the table
set forth above under "Amended and Restated Omnibus Termination Agreement". The
Company does not have a compensation committee, and all compensation decisions
are made by the Board of Directors.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The Company's sole member is Waterford Group, L.L.C.
The following table sets forth the beneficial ownership interest in Waterford
Group, L.L.C.
NAME OF % OWNERSHIP
BENEFICIAL OWNER IN THE COMPANY
- ---------------- --------------
LMW Investments, Inc.(1).................................. 32.2033%
Slavik Suites, Inc.(2).................................... 67.7967%
--------------
100.0000%
==============
(1) LMW Investments, Inc. is owned 50% by Mr. Len Wolman and 50% by Mr. Mark
Wolman. The address for LMW Investments, Inc. is 914 Hartford Turnpike, P.O. Box
715, Waterford, Connecticut 06385.
(2) Messrs. Len and Mark Wolman each own approximately 11.875% of the
outstanding shares of Slavik Suites, Inc. Messrs. Stephan F. Slavik and Richard
Slavik each own approximately 14.35% of the outstanding shares of Slavik
Suites, Inc. The address for Slavik Suites, Inc. is 32605 West 12 Mile Road,
Suite 350, Farmington Hills, Michigan 48334.
The Company does not currently have in place any equity compensation plans.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DEVELOPMENT SERVICES AGREEMENT PHASE II AND RELATED AGREEMENTS AND PAYMENTS
As noted in the section above entitled "Business - Trading Cove Associates
Material Agreements - Development Agreement and Related Agreements", on February
9, 1998, TCA and KIML, an affiliate of Kerzner Investments, the Company's
partner in TCA, entered into the Development Services Agreement Phase II.
Pursuant to the Development Services Agreement Phase II, TCA subcontracted with
KIML, who 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. KIML assigned the Development Services
Agreement Phase II to Kerzner Investments.
28
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner
Investments the Development Services Fee Phase II, which equals 3 percent of the
development costs of the Project Sunburst expansion, excluding capitalized
interest, less all costs incurred by TCA in connection with the Project Sunburst
expansion. 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 Sunburst expansion 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 of the Development Services Fee Phase II and TCA's costs related to the
development of the Project Sunburst expansion will exceed the related revenue
received by TCA under the Development Agreement by approximately $15,964,000.
Before KIML assigned the Development Services Agreement Phase II to Kerzner
Investments, it entered into the Local Construction Services Agreement with
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 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 percent of the Development
Services Fee Phase II as and when Kerzner Investments receives payment from TCA
in accordance with the Development Services Agreement Phase II.
Pursuant to a letter agreement, Construction has subcontracted with The Slavik
Company, an affiliate of the Company, to provide certain services under the
Local Construction Services Agreement. In exchange for providing such services,
Construction agreed that The Slavik Company would be paid a fee equal to 14.30
percent of its fee under the Local Construction Services Agreement.
On April 26, 2000, July 26, 2000, January 26, 2001 and July 28, 2003 TCA paid
$3,095,000, $1,238,000, $6,474,000 and $9,157,000, respectively, as partial
payment of the Development Services Fee Phase II. Construction received
$644,688, $257,875, $1,348,534, and $1,907,403, respectively, and Construction
paid The Slavik Company $92,190, $36,876, $192,840 and $259,121 on April 26,
2000, July 26, 2000, January 26, 2001 and July 28, 2003, respectively.
At December 31, 2003 the accrued liability to Kerzner Investments pursuant to
the Development Services Agreement Phase II was approximately $507,000.
The Development Services Agreement Phase II and the Local Construction Services
Agreement are each filed as an exhibit to the Company'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, and each is incorporated herein by
reference.
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 the TCA
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 the employment agreement, the Company agreed pay to Mr.
Wolman an amount equal to 0.05 percent 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
to 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
percent to .10 percent) to be determined using a formula attached to the
employment agreement, which compares actual revenues to predetermined revenue
targets. For the years ended December 31, 2003, 2002 and 2001, the Company paid
and incurred $900,998, $835,086 and $707,153, respectively, as an expense
pursuant to Len Wolman's employment agreement.
29
OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 2003, 2002, and 2001 approximately $42,000,
$46,000 and $46,000, respectively, was paid and incurred by TCA to the
principals and affiliates of the Company as part of TCA's operating expenses. In
addition, in 2003, 2002 and 2001, TCA paid and incurred approximately $962,000,
$0 and approximately $856,000, respectively, to the principals of the Company in
connection with the first priority payments set forth under the section
"Business - 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 years ended December 31, 2003, 2002 and 2001 was $6,480.
Waterford Group, Slavik Suites, Inc. and the other principals of the Company and
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.
ITEM 14. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES
For the year ended December 31, 2003
Audit fees $ 264,000
Tax fees 2,250
All other fees
Analyses of propsed buyout of a contract 17,250
---------
Total $ 283,500
=========
For the year ended December 31, 2002
Audit fees $ 34,750
Tax fees 750
All other fees
Excess cash certification 1,500
Internal revenue services audit 4,950
Permitted dividend certification 1,125 7,575
----- ---------
Total $ 43,075
=========
30
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) EXHIBITS
Exhibit No. Description
3.1 Certificate of Formation, as amended, of Waterford
Gaming, 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)
4.2.1 First Supplemental Indenture, dated as of June 6,
2003, among Waterford Gaming, L.L.C. and Waterford
Gaming Finance Corp., as issuers, and U.S. Bank
National Association, as trustee, relating to
$125,000,000 9-1/2% Senior Notes due 2010. (viii)
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)
4.3.1 Termination Agreement, dated as of June 11,
2003, among Waterford Gaming, L.L.C. and
Waterford Gaming Finance Corp., and
U.S. Bank National Association, as securities
intermediary. (viii)
4.4 Specimen Form of 9-1/2% Senior Notes due 2010
(included in Exhibit 4.2). (vi)
4.5 Indenture, dated as of June 11, 2003, among
Waterford Gaming, L.L.C. and Waterford Gaming
Finance Corp., as issuers, and U.S. Bank National
Association, as trustee, relating to $155,000,000
8-5/8% Senior Notes due 2012. (viii)
4.6 Security and Control Agreement, dated as of
June 11, 2003, among Waterford Gaming, L.L.C. and
Waterford Gaming Finance Corp., as pledgors and
U.S. Bank National Association, as securities
intermediary. (viii)
4.7 Specimen Form of 8-5/8% Senior Notes due 2012
(included in Exhibit 4.5). (viii)
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)
31
10.4 First Amendment to Amended and Restated
Partnership Agreement of Trading Cove Associates,
dated as of October 22, 1996, among Sun Cove
Limited, Slavik Suites, Inc., RJH Development
Corp., LMW Investments, Inc. and Waterford Gaming,
L.L.C. (i)
10.5 Purchase Agreement, dated as of March 10, 1999,
among Waterford Gaming, L.L.C., Waterford Gaming
Finance Corp., Bear, Stearns & Co., Inc., Merrill
Lynch, Pierce, Fenner and Smith Inc. and Salomon
Smith Barney. (vi)
10.5.1 Agreement with Respect to Redemption or Repurchase
of Subordinated Notes, dated September 10,
1997 (ii)
10.6 Amended and Restated Limited Liability Company
Agreement of Waterford Gaming, L.L.C., dated as of
March 17, 1999 by Waterford Group, L.L.C. (vi)
10.7 Note Purchase Agreement, dated as of October 19,
1996, among Sun International Hotels Limited,
Waterford Gaming, L.L.C. and Trading Cove
Associates. (i)
10.8 Note Purchase Agreement, dated as of September 29,
1995, between the Mohegan Tribal Gaming Authority
and Sun International Hotels Limited relating to
the Subordinated Notes. (i)
10.9 Management Agreement, dated as of July 28, 1994,
between the Mohegan Tribe of Indians of
Connecticut and Trading Cove Associates. (i)
10.10 Management Services Agreement, dated September 10,
1997. (ii)
10.11 Development Services Agreement, dated September
10, 1997. (ii)
10.12 Subdevelopment Services Agreement, dated September
10, 1997. (ii)
10.13 Completion Guarantee and Investment Banking and
Financing Arrangement Fee Agreement, dated
September 10, 1997. (ii)
10.14 Settlement and Release Agreement, dated January 6,
1998, by and among Leisure Resort Technology,
Inc., Lee R. Tyrol, Trading Cove Associates,
Slavik Suites, Inc., LMW Investments, Inc., RJH
Development Corp., Waterford Gaming, L.L.C. and
Sun Cove Limited. (iii)
10.15 Waiver and Acknowledgment of Noteholder. (iv)
10.16 Relinquishment Agreement, dated February 7, 1998,
between the Mohegan Tribal Gaming Authority and
Trading Cove Associates. (v)
10.17 Development Services Agreement, dated February 7,
1998, between the Mohegan Tribal Gaming Authority
and Trading Cove Associates. (v)
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)
31 Certifications. (ix)
32
(i) Incorporated by reference to the Registrant's Registration Statement
on Form S-4, Commission File No. 333-17795, declared effective on May
15, 1997.
(ii) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1997, Commission File No.
333-17795, as accepted by the Commission on November 14, 1997.
(iii) 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.
(viii)Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2003, Commission File No. 333-17795
as accepted by the Commission on August 12, 2003.
(ix) Filed herewith.
33
b) FINANCIAL STATEMENTS SCHEDULES
INDEX TO FINANCIAL STATEMENTS
WATERFORD GAMING, L.L.C.
Report of Independent Auditors F-1
Financial Statements:
Balance Sheets as of December 31, 2003 and 2002 F-2
Statements of Income for the years ended
December 31, 2003, 2002 and 2001 F-3
Statements of Changes in Member's Deficiency for the
years ended December 31, 2003, 2002 and 2001 F-4
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-5
Notes to Financial Statements F-6
TRADING COVE ASSOCIATES
Report of Independent Auditors F-18
Financial Statements:
Balance Sheets as of December 31, 2003 and 2002 F-19
Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-20
Statements of Changes in Partner's Capital
(Deficiency)for the years ended
December 31, 2003, 2002 and 2001 F-21
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 F-22
Notes to Financial Statements F-23
34
REPORT OF INDEPENDENT AUDITORS
To the Member of Waterford Gaming, L.L.C.
In our opinion, the accompanying balance sheets and the related statements of
income, changes in member's deficiency and of cash flows present fairly, in all
material respects, the financial position of Waterford Gaming, L.L.C. (the
"Company") at December 31, 2003 and 2002 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2003
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers, LLP
March 24, 2004
F-1
Waterford Gaming, L.L.C.
Balance Sheets
December 31, 2003 and 2002
---------------------------------
2003 2002
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 4,892,072 $ 4,658,602
Restricted investments 6,623,725 10,344,130
Other current assets 7,252 7,965
--------------- ---------------
Total current assets 11,523,049 15,010,697
--------------- ---------------
Trading Cove Associates - equity investment 16,965,487 11,972,338
Beneficial interest - Leisure Resort Technology, Inc. 4,162,049 4,540,039
Deferred financing costs, net of accumulated amortization of $274,972
and $1,391,838 at December 31, 2003 and 2002, respectively 3,568,059 2,643,338
Fixed assets, net of accumulated depreciation of $53,002 and $42,222 at
December 31, 2003 and 2002, respectively 916 11,696
--------------- ---------------
Total assets $ 36,219,560 $ 34,178,108
=============== ===============
LIABILITIES AND MEMBER'S DEFICIENCY
Current liabilities
Accrued expenses and accounts payable $ 150,535 $ 111,996
Accrued interest on senior notes payable 3,887,797 3,021,196
--------------- ---------------
Total current liabilities 4,038,332 3,133,192
--------------- ---------------
9.50% senior notes payable --- 108,007,000
8.625% senior notes payable 153,088,000 ---
--------------- ---------------
Total liabilities 157,126,332 111,140,192
--------------- ---------------
Contingencies
Member's deficiency (120,906,772) (76,962,084)
--------------- ---------------
Total liabilities and member's deficiency $ 36,219,560 $ 34,178,108
=============== ===============
The accompanying notes are an integral part of these financial statements.
F-2
Waterford Gaming, L.L.C.
Statements of Income
For the years ended December 31, 2003, 2002 and 2001
-----------------------------
2003 2002 2001
------------------- ------------------- -------------------
Expenses
Interest expense $ 19,481,783 $ 11,080,139 $ 11,560,994
Salaries - related parties 900,998 835,086 707,153
General and administrative 552,586 431,223 555,819
9.50% senior notes tender expense 509,414 --- ---
Amortization of beneficial interest -
Leisure Resort Technology, Inc. 377,990 377,990 377,990
Amortization on deferred financing costs 2,918,310 366,864 366,864
Depreciation 10,780 10,780 10,780
------------------- ------------------- -------------------
Total expenses 24,751,861 13,102,082 13,579,600
------------------- ------------------- -------------------
Interest and dividend income 123,634 534,012 1,330,711
Equity in income of
Trading Cove Associates 28,519,860 24,601,380 18,823,461
------------------- ------------------- -------------------
Net income $ 3,891,633 $ 12,033,310 $ 6,574,572
=================== =================== ===================
The accompanying notes are an integral part of these financial statements.
F-3
Waterford Gaming, L.L.C.
Statements of Changes in Member's Deficiency
For the years ended December 31, 2003, 2002 and 2001
-----------------------------
Balance, January 1, 2001 $ (75,309,744)
Distributions (1,739,660)
Net income 6,574,572
---------------
Balance, December 31, 2001 (70,474,832)
Distributions (18,520,562)
Net income 12,033,310
---------------
Balance, December 31, 2002 (76,962,084)
Distributions (47,836,321)
Net income 3,891,633
---------------
Balance, December 31, 2003 $(120,906,772)
===============
The accompanying notes are an integral part of these financial statements.
F-4
Waterford Gaming, L.L.C.
Statements of Cash Flows
For the years ended December 31, 2003, 2002 and 2001
-----------------------------
2003 2002 2001
--------------- --------------- ---------------
Cash flows from operating activities
Net income $ 3,891,633 $ 12,033,310 $ 6,574,572
--------------- --------------- ---------------
Adjustments to reconcile net income
to net cash provided by operating activities
Amortization 3,296,300 744,854 744,854
Depreciation 10,780 10,780 10,780
Equity in income of Trading Cove Associates (28,519,860) (24,601,380) (18,823,461)
Operating distributions from Trading Cove Associates 23,526,711 22,718,604 1,370,975
Changes in operating assets and liabilities
Decrease in due from Trading Cove Associates --- --- 15,580,878
Decrease in other current assets 713 1,107 17,424
Increase (decrease) in accrued expenses
and accounts payable 38,539 (59,614) 37,996
Increase (decrease) in accrued interest on
senior notes payable 866,601 (207,750) (119,077)
--------------- --------------- ---------------
Total adjustments (780,216) (1,393,399) (1,179,631)
--------------- --------------- ---------------
Net cash provided by operating activities 3,111,417 10,639,911 5,394,941
--------------- --------------- ---------------
Cash flows from investing activities
Contributions to Trading Cove Associates (450,000) (1,000,000) (1,350,000)
Distributions from Trading Cove Associates 450,000 1,550,000 800,000
Maturities and (purchases) of restricted investments - net 3,720,405 15,845,304 698,647
--------------- --------------- ---------------
Net cash provided by
investing activities 3,720,405 16,395,304 148,647
--------------- --------------- ---------------
Cash flows from financing activities
Redemption of 9.50% senior notes (108,007,000) (7,427,000) (4,257,000)
Proceeds of 8.625% senior notes issuance 155,000,000 --- ---
Redemption of 8.625% senior notes (1,912,000) --- ---
Deferred financing costs (3,843,031) --- ---
Distributions to member (47,836,321) (18,520,562) (1,739,660)
--------------- --------------- ---------------
Net cash used in
financing activities (6,598,352) (25,947,562) (5,996,660)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 233,470 1,087,653 (453,072)
Cash and cash equivalents at beginning of year 4,658,602 3,570,949 4,024,021
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 4,892,072 $ 4,658,602 $ 3,570,949
=============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 18,615,181 $ 11,287,889 $ 11,680,071
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
F-5
WATERFORD GAMING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION, MEMBERSHIP AGREEMENT, CHANGE OF OWNERSHIP AND MEMBER ALLOCATIONS:
Waterford Gaming, L.L.C. (the "Company"), a Delaware limited liability company,
was formed on September 30, 1996. The Company initially acquired and owns a
partnership interest in Trading Cove Associates ("TCA"), a Connecticut general
partnership, and invested in certain notes issued by the Mohegan Tribal Gaming
Authority (the "Authority"). The Company is governed by a Board of Directors
pursuant to the limited liability company agreement (the "Agreement"). In June
2003, the Company with its wholly-owned subsidiary Waterford Gaming Finance
Corp. ("Finance") issued $155 Million 8.625% Senior Notes due 2012 (the "8.625%
Senior Notes") in connection with the redemption of the Company's and Finance's
$125 Million 9.5% Senior Notes due 2010 (the "$125 Million Senior Notes"). In
March 1999, the Company together with Finance had issued the $125 Million Senior
Notes in connection with the redemption of the Company's and Finance's $65
Million 12.75% Senior Notes due 2003 (the "$65 Million Senior Notes"). In
connection with the issuance by the Company's and Finance's $125 Million Senior
Notes, each of Slavik Suites, Inc. ("Slavik") and LMW Investments, Inc. ("LMW")
contributed their respective interests in the Company as of March 17, 1999 to a
Delaware limited liability company, Waterford Group, L.L.C. ("Waterford Group").
Waterford Group is now the sole member of the Company. Slavik and LMW own
Waterford Group in the same respective interest as they had in the Company which
are as follows:
Slavik Suites, Inc. 67.7967%
LMW Investments, Inc. 32.2033%
---------
100.0000%
=========
The Agreement is effective until September 30, 2020 and may be terminated by the
member or any other event as stated in the Agreement.
In connection with the $125 Million Senior Notes offering, the Company
distributed $37,050,000 to Waterford Group, L.L.C. during March 1999. During
December 1999, the Company received a payment on notes it held due from 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 during January 2000. On November 1, 2002 the Company distributed
$15,000,000 to Waterford Group in accordance with the terms of the indenture
relating to the $125 Million Senior Notes. In connection with the 8.625% Senior
Notes offering, the Company distributed approximately $44,500,000 to Waterford
Group during June 2003. Tax distributions totaling approximately $12,444,000
were made by the Company during 1999, 2000, 2001, 2002 and 2003. In addition the
Company distributed approximately $98,100 to Waterford Group during September
2003 in accordance with the terms of the indenture relating to the 8.625% Senior
Notes (the "8.625% Senior Notes Indenture"). On March 15, 2004 the Company
distributed approximately $349,200 to Waterford Group in accordance with the
8.625% Senior Notes Indenture.
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Method
The accrual method of accounting is used in the preparation of the financial
statements.
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid
investments with original maturities of three months or less.
Restricted Investments
Restricted investments at December 31, 2003 are principally comprised of an
investment in a Federal Home Loan Bank Discount Note, which was purchased at a
discount of 1.01% and matured March 10, 2004 and an investment in the First
American Treasury Obligations Fund and at December 31, 2002 are principally
comprised of an investment in a Federal Home Loan Bank Discount Note, which was
purchased at a discount of 1.64% and matured March 7, 2003, and an investment in
the Federated Treasury Obligations Fund. The investments represent a restricted
investment fund that has been established with a trustee in terms of the
applicable indenture and is reported at cost plus accrued interest, which
approximates market.
F-6
Trading Cove Associates - Equity Investment
The Company's equity investment in TCA is accounted for utilizing the equity
method. Included in the investment is the purchase price of $10,600,000 paid to
a corporation for their 12.5 percent interest in TCA. This amount was initially
amortized on a straight-line basis over a 7-year term, which represents the term
of the management agreement between TCA and the Authority. Then beginning in
March 1999, as a result of the Relinquishment Agreement, as defined, becoming
effective the remaining balance is being amortized over 189 months beginning
April 1999.
The Company receives distributions from TCA in accordance with an Amended and
Restated Omnibus Termination Agreement. The amount of distributions received
relies on the fees earned by TCA pursuant to its Relinquishment Agreement with
the Authority. Distributions are recorded when received.
Deferred Financing Costs
All costs incurred with the issuance of the Company's and Finance's 8.625%
Senior Notes, were capitalized and are amortized on a straight-line basis over
the term of the 8.625% Senior Notes. Additional amortization is recorded when
the 8.625% Senior Notes are redeemed. The additional amortization is the amount
that the redeemed 8.625% Senior Notes represents of the total deferred financing
costs net of accumulated amortization.
Fixed Assets
Fixed Assets are stated at cost. Depreciation is charged against income over the
estimated life of the fixed assets. The estimated life is five years for
furniture and fixtures and leasehold improvements.
Income Taxes
The Company, as a wholly owned subsidiary of Waterford Group, does not file
federal or state income tax returns. As a result, no provision for federal and
state income taxes has been made in the accompanying financial statements.
Concentration of Credit Risk
The Company's interest in TCA is its principal asset and source of income and
cash flow. The Company anticipates regular distributions from TCA based upon the
operating results of the Authority and payments of the related Relinquishment
Fees, as defined, by the Authority. Financial instruments, which potentially
subject the Company to a concentration of credit risk, principally consist of
cash in excess of the financial institutions' insurance limits. The Company
invests available cash with high credit quality institutions.
Fair Value of Financial Instruments
Fair value of the Company's debt is based on quoted market prices. The carrying
value of all other assets and liabilities approximate market.
Use of Estimates
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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-7
2. TRADING COVE ASSOCIATES:
TCA was organized on July 27, 1993. The primary purpose of TCA has been,
a) to assist the Mohegan Tribe of Indians of Connecticut (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 Casino (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 pursuant to the terms of
the Management Agreement until midnight 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. From the opening of
Mohegan Sun until January 1, 2000, TCA oversaw the Mohegan Sun's day-to-day
operations.
TCA's Partnership Agreement (the "TCA Partnership Agreement") will terminate on
December 31, 2040, or earlier, in accordance with its terms. The Company has a
50 percent partnership interest in TCA. The remaining 50 percent interest is
owned by Kerzner Investments Connecticut, Inc. ("Kerzner Investments"), formerly
Sun Cove Limited, an affiliate of Kerzner International Limited ("Kerzner
International").
As of December 31, 2003, 2002 and 2001 the following summary information relates
to TCA. Total revenues and net income are for the years ended December 31, 2003,
2002 and 2001.
2003 2002 2001
------------- ------------ ------------
Total current assets $ 26,143,405 $ 24,501,961 $ 20,628,646
============= ============ ============
Total assets $ 28,582,603 $ 27,166,723 $ 23,522,567
Total liabilities (1,070,719) (10,521,195) (10,422,645)
------------- ------------ ------------
Partners' capital $ 27,511,884 $ 16,645,528 $ 13,099,922
============= ============ ============
Total revenue $ 69,797,608 $ 59,065,491 $ 46,969,145
============= ============ ============
Net income $ 62,919,777 $ 55,082,815 $ 43,526,978
============= ============ ============
As of December 31, 2003, 2002 and 2001, the following summarizes the Company's
investment in TCA.
2003 2002 2001
------------- ------------ ------------
Trading Cove Associates -
equity investment, beginning
of year $ 11,972,338 $ 10,639,562 $ (7,362,924)
Contributions 450,000 1,000,000 1,350,000
Distributions (23,976,711) (24,268,604) (2,170,975)
------------- ------------ ------------
(11,554,373) (12,629,042) (8,183,899)
------------- ------------ ------------
Income from Trading Cove
Associates 28,959,888 25,041,408 19,263,489
Amortization of interests
purchased (440,028) (440,028) (440,028)
------------- ------------ ------------
Equity in income of
Trading Cove Associates 28,519,860 24,601,380 18,823,461
------------- ------------ ------------
Trading Cove Associates -
equity investment, end of year $ 16,965,487 $ 11,972,338 $ 10,639,562
============= ============ ============
F-8
TRADING COVE ASSOCIATES - MATERIAL AGREEMENTS
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
percent 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 Sunburst expansion").
The Relinquishment Fees are divided into senior relinquishment payments and
junior relinquishment payments, each of which equals 2.5 percent of "Revenues".
Revenues are defined in the Relinquishment Agreement as gross gaming revenues
(other than Class II gaming revenue) 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 Authority's senior obligations, as defined
in the Relinquishment Agreement.
For the years ended December 31, 2003, 2002 and 2001 the Relinquishment Fees
earned were $65,099,533, $58,508,703 and $45,715,318, respectively. The amount
of Relinquishment Fees reported are based upon Revenues reported to TCA by the
Authority.
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 Sunburst expansion 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 Sunburst
expansion and that TCA has no further obligations relating to the staffing of
the Project Sunburst expansion.
The first phase of the Project Sunburst expansion, 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 approximately 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 approximately 1,200-hotel rooms opened during June
2002. At December 31, 2003 the Project Sunburst expansion was 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 Sunburst expansion 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 Sunburst
expansion. A summary of the quarterly Development Fee payments received by TCA
in accordance with the terms of the Development Agreement is as follows:
F-9
Date Received by TCA Development 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
October 30, 2003 56,000
------------
$ 14,000,000
============
The Development Agreement terminates after the earlier of the completion of the
Project Sunburst expansion 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
Development Agreement to arbitration and each has 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.
On February 9, 1998, TCA and Kerzner International Management Limited ("KIML),
an affiliate of Kerzner Investments, 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, who
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. KIML 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 percent of the development costs of the Project Sunburst expansion,
excluding capitalized interest, less all costs incurred by TCA in connection
with the Project Sunburst expansion. The Development Services Fee Phase II is
paid 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 Sunburst expansion are known. TCA pays
the Development Services Fee Phase II from available cash flow, if any, in
accordance with an Amended and Restated Omnibus Termination Agreement. The total
of the Development Services Fee Phase II and TCA's costs related to the
development of Project Sunburst expansion will exceed the related revenue
received by TCA under the Development Agreement by approximately $15,964,000. At
December 31, 2003, the accrued liability to Kerzner Investments pursuant to the
Development Agreement Phase II was approximately $507,000.
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"), 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 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 percent
of the Development Services Fee Phase II as and when Kerzner Investments
receives payment from TCA in accordance with the Development Services Agreement
Phase II. Pursuant to a Letter Agreement, Construction has subcontracted with
The Slavik Company to provide certain services under the Local Construction
Services Agreement. In exchange for providing such services, Construction agreed
that The Slavik Company would be paid a fee equal to 14.30 percent of its fee
under the Local Construction Services Agreement.
MANAGEMENT AGREEMENT
On August 30, 1995 TCA and the Tribe entered into the Management Agreement.
After entering into the Management Agreement, the Tribe assigned it to the
Authority.
F-10
Until midnight December 31, 1999, TCA was the exclusive manager of the Mohegan
Sun and earned a management fee from the Authority pursuant to the Management
Agreement (the "Management Fees"). The Management Fees were paid monthly (the
final payment was received by TCA from the Authority on January 25, 2000) and
were calculated in three tiers based upon net revenues of the Mohegan Sun.
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 years ended December 31, 2003,
and 2002, $1,840,346 ($920,173 to each of Kerzner Investments and
affiliates of the Company), and $0, respectively, have 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. The Company does not anticipate TCA
making further capital calls to fund expenses related to the
development of the Project Sunburst expansion. From January 1, 2000 to
December 31, 2003 these capital contributions aggregated $8,000,000.
From January 1, 2000 to December 31, 2003 $8,000,000 has been repaid
to the partners of TCA, 50 percent to the Company and 50 percent to
Kerzner Investments.
As of December 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 December
31, 2003. The accrued liability to Kerzner Investments with respect to
such fee at December 31, 2003 was approximately $507,000.
(e) Fifth, to pay Kerzner Investments an annual fee (in the form of a
priority distribution) of $5.0 million payable in equal quarterly
installments of $1.25 million beginning March 31, 2000 and ending
December 31, 2006. On January 27, 2004 and on January 28, 2003,
$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 January 27, 2004 and January 28, 2003, $12,669,636
($6,334,818 to each of Kerzner Investments and the Company) and
$22,043,000 ($11,025,500 to each of Kerzner Investments and the
Company), respectively, was distributed by TCA in terms of the seventh
priority.
(h) Eighth, to distribute all excess cash. On January 27, 2004,
$10,926,597 ($5,463,298 to Kerzner Investments and $5,463,299 to the
Company) was distributed as excess cash.
F-11
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 TCA 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.
AMENDED AND RESTATED OMNIBUS FINANCING AGREEMENT
Until January 1, 2000 TCA's primary source of revenue was Management Fees. Those
fees were utilized by TCA to make subcontract payments to partners and
affiliates pursuant to the Amended and Restated Omnibus Financing Agreement
which was terminated effective January 1, 2000.
3. BENEFICIAL INTEREST - LEISURE RESORT TECHNOLOGY, INC.:
On January 6, 1998, pursuant to the settlement and release agreement described
in Note 7 below, the Company paid $5,000,000 to Leisure Resort Technology, Inc.
("Leisure") and, among other things, Leisure gave up (a) its beneficial interest
of 5 percent in 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, 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 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 percent of the Organizational and Administrative fee, as defined in
the Organizational and Administrative Services Agreement, and 5 percent of TCA's
Excess Cash as defined in the TCA 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 7 to these
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
December 31, 2003 and 2002, amounts to $2,895,162 and $2,517,172, respectively.
4. $155 MILLION 8.625% SENIOR NOTES PAYABLE:
On June 11, 2003, the Company and Finance issued the 8.625% Senior Notes.
Payment of the principal of, and interest on, the 8.625% Senior Notes is pari
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 collateralized and subordinated debts.
The 8.625% Senior Notes bear interest at a rate of 8.625% per annum, payable
semi-annually in arrears on March 15 and September 15 of each year, commencing
September 15, 2003. The principal amount due on the 8.625% Senior Notes is
payable on September 15, 2012.
F-12
The Company and Finance may elect to redeem all or any of the 8.625% Senior
Notes at any time on or after September 15, 2008 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 September 14, 2008 but
on or before September 14, 2009 103.551%
after September 14, 2009 but
on or before September 14, 2010 102.537%
after September 14, 2010
but on or before September 14, 2011 101.522%
after September 14, 2011 but
on or before September 14, 2012 100.507%
after September 14, 2012 100.000%
The 8.625% Senior Notes provide that upon the occurrence of a Change of Control
(as defined in the 8.625% Senior Notes Indenture), the holders thereof will have
the option to require the redemption of the 8.625% Senior Notes at a redemption
price equal to 101% of the principal amount thereof plus accrued interest.
Pursuant to the terms of the 8.625% Senior Notes Indenture, if the Company and
Finance have any Company Excess Cash, as defined in the 8.625% Senior Notes
Indenture, on February 1 or August 1 of any year, they must use such Company
Excess Cash less all Required IRA True-Up Payments, as defined in the 8.625%
Senior Notes Indenture, and less any amount set aside for the payment of accrued
and unpaid interest on the interest payment date that corresponds to the
redemption date for which the determination is being made, to redeem the 8.625%
Senior Notes on the March 15 or September 15 following such dates. Any such
redemption will be made at a price equal to a percentage of the principal amount
being redeemed. Such percentage is set forth in the following table:
If notes are redeemed with Redemption Price (expressed as a percentage
Company Excess Cash of the principal amount being redeemed)
------------------------- --------------------------------------------
after September 14, 2003 but
on or before September 14, 2004 108.625%
after September 14, 2004 but
on or before September 14, 2005 107.610%
after September 14, 2005 but
on or before September 14, 2006 106.596%
after September 14, 2006 but
on or before September 14, 2007 105.581%
after September 14, 2007 but
on or before September 14, 2008 104.566%
after September 14, 2008 but
on or before September 14, 2009 103.551%
after September 14, 2009 but
on or before September 14, 2010 102.537%
after September 14, 2010
but on or before September 14, 2011 101.522%
after September 14, 2011 but
on or before September 14, 2012 100.507%
after September 14, 2012 100.000%
On August 1, 2003 the Company and Finance had Company Excess Cash (which totaled
$5,568,186), as defined in the 8.625% Senior Notes Indenture, and after
deducting (i) all Required IRA True-Up Payments, as defined in the 8.625% Senior
Notes Indenture, (which totaled $0) and (ii) the amount set aside for the
payment of accrued and unpaid interest on the interest payment date that
corresponds to the redemption date for which the determination is being made
(which totaled $3,490,729), the amount available for a mandatory redemption of
the 8.625% Senior Notes totaled $2,077,457, and accordingly on September 15,
2003 the Company and Finance made a mandatory redemption of the 8.625% Senior
Notes in the principal amount of $1,912,000 at the redemption price of 108.625%.
Such redemption price is expressed as a percentage of the principal amount being
redeemed.
F-13
On February 1, 2004 the Company and Finance had Company Excess Cash (which
totaled $14,533,996), as defined in the 8.625% Senior Notes Indenture, and after
deducting (i) all Required IRA True-Up Payments, as defined in the 8.625% Senior
Notes Indenture, (which totaled $0) and (ii) the amount set aside for the
payment of accrued and unpaid interest on the interest payment date that
corresponds to the redemption date for which the determination is being made
(which totaled $6,601,920), the amount available for a mandatory redemption of
the 8.625% Senior Notes totaled $7,932,076, and accordingly on March 15, 2004
the Company and Finance made a mandatory redemption of the 8.625% Senior Notes
in the principal amount of $7,302,000 at the redemption price of 108.625%. Such
redemption price is expressed as a percentage of the principal amount being
redeemed.
In certain circumstances, if either the Company or Kerzner Investments, the
Company's partner in TCA, exercises the option to buy or sell partnership
interests in TCA, the Company and Finance must redeem the 8.625% Senior Notes.
The 8.625% Senior Notes 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) make distributions on
its equity interests or 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 8.625%
Senior Notes Indenture also provides for customary events of default and the
establishment of a restricted investment account with a trustee for interest
reserves ("IRA"). The IRA consists of an amount of funds equal to the interest
payment due on the 8.625% Senior Notes on the following interest payment date.
The IRA will be released and the Company can make a permitted distribution to
Waterford Group once the Leverage Ratio, as defined in the 8.625% Senior Notes
Indenture, is less than or equal to 3.0 to 1.0.
The fair market value of the Company's long term debt at December 31, 2003 and
2002 is estimated to be approximately $163,804,000 and $111,787,000,
respectively, based on the quoted market price for the 8.625% Senior Notes and
the $125 Million Senior Notes, respectively.
5. $125 MILLION 9.50% SENIOR NOTES PAYABLE:
The $125 Million Senior Notes payable at December 31, 2003 and 2002, was $0 and
$108,007,000, respectively, and consisted of the aggregate principal amount of
the $125 Million Senior Notes issued on March 17, 1999 by the Company and
Finance.
All of the $125 Million Senior Notes were redeemed as part of the Company's and
Finance's 8.625% Senior Notes offering on June 11, 2003.
6. RECONCILIATION OF FINANCIAL STATEMENT AND TAX INFORMATION:
The following is a reconciliation of net income for financial statement purposes
to net income for federal income tax purposes for the years ended December 31,
2003, 2002 and 2001.
For the For the For the
Year Ended Year Ended Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ----------------- -----------------
Financial Statement
net income $ 3,891,633 $ 12,033,310 $ 6,574,572
Financial statement equity in
(income) loss of Trading Cove Associates over tax basis equity
in (income) loss of Trading
Cove Associates (4,581,809) 562,075 (394,380)
Other 6,124 7,263 6,188
----------------- ----------------- -----------------
Federal income tax basis
net income (loss) $ (684,052) $ 12,602,648 $ 6,186,380
================= ================= =================
F-14
The following is a reconciliation of member's deficiency for financial statement
purposes to member's deficiency for federal income tax purposes as of December
31, 2003, 2002 and 2001.
2003 2002 2001
-------------- -------------- --------------
Financial statement member's
deficiency $ (120,906,772) $ (76,962,084) $ (70,474,832)
Adjustment for cumulative
difference between tax basis
of Trading Cove Associates-
equity investment and GAAP
basis of Trading Cove
Associates-equity investment 837,129 4,764,291 5,152,483
Current year financial
statement net income (over)
under federal income tax
basis net income (loss) (4,575,685) 569,338 (388,192)
-------------- -------------- --------------
Federal income tax basis
member's deficiency $ (124,645,328) $ (71,628,455) $ (65,710,541)
============== =============== ==============
F-15
7. 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 State Court 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 moved for summary judgment seeking dismissal of the counter
claims in full, which motion was denied on April 14, 2003.
Discovery has commenced and is ongoing. Jury selection is scheduled to commence
on October 19, 2004, with presentation of evidence to begin on October 26, 2004.
The Company believes that it has meritorious defenses and intends vigorously to
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.
F-16
8. CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS:
DEVELOPMENT SERVICES AGREEMENT PHASE II AND RELATED AGREEMENTS AND PAYMENTS
On February 9, 1998, TCA and KIML, an affiliate of Kerzner Investments, the
Company's partner in TCA, entered into the Development Services Agreement Phase
II. Pursuant to the Development Services Agreement Phase II, TCA subcontracted
with KIML who 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. KIML 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, equal to 3 percent of the development costs
of the Project Sunburst expansion, excluding capitalized interest, less all
costs incurred by TCA in connection with the Project Sunburst expansion. The
Development Services Fee Phase II is paid in 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 Sunburst expansion 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 with
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 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 percent of the Development Services Fee Phase II as and when Kerzner
Investments receives payment from TCA in accordance with the Development
Services Agreement Phase II.
Pursuant to a Letter Agreement, Construction has subcontracted with The Slavik
Company, an affiliate of the Company, to provide certain services under the
Local Construction Services Agreement. In exchange for providing such services,
Construction agreed that The Slavik Company would be paid a fee equal to 14.30
percent of its fee under the Local Construction Services Agreement.
On April 26, 2000, July 26, 2000, January 26, 2001 and July 28, 2003 TCA paid
$3,095,000, $1,238,000, $6,474,000 and $9,157,000, respectively, as partial
payment of the Development Services Fee Phase II. Construction received
$644,688, $257,875, $1,348,534 and $ 1,907,403, respectively, and Construction
paid The Slavik Company $92,190, $36,876, $192,840 and $259,121 on April 26,
2000, July 26, 2000, January 26, 2001 and July 28, 2003 respectively.
At December 31, 2003 TCA has accrued a liability to Kerzner Investments of
approximately $507,000 pursuant to the Development Services 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 the TCA
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 the employment agreement, the Company agreed to pay to
Mr. Wolman an amount equal to 0.05 percent 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
to 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
percent to .10 percent) to be determined using a formula attached to the
employment agreement which compares actual revenues to predetermined revenue
targets. For the years ended December 31, 2003, 2002 and 2001 the Company paid
and incurred $900,998, $835,086 and $707,153, respectively, as an expense
pursuant to Len Wolman's employment agreement.
OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 2003, 2002 and 2001, approximately $42,000,
$46,000 and $46,000, respectively, was paid and incurred to the principals and
affiliates of the Company as part of TCA's operating expenses. In addition in
2003, 2002 and 2001 TCA paid and incurred approximately $962,000, $0, and
approximately $856,000, 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 years ended December 31, 2003, 2002 and 2001 was $6,480.
Waterford Group, Slavik and the other principals of the Company and 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.
F-17
REPORT OF INDEPENDENT AUDITORS
To the Partners of Trading Cove Associates
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in partners' capital (deficiency) and of cash flows present
fairly, in all material respects, the financial position of Trading Cove
Associates (the "Partnership") at December 31, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Partnership's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers, LLP
March 24, 2004
F-18
Trading Cove Associates
Balance Sheets
December 31, 2003 and 2002
-------------------------------
2003 2002
---- ----
Assets
Current assets
Cash and cash equivalents $ 798,602 $ 744,138
Relinquishment fee receivable 25,339,272 23,669,823
Development fee receivable --- 84,000
Other current assets 5,531 4,000
-------------- --------------
Total current assets 26,143,405 24,501,961
--------------- --------------
Deferred costs, net of accumulated amortization of $3,060,427 and
$2,838,909 at December 31, 2003 and 2002, respectively 2,438,514 2,660,032
Property and equipment, net of accumulated depreciation of $14,651 and
$48,473 at December 31, 2003 and 2002, respectively 684 4,730
--------------- --------------
Total assets $ 28,582,603 $ 27,166,723
=============== ==============
Liabilities and Partners' Capital
Current liabilities
Accounts payable and accrued expenses $ 88,972 $ 114,856
Subcontracted services payable 474,767 ---
Development contract loss provision 270,380 5,639,684
Amounts billed in excess of development costs and estimated losses 236,600 4,766,655
-------------- --------------
Total current liabilities 1,070,719 10,521,195
-------------- --------------
Commitments and contingencies
Partners' capital 27,511,884 16,645,528
-------------- --------------
Total liabilities and partners' capital $ 28,582,603 $ 27,166,723
============== ==============
The accompanying notes are an integral part of these financial statements.
F-19
Trading Cove Associates
Statements of Operations
For the Years Ended December 31, 2003, 2002 and 2001
----------------------------------------------------
2003 2002 2001
---- ---- ----
Revenue
Relinquishment fee $ 65,099,553 $ 58,508,703 $ 45,715,318
Development services revenue 4,698,055 556,788 1,253,827
------------- ------------ ------------
Total revenue 69,797,608 59,065,491 46,969,145
------------- ------------ ------------
Expenses
Subcontract payments to partners and
their affiliates 1,840,346 --- 1,712,791
Cost of development services revenue 4,662,055 1,756,788 1,253,827
Amortization and depreciation 221,818 221,818 221,717
General and administrative 159,653 2,017,350 287,209
------------- ------------ ------------
Total expenses 6,883,872 3,995,956 3,475,544
------------- ------------ ------------
Interest and dividend income 6,041 13,280 33,377
------------- ------------ ------------
Net income $ 62,919,777 $ 55,082,815 $ 43,526,978
============= ============ ============
The accompanying notes are an integral part of these financial statements.
F-20
Trading Cove Associates
Statements of Changes in Partners' Capital (Deficiency)
For the Years Ended December 31, 2003, 2002 and 2001
--------------------------------------------------------
Kerzner Investments Waterford
Connecticut Inc. Gaming, L.L.C. Total
------------------- --------------- --------------
Partners' deficiency, January 1, 2001 $ (11,267,552) $ (12,517,553) $ (23,785,105)
Net income 24,263,489 19,263,489 43,526,978
Contributions 1,350,000 1,350,000 2,700,000
Distributions (7,170,976) (2,170,975) (9,341,951)
------------- -------------- --------------
Partners' capital, December 31, 2001 7,174,961 5,924,961 13,099,922
Net income 30,041,407 25,041,408 55,082,815
Contributions 1,000,000 1,000,000 2,000,000
Distributions (29,268,604) (24,268,605) (53,537,209)
------------- -------------- --------------
Partners' capital, December 31, 2002 8,947,764 7,697,764 16,645,528
Net income 33,959,889 28,959,888 62,919,777
Contributions 450,000 450,000 900,000
Distributions (28,976,711) (23,976,710) (52,953,421)
------------- -------------- --------------
Partners' capital, December 31, 2003 $ 14,380,942 $ 13,130,942 $ 27,511,884
============= ============== ==============
The accompanying notes are an integral part of these financial statements.
F-21
Trading Cove Associates
Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
----------------------------------------------------
2003 2002 2001
---- ---- ----
Cash flows from operating activities
Net income $ 62,919,777 $ 55,082,815 $ 43,526,978
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating activities
Amortization 221,518 221,518 221,517
Depreciation 3,303 7,641 12,708
Loss on disposal of property and equipment 743 --- ---
Gain on sale of property and equipment (1,750) --- ---
Change in assets and liabilities
Increase in relinquishment fee receivable (1,669,449) (4,983,247) (3,113,366)
Decrease (increase) in development fee receivable 84,000 1,176,000 (672,000)
Decrease in development costs and estimated
losses in excess of amounts billed --- --- 1,766,730
(Increase) decrease in other current assets (1,531) (4,000) 1,868
(Decrease) increase in accounts payable and accrued expenses (25,884) (64,237) 38,911
Increase (decrease) in subcontracted services payable 474,767 (430,791) (14,051,965)
(Decrease) increase in amounts billed in excess of
development costs and estimated losses (4,530,055) 759,212 4,007,443
Decrease in accrued obligations - affiliates --- --- (23,621,754)
Decrease in development contract loss provision (5,369,304) (165,634) (1,325,476)
------------ ------------ ------------
Total adjustments (10,813,642) (3,483,538) (36,735,384)
------------ ------------ ------------
Net cash provided by operating activities 52,106,135 51,599,277 6,791,594
------------ ------------ ------------
Cash flows from investing activities
Proceeds from sale of property and equipment 1,750 --- ---
Purchase of property and equipment --- --- (1,484)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,750 --- (1,484)
------------ ------------ ------------
Cash flows from financing activities
Partners' contributions 900,000 2,000,000 2,700,000
Distributions (52,953,421) (53,537,209) (9,341,951)
------------ ------------ ------------
Net cash used in financing activities (52,053,421) (51,537,209) (6,641,951)
------------ ------------ ------------
Net increase in cash and cash equivalents 54,464 62,068 148,159
Cash and cash equivalents at beginning of year 744,138 682,070 533,911
------------ ------------ ------------
Cash and cash equivalents at end of year $ 798,602 $ 744,138 $ 682,070
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-22
Trading Cove Associates
NOTES TO FINANCIAL STATEMENTS
1. Organization, Partnership Agreement and Other Material Agreements
i) Organization and Partnership Agreement
Trading Cove Associates (the "Partnership"), a Connecticut general partnership,
was organized on July 27, 1993. The primary purpose of the Partnership has been:
a) to assist the Mohegan Tribe of Indians of Connecticut (the "Tribe")
and the Mohegan Tribal Gaming Authority (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 Casino (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 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. From the opening of
the Mohegan Sun, and until January 1, 2000, the Partnership oversaw the Mohegan
Sun's day-to-day operations.
The Partnership will terminate on December 31, 2040, or earlier, in accordance
with the terms of the partnership agreement (the "Partnership Agreement").
The original partners of the Partnership were RJH Development Corp. ("RJH"), a
New York corporation, Leisure Resort Technology, Inc. ("Leisure"), a Connecticut
corporation, Slavik Suites, Inc. ("Slavik"), a Michigan corporation and LMW
Investments, Inc. ("LMW"), a Connecticut corporation. On September 21, 1994, the
Partnership Agreement was amended and restated to admit Kerzner Investments
Connecticut, Inc. ("Kerzner Investments"), a Connecticut corporation, formerly
Sun Cove Limited, as a partner.
On February 3, 1995, Leisure entered into an acknowledgement and release
agreement to withdraw as a partner of the Partnership and hold its interest in
the Partnership as a beneficial interest. On August 6, 1997, Leisure filed a
lawsuit against the Partnership, Kerzner Investments, RJH and Waterford Gaming,
L.L.C. ("Waterford Gaming") and its owners, claiming breach of contract, breach
of fiduciary duties and other matters in connection with the development of the
Mohegan Sun. On January 6, 1998, pursuant to the settlement and release
agreement described in Note 7 below, Waterford Gaming paid $5,000,000 to Leisure
and, among other things Leisure gave up, (a) its beneficial interest of 5
percent of certain fees and excess cash flows, as defined, of the Partnership
and (b) any other claims it may have had against the Partnership, Kerzner
Investments, RJH, Waterford Gaming and its owners. In connection with the
settlement of all matters related to such suit, pursuant to the settlement and
release agreement, Waterford Gaming agreed to acquire Leisure's interests in the
Partnership. As a result of this acquisition, Leisure no longer has the right to
5 percent of the Organizational and Administrative fee, as defined in the
Organizational and Administrative Services Agreement, and 5 percent of the
Partnership's Excess Cash as defined in the Partnership Agreement, and Waterford
Gaming is now entitled to such fees and cash.
During March 1999, Waterford Gaming's $65,000,000 senior notes were retired and,
on March 18, 1999, Waterford Gaming 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 Partnership and certain other defendants. For a
description of the complaint, see Note 7 to these financial statements.
On November 8, 1996, Slavik, LMW and RJH withdrew from the Partnership and,
concurrently, consented to the admission of Waterford Gaming to the Partnership.
Waterford Gaming, simultaneously, purchased RJH's interest in the Partnership.
Waterford Gaming is owned by Waterford Group, LLC. Waterford Group, LLC is owned
by Slavik and LMW.
F-23
The partners' percentage interest in the Partnership as of November 8, 1996 was
as follows:
Percentage
Partner Interest
------- ----------
Kerzner Investments 50.0 percent
Waterford Gaming 50.0 percent
ii) Other Material Agreements
Relinquishment Agreement
On February 7, 1998, the Partnership and the Authority entered into the
Relinquishment Agreement (the "Relinquishment Agreement"). Under the terms of
the Relinquishment Agreement the Partnership 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 the Partnership for
terminating its rights under the Management Agreement and the Hotel/Resort
Management Agreement the Authority agreed to pay to the Partnership a fee (the
"Relinquishment Fees") equal to 5 percent 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 (the "Project Sunburst expansion").
The Relinquishment Fees are divided into senior relinquishment payments and
junior relinquishment payments, each of which equals 2.5 percent of "Revenues".
Revenues are defined as gross gaming revenues (other than Class II gaming
revenue) 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 Authority's
senior obligations, as defined in the Relinquishment Agreement.
Development Agreement
On February 7, 1998 the Partnership and the Authority entered into the
Development Services Agreement (the "Development Agreement"), which made the
Partnership the exclusive developer of the Project Sunburst expansion. Pursuant
to the Development Agreement, the Partnership agreed to oversee the planning,
design, construction, furnishing, equipping and staffing of the Project Sunburst
expansion for a $14.0 million development fee (the "Development Fee").
On May 24, 2000, the Partnership and the Authority agreed that the Partnership
had performed and completed all its obligations relating to the staffing of the
Project Sunburst expansion and that the Partnership has no further obligations
relating to the staffing of the Project Sunburst expansion.
The first phase of the Project Sunburst expansion, 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 approximately 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 approximately 1,200-hotel rooms opened during June
2002. At December 31, 2003, the Project Sunburst expansion was complete in terms
of the Development Agreement.
Pursuant to the Development Agreement, the Authority agreed to pay the
Development Fee to the Partnership quarterly beginning on January 15, 2000 based
on the incremental completion of the Project Sunburst expansion as of the
previous calendar quarter and thereafter within fifteen (15) days following the
end of each calendar quarter. The last payment of the Development Fee is to be
paid on the Completion Date, as defined in the Development Agreement, of the
Project Sunburst expansion.
The Development Agreement terminates after the earlier of the completion of the
Project Sunburst expansion or ten (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.
Management Agreement
The Partnership entered into the Management Agreement with the Tribe pursuant to
which the Tribe granted to the Partnership the exclusive right and obligation to
develop, manage, operate and maintain the Mohegan Sun. The Management Agreement
was amended and restated effective September 29, 1995 (the "Effective Management
Agreement Date"). The Partnership's obligations under this agreement began five
days after the Effective Management Agreement Date and were originally intended
to end on October 11, 2003, seven years from the opening of the Mohegan Sun.
Pursuant to the Management Agreement the Partnership received a management fee
(the "Management Fees") that was calculated in three tiers based upon the Net
Revenues, as defined in the Management Agreement, of the Mohegan Sun. The
Management Agreement terminated at midnight on December 31, 1999. The final
management fee was received by the Partnership from the Authority on January 25,
2000.
F-24
Agreements with Partners and/or their Affiliates
Agreement Relating to Development Services
On February 9, 1998, the Partnership and Kerzner International Management
Limited ("KIML"), entered into the Agreement Relating to Development Services
(the "Development Services Agreement Phase II"). Pursuant to the Development
Services Agreement Phase II, the Partnership subcontracted with KIML who agreed
to perform those services assigned to KIML by the Partnership in order to
facilitate the Partnership's fulfillment of its duties and obligations to the
Authority under the Development Agreement. KIML subsequently assigned the
Development Services Agreement Phase II to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, the Partnership pays to
Kerzner Investments a fee, as subcontractor (the "Development Services Fee Phase
II"), equal to 3 percent of the development costs of the Project Sunburst
expansion, excluding capitalized interest, less all costs incurred by the
Partnership in connection with the Project Sunburst expansion. The Development
Services Fee Phase II shall be paid in installments due on December 31, 1999 and
2000 and on the Completion Date, as defined in the Development Agreement, with a
final payment being made when the actual development costs of the Project
Sunburst expansion are known. The Partnership pays the Development Services Fee
Phase II, from available cash flow, if any, in accordance with the Amended and
Restated Omnibus Termination Agreement. At December 31, 2003, the total of the
Development Services Fee Phase II and the Partnership's costs related to the
development of the Project Sunburst expansion exceeded the development services
revenue from the Authority by approximately $15,964,000 as discussed in Note 3
to these financial statements.
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, LLC
("Construction") pursuant to which Construction agreed to provide certain of
those services assigned to KIML by the Partnership pursuant to the Development
Services Agreement Phase II. KIML 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 percent of the Development Services Fee Phase II as and when Kerzner
Investments receives payment from the Partnership in accordance with 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, Construction agreed that The Slavik Company would be paid a fee equal to
14.30 percent of its fee under the Local Construction Services Agreement.
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
the Partnership, Kerzner International Limited ("Kerzner International"),
Waterford Gaming, 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) the
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, the Partnership will
use its cash to pay the following obligations in the priority set forth below:
(i) First, to pay all unpaid amounts which may be due under the terminated
Letter Agreement and to pay to certain affiliates of Waterford Gaming
and to Kerzner Investments a percentage of an annual fee of $2.0
million less the actual expenses incurred by the Partnership during
such year. Such annual fee shall be payable in equal quarterly
installments beginning March 31, 2000 and ending December 31, 2014.
For the years ended December 31, 2003, 2002 and 2001, $1,840,346, $0
and $1,712,791, respectively, had been incurred by the Partnership in
terms of the first priority;
(ii) Second, to return all capital contributions made by the partners of
the Partnership after September 29, 1995. The Partnership does not
anticipate making further capital calls to fund expenses related to
the development of the Project Sunburst expansion. From January 1,
2000 to December 31, 2003, these contributions aggregated $8,000,000.
From January 1, 2000 to December 31, 2003, $8,000,000 has been repaid
to the partners of the Partnership.
As of December 31, 2003, $0 in capital contributions remained
outstanding;
F-25
(iii) 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;
(iv) Fourth, to make the payments set forth in the agreements relating to
the Development Services Agreement Phase II and the Local Construction
Services Agreement as detailed under the Agreement Relating to
Development Services above. No such payments are required or due at
December 31, 2003. The accrued liability to Kerzner Investments with
respect to such fee at December 31, 2003 was approximately $507,000;
(v) Fifth, to pay Kerzner Investments an annual fee (in the form of a
priority distribution) of $5.0 million payable in equal quarterly
installments of $1.25 million beginning March 31, 2000 and ending
December 31, 2006. On January 27, 2004 and on January 28, 2003,
$1,250,000 was distributed in terms of the fifth priority;
(vi) 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;
(vii) Seventh, for the period beginning March 31, 2000 and ending December
31, 2014, to pay each of Kerzner Investments and Waterford Gaming
twenty-five percent (25%) of the relinquishment payments as
distributions. On January 27, 2004 and January 28, 2003, $12,669,636
($6,334,818 to each of Kerzner Investments and Waterford Gaming) and
$22,043,000 ($11,021,500 to each of Kerzner Investments and Waterford
Gaming), respectively, was distributed by the Partnership in terms of
the seventh priority; and
(viii) Eighth, to distribute all excess cash. On January 27, 2004,
$10,926,597 ($5,463,298 to Kerzner Investments and $5,463,299 to
Waterford Gaming) was distributed as excess cash.
In addition, the Partnership 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 the 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 Waterford Gaming
during such year pursuant to the Amended and Restated Omnibus Termination
Agreement.
To the extent the Partnership does not have adequate cash to make the payments
pursuant to the Amended and Restated Omnibus Termination Agreement, such amounts
due shall be deferred without the accrual of interest until the Partnership has
sufficient cash to pay them.
Amended and Restated Omnibus Financing Agreement
Until January 1, 2000, the Partnership's primary source of revenue and cash flow
was Management Fees. Those fees were utilized by the Partnership to make
subcontract payments to partners and affiliates pursuant to the Amended and
Restated Omnibus Financing Agreement, which was terminated effective January 1,
2000.
2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid
investments with original maturities of three months or less.
F-26
Relinquishment Fee
Revenue is generated in accordance with the terms of the Relinquishment
Agreement and recognized quarterly based upon the revenues of the Authority.
Development Services Revenue and Cost Recognition
Revenue generated from services performed in accordance with the terms of the
Development Agreement are recognized on the percentage-of-completion basis,
determined by the percentage of costs incurred to date to estimated total costs
for the contract. This method is used because management considers cost incurred
to be the best available measure of progress on the contract.
Costs of development services revenue performed include all direct labor costs
and those indirect costs related to services such as subcontractors,
consultants, supplies, depreciation and other costs. Changes in performance,
requirements and estimated profitability may result in revisions to costs and
income and will be recognized in the period in which the revisions are
determined. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
The asset, "development costs and estimated losses in excess of amounts billed",
represents revenues recognized in excess of amounts billed. The liability,
"amounts billed in excess of costs and estimated losses", represents billings in
excess of revenues recognized.
Deferred Costs
Costs associated with acquiring the Management Agreement were amortized on a
straight-line basis over the 84-month period of the Management Agreement through
March 3, 1999. As a result of the Relinquishment Agreement becoming effective,
the remaining balance will be amortized over 189 months beginning March 4, 1999.
Property and Equipment
Office equipment, computer equipment and furniture and fixtures are stated at
cost. Depreciation is charged against income over a 3-year estimated life of the
office and computer equipment and over a 5-year estimated life of furniture and
fixtures. Depreciation expense for the years ended December 31, 2003, 2002 and
2001 amounted to $3,303, $7,641 and $12,708 of which $3,003, $7,341 and $12,508
were included in cost of development services revenue, respectively.
Income Taxes
No income tax provision or benefit is recorded on the books of the Partnership,
as the respective share of taxable income or loss is reportable by the partners
on their individual tax returns.
Concentration of Credit Risk
Financial instruments, which potentially subject the Partnership to a
concentration of credit risk, principally consist of cash in excess of the
financial institutions' insurance limits. The Partnership invests available cash
with high credit quality institutions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Payments to Partners and their Affiliates
Payments are made to the partners and/or their affiliates in accordance with the
terms of the Amended and Restated Omnibus Termination Agreement for certain
subcontracted services rendered and are accounted for as expenses of the
Partnership.
F-27
3. Development Contract
The Partnership entered into a Development Agreement with the Authority, which
entitles the Partnership to receive a development fee totaling $14 million. A
summary of the quarterly Development Fee payments received by the Partnership in
accordance with the terms of the Development Agreement is as follows:
Date of Payment Amount
--------------- ----------
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
October 30, 2003 56,000
-----------
$14,000,000
===========
Information relative to the development contract in progress is as follows:
2003 2002
---- ----
Development costs incurred $ 29,727,400 $ 25,065,345
Estimated losses (15,964,000) (16,000,000)
------------ ------------
13,763,400 9,065,345
Less: billings to date (14,000,000) (13,832,000)
------------ ------------
Amounts billed in excess of
development costs and
estimated losses $ (236,600) $ (4,766,655)
------------ ------------
The balance sheets include a related loss provision of $270,380 and $5,639,684
representing an accrual for additional contract costs exceeding cumulative
revenues earned and cumulative costs incurred at December 31, 2003 and 2002,
respectively.
4. Deferred Costs
Certain costs incurred by the Partnership in connection with obtaining the
Management Agreement and the opening of the Mohegan Sun totaling $5,498,941 were
capitalized. Amortization commenced upon the opening of the Mohegan Sun.
Amortization expense for the years ended December 31, 2003, 2002 and 2001 was
$221,518, $221,518 and $221,517, respectively.
F-28
5. Relinquishment Fee
The Partnership entered into a Relinquishment Agreement with the Authority,
which entitles the Partnership to receive a relinquishment fee of 5 percent of
the Revenues generated by the Mohegan Sun including revenue generated by the
Project Sunburst expansion.
For the years ended December 31, 2003, 2002 and 2001, Relinquishment Fees earned
were $65,099,553, $58,508,703 and $45,715,318, respectively. The amount of
Relinquishment Fees reported in these financial statements are based upon
Revenues reported to the Partnership by the Authority. These amounts were paid
by the Authority as follows:
Date received by the Partnership Amount
-------------------------------- ------
April 25, 2003 $ 7,433,160
July 25, 2003 23,635,310
October 27, 2003 8,691,811
January 26, 2004 25,339,272
-------------
Relinquishment Fees earned 2003 $ 65,099,553
=============
April 25, 2002 $ 6,228,559
July 25, 2002 20,438,439
October 25, 2002 8,171,882
January 27, 2003 23,669,823
-------------
Relinquishment Fees earned 2002 $ 58,508,703
=============
April 25, 2001 $ 5,090,622
July 25, 2001 16,036,421
September 7, 2001 136,467
October 25, 2001 5,765,232
January 25, 2002 18,686,576
-------------
Relinquishment Fees earned 2001 $ 45,715,318
=============
6. Reconciliation of Financial Statements and Tax Information
2003 2002 2001
---- ---- ----
Financial statement net income $ 62,919,777 $ 55,082,815 $ 43,526,978
Guaranteed payments to partners (39,941,567) (55,765,000) (36,268,038)
Subcontract payments to
affiliates previously recorded
for financial statement purposes --- --- (11,810,876)
Financial statement depreciation
and amortization (greater than)
less than tax basis depreciation
and amortization (3,028) 1,560 4,172
Conversion from accrual basis to
cash basis method of accounting --- --- 14,660
Percentage of completion
accounting difference (9,236,479) 991,712 (923,794)
Other (4,865) 50,093 34,156
------------ ------------ ------------
Federal income tax basis
net income (loss) $ 13,733,838 $ 361,180 $(5,422,742)
============ ============ ===========
For the year ended December 31, 1998, the Partnership was required to change its
method of accounting for tax purposes from the cash method to the accrual
method, in accordance with Internal Revenue Code Section 448. The cumulative
difference of $58,640 is amortized equally over four years at $14,660 per year.
F-29
7. Commitments and Contingencies
Litigation
On January 6, 1998, Leisure and defendants Waterford Gaming, the Partnership,
LMW and Slavik settled a prior lawsuit brought by Leisure. In connection with
this settlement, Leisure, the Partnership, Waterford Gaming, LMW and Slavik
entered into a settlement and release agreement. Pursuant to this settlement and
release agreement, Waterford Gaming bought out Leisure's beneficial interest in
the Partnership.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a
four count complaint naming as defendants Waterford Gaming, the Partnership,
LMW, Slavik, Waterford Group, LLC, 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, Slavik, Len Woman, and Mark Wolman. In a decision dated
August 6, 2001, the Court dismissed all claims against LMW, Slavik, Len Wolman
and Mark Wolman.
On November 15, 2000, the Partnership and its co-defendants answered the
complaint. In addition, the Partnership and Waterford Gaming 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 judgment seeking dismissal of the
counterclaims in full, which motion was denied on April 14, 2003.
Discovery has commenced and is ongoing. Jury selection is scheduled to commence
on October 19, 2004 with presentation of evidence to begin on October 26, 2004.
The Partnership 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 Partnership 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 Partnership as a result of this litigation due
to the disputed issues of law and/or facts on which the outcome of this
litigation depends.
In addition, the Partnership is a defendant in certain litigation incurred in
the normal course of business. In the opinion of the Partnership's management,
based on the advice of counsel, the aggregate liability, if any, arising from
such litigation will not have a material adverse effect on the Partnership's
financial condition or results of operations.
F-30
c) REPORTS ON FORM 8-K
(i) Form 8-K filed on November 19, 2003
Item 5.
On November 14, 2003, the Mohegan Tribal Gaming Authority (the "Authority")
filed Form 8-K, relating to the completion of its offer to exchange its
Senior Subordinated Notes, 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: November 14, 2003
(ii) Form 8-K filed on December 18, 2003
Item 5.
On December 16, 2003, the Mohegan Tribal Gaming Authority (the "Authority")
filed its annual report on Form 10-K for the year ended September 30, 2003,
a copy of which has been filed as an exhibit to this report and is
incorporated by reference to the Authority's electronic filing of such
report on Form 10-K, Securities and Exchange Commission file reference no.
033-80655.
Date of Report: December 16, 2003
(iii)Form 8-K filed on January 21, 2004
Item 5.
On January 20, 2004, the Mohegan Tribal Gaming Authority (the "Authority")
filed Form 8-K, relating to the posting on its website of its slot machine
statistical report, 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: January 20, 2004
(iv) Form 8-K filed on February 2, 2004
Item 5.
On January 30, 2004, the Mohegan Tribal Gaming Authority (the "Authority")
filed a press release on Form 8-K, announcing its first quarter ended
December 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: January 30, 2004
(v) Form 8-K filed on February 12, 2004
Item 5.
On February 11, 2004, the Mohegan Tribal Gaming Authority (the "Authority")
filed its quarterly report on Form 10-Q for the quarter ended December 31,
2003, a copy of which has been filed as an exhibit to this report and is
incorporated by reference to the Authority's electronic filing of such
report on Form 10-Q, Securities and Exchange Commission file reference no.
033-80655.
Date of Report: February 11, 2004
35
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
WATERFORD GAMING, L.L.C.
Date: March 26, 2004 By: /s/ Len Wolman
------------------------------------
Len Wolman, Chairman of the Board of
Directors, Chief Executive Officer
Date: March 26, 2004 By: /s/ Alan Angel
------------------------------------
Alan Angel, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on March 26, 2004.
SIGNATURE TITLE
/s/ Len Wolman Chairman of the Board of Directors,
- ---------------------------
Len Wolman Chief Executive Officer
/s/Del J. Lauria Member of the Board of Directors,
- ---------------------------
Del J. Lauria Secretary
/s/ Mark Wolman Member of the Board of Directors
- ---------------------------
Mark Wolman
/s/ Stephen F. Slavik Member of the Board of Directors
- ---------------------------
Stephen F. Slavik
36