UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 09/30/04
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______ to________
Commission file number 333-17795
WATERFORD GAMING, L.L.C.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1465402
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
914 Hartford Turnpike, P.O. Box 715
Waterford, CT 06385
------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 442-4559
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that 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.
WATERFORD GAMING, L.L.C.
INDEX TO FORM 10-Q
Page
Number
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Report of Independent Registered Public Accounting Firm 1
Financial Information 2
Condensed Balance Sheets of Waterford Gaming, L.L.C. as of
September 30, 2004 (unaudited) and December 31, 2003 3
Condensed Statements of Income of Waterford Gaming, L.L.C.
for the three and nine month periods ended September 30, 2004
and 2003 (unaudited) 4
Condensed Statements of Changes in Member's Deficiency of
Waterford Gaming, L.L.C. for the nine month periods ended
September 30, 2004 and 2003 (unaudited) 5
Condensed Statements of Cash Flows of Waterford Gaming, L.L.C.
for the nine month periods ended September 30, 2004 and 2003 (unaudited) 6
Notes to Condensed Financial Statements for Waterford
Gaming, L.L.C. (unaudited) 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 -- Quantitative and Qualitative Disclosures about
Market Risk 27
Item 4 -- Controls and Procedures 28
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 28
Item 2 -- Changes in Securities 29
Item 3 -- Defaults upon Senior Securities 29
Item 4 -- Submission of Matters to a Vote of Security Holders 29
Item 5 -- Other Information 29
Item 6 -- Exhibits and Reports on Form 8-K 29
Signatures 33
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member of Waterford Gaming, L.L.C.
We have reviewed the accompanying condensed balance sheet of Waterford Gaming,
L.L.C. (the "Company") as of September 30, 2004, and the related condensed
statements of income, for each of the three-month and nine-month periods ended
September 30, 2004 and 2003, and the related condensed statements of changes in
member's deficiency and of cash flows for each of the nine-month periods ended
September 30, 2004 and 2003. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheet as of December 31,
2003, and the related statements of income, of changes in member's deficiency
and of cash flows for the year then ended (not presented herein), and in our
report dated March 24, 2004, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 2003 is fairly stated in
all material respects in relation to the balance sheet from which it has been
derived.
PricewaterhouseCoopers, LLP
Hartford, Connecticut
October 28, 2004
1
FINANCIAL INFORMATION
The unaudited condensed interim financial information as of September 30, 2004
and 2003, and for each of the three-month and nine-month periods ended September
30, 2004 and 2003 included in this report was reviewed by
PricewaterhouseCoopers, LLP, an independent registered public accounting firm,
in accordance with the standards of the Public Company Accounting Oversight
Board (United States).
2
Waterford Gaming, L.L.C.
Condensed Balance Sheets
September 30, 2004 and December 31, 2003
---------------------------------
September 30, December 31,
2004 2003
(Unaudited)
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 1,412,429 $ 4,892,072
Restricted investments 6,076,310 6,623,725
Other current assets 52,218 7,252
--------------- ---------------
Total current assets 7,540,957 11,523,049
--------------- ---------------
Trading Cove Associates - equity investment 13,425,713 16,965,487
Beneficial interest - Leisure Resort Technology, Inc. 3,879,333 4,162,049
Deferred financing costs, net of accumulated amortization of $844,977
and $274,972 at September 30, 2004 and December 31, 2003, respectively 2,998,054 3,568,059
Fixed assets, net of accumulated depreciation of $53,918 and $53,002 at
September 30, 2004 and December 31, 2003, respectively --- 916
--------------- ---------------
Total assets $ 27,844,057 $ 36,219,560
=============== ===============
LIABILITIES AND MEMBER'S DEFICIENCY
Current liabilities
Accrued expenses and accounts payable $ 276,657 $ 150,535
Accrued interest on senior notes payable 539,584 3,887,797
--------------- ---------------
Total current liabilities 816,241 4,038,332
--------------- ---------------
8.625% senior notes payable 140,761,000 153,088,000
--------------- ---------------
Total liabilities 141,577,241 157,126,332
--------------- ---------------
Contingencies
Member's deficiency (113,733,184) (120,906,772)
--------------- ---------------
Total liabilities and member's deficiency $ 27,844,057 $ 36,219,560
=============== ===============
The accompanying notes are an integral part of these condensed financial
statements.
3
Waterford Gaming, L.L.C.
Condensed Statements of Income
For the three and nine months ended September 30, 2004 and 2003
(Unaudited)
-----------------------------
For the For the For the For the
three months three months nine months nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
---------------- -------------- --------------- ---------------
Expenses
Interest expense $ 3,506,650 $ 3,499,768 $ 10,552,928 $ 16,180,823
Salaries - related parties 319,121 236,337 910,975 672,022
General and administrative 128,836 125,036 785,292 338,013
9.50% senior notes tender expense --- 13,452 --- 509,414
Amortization of beneficial interest -
Leisure Resort Technology, Inc. 95,274 95,274 282,716 282,716
Amortization on deferred financing costs 205,401 150,199 570,005 2,815,114
Depreciation --- 2,695 916 8,085
---------------- -------------- --------------- ---------------
Total expenses 4,255,282 4,122,761 13,102,832 20,806,187
---------------- -------------- --------------- ---------------
Interest and dividend income 33,134 20,761 77,617 103,787
Equity in income of
Trading Cove Associates 7,689,143 7,679,699 22,803,342 21,208,884
---------------- -------------- --------------- ---------------
Net income $ 3,466,995 $ 3,577,699 $ 9,778,127 $ 506,484
================ ============== =============== ===============
The accompanying notes are an integral part of these condensed financial
statements.
4
Waterford Gaming, L.L.C.
Condensed Statements of Changes in Member's Deficiency
For the nine months ended September 30, 2004 and 2003
(Unaudited)
-----------------------------
For the nine months ended September 30, 2004
Balance, January 1, 2004 $ (120,906,772)
Distributions (2,604,539)
Net income 9,778,127
---------------
Balance, September 30, 2004 $ (113,733,184)
===============
For the nine months ended September 30, 2003
Balance, January 1, 2003 $ (76,962,084)
Distributions (47,836,321)
Net income 506,484
---------------
Balance, September 30, 2003 $ (124,291,921)
===============
The accompanying notes are an integral part of these condensed financial
statements.
5
Waterford Gaming, L.L.C.
Condensed Statements of Cash Flows
For the nine months ended September 30, 2004 and 2003
(Unaudited)
-----------------------------
2004 2003
--------------- ---------------
Cash flows from operating activities
Net income $ 9,778,127 $ 506,484
--------------- ---------------
Adjustments to reconcile net income
to net cash provided by (used in) operating activities
Amortization 852,721 3,097,830
Depreciation 916 8,085
Equity in income of Trading Cove Associates (22,803,342) (21,208,884)
Operating distributions from Trading Cove Associates 26,343,116 19,814,004
Changes in operating assets and liabilities:
Other current assets (44,966) (25,814)
Accrued expenses and accounts payable 126,122 52,211
Accrued interest on senior notes payable (3,348,213) (2,434,359)
--------------- ---------------
Total adjustments 1,126,354 (696,927)
--------------- ---------------
Net cash provided by (used in)
operating activities 10,904,481 (190,443)
--------------- ---------------
Cash flows from investing activities
Maturities and (purchases) of restricted investments - net 547,415 3,737,476
Contributions to Trading Cove Associates --- (450,000)
Distributions from Trading Cove Associates --- 650,000
--------------- ---------------
Net cash provided by
investing activities 547,415 3,937,476
--------------- ---------------
Cash flows from financing activities
Redemption of 8.625% senior notes payable (12,327,000) (1,912,000)
Distributions to member (2,604,539) (47,836,321)
Proceeds from 8.625% senior notes issuance --- 155,000,000
Deferred financing costs --- (3,843,031)
Redemption of 9.50% senior notes payable --- (108,007,000)
--------------- ---------------
Net cash used in
financing activities (14,931,539) (6,598,352)
--------------- ---------------
Net change in cash and cash equivalents (3,479,643) (2,851,319)
Cash and cash equivalents at beginning of period 4,892,072 4,658,602
--------------- ---------------
Cash and cash equivalents at end of period $ 1,412,429 $ 1,807,283
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 13,901,141 $ 18,615,181
=============== ===============
The accompanying notes are an integral part of these condensed financial
statements.
6
WATERFORD GAMING, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation:
The unaudited condensed interim financial statements have been prepared in
accordance with the policies described in Waterford Gaming, L.L.C.'s (the
"Company") 2003 audited financial statements and should be read in conjunction
with the Company's 2003 audited financial statements within the Company's Annual
Report for the fiscal year ended December 31, 2003 on Form 10-K as filed with
the Securities and Exchange Commission (the "Commission") on March 26, 2004. The
condensed balance sheet at December 31, 2003, contained herein, was derived from
audited financial statements, but does not include all disclosures contained in
the Form 10-K and required by accounting principles generally accepted in the
United States of America. The unaudited condensed interim financial statements
include normal and recurring adjustments which are, in the opinion of
management, necessary to present a fair statement of financial position as of
September 30, 2004, the statements of income for the three-month and nine-month
periods ended September 30, 2004 and 2003 and statements of member's deficiency
and of cash flows for each of the nine-month periods ended September 30, 2004
and 2003. Statements of income for the period are not necessarily indicative of
the results to be expected for the full year.
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 9.50% 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 $125 Million Senior Notes offering, the Company
distributed $37,050,000 to Waterford Group, L.L.C. ("Waterford Group") during
March 1999. During December 1999, the Company received a payment on notes it
held due from the Mohegan Tribal Gaming Authority (the "Authority") and a
distribution from Trading Cove Associates ("TCA" or "Trading Cove"). As
contemplated in the $125 Million Senior Notes offering, the Company distributed
approximately $34,672,000 to Waterford Group during January 2000. In connection
with the 8.625% Senior Notes offering, the Company distributed approximately
$44,500,000 to Waterford Group during June 2003.
Note 2. Trading Cove Associates - Equity Investment:
As of September 30, 2004 and 2003, the following unaudited summary information
relates to TCA. Total revenues and net income are for the nine-month periods
ended September 30, 2004 and 2003:
2004 2003
------------- -------------
Total current assets $ 20,742,913 $ 18,377,213
============= =============
Total assets $ 23,015,596 $ 20,872,789
Total liabilities (1,923,219) (1,177,458)
------------- -------------
Partners' capital $ 21,092,377 $ 19,695,331
============= =============
Total revenues $ 51,699,369 $ 53,067,547
============= =============
Net income $ 50,016,726 $ 46,827,811
============= =============
Company's interest:
Trading Cove Associates -
equity investment, beginning
of period $ 16,965,487 $ 11,972,338
Contributions --- 450,000
Distributions (26,343,116) (20,464,004)
------------- -------------
(9,377,629) (8,041,666)
------------- -------------
Income from Trading Cove
Associates 23,133,363 21,538,905
Amortization of interests
purchased (330,021) (330,021)
------------- -------------
Equity in income of
Trading Cove Associates 22,803,342 21,208,884
------------- -------------
Trading Cove Associates -
equity investment, end of period $ 13,425,713 $ 13,167,218
============= =============
7
Note 3. Beneficial Interest - Leisure Resort Technology, Inc.:
On January 6, 1998, pursuant to the settlement and release agreement described
in Note 6 below, the Company paid $5,000,000 to Leisure Resort Technology, Inc.
("Leisure") and, among other things, Leisure (a) gave up its beneficial interest
of 5% 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 Kerzner Investments
Connecticut, Inc. (formerly Sun Cove Limited, "Kerzner Investments") and TCA's
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 Casino
(the "Mohegan Sun") by TCA.
In connection with the settlement of all matters related to such suit, pursuant
to the settlement and release agreement, the Company agreed to acquire Leisure's
interests in TCA. As a result of this acquisition, Leisure no longer has the
right to 5% of the Organizational and Administrative Fee, as defined in the
Organizational and Administrative Services Agreement, and 5% of TCA's Excess
Cash as defined in TCA's partnership agreement, and the Company is now entitled
to such fees and such cash.
On March 17, 1999, the $65 Million Senior Notes were retired, and on March 18,
1999, the Company paid an additional $2,000,000 to Leisure pursuant to the
settlement and release agreement. On January 7, 2000, Leisure filed a complaint
against the Company and certain other defendants relating to the settlement and
release agreement. For a description of the complaint, see Note 6 to these
condensed financial statements.
Until March 17, 1999, the payments made to Leisure pursuant to the settlement
and release agreement and associated costs were amortized on a straight-line
basis over the remaining term of the Management Agreement (defined below). As a
result of the Relinquishment Agreement (defined below) becoming effective, the
remaining balance will be amortized over 189 months beginning March 18, 1999.
Accumulated amortization at September 30, 2004 and December 31, 2003 amounts to
$3,177,878 and $2,895,162, respectively.
Note 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 debts.
The 8.625% Senior Notes bear interest at a rate of 8.625% per annum, payable
semi-annually in arrears on March 15th and September 15th 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.
8
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 1st or August 1st 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 15th or September 15th 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%
The Company and Finance have periodically redeemed portions of the 8.625% Senior
Notes with Company Excess Cash pursuant to the terms of the 8.625% Senior Notes
Indenture. The table below summarizes (a) the amount of Company Excess Cash that
the Company and Finance have determined was available for the mandatory
redemption of the 8.625% Senior Notes on February 1st and August 1st of each
applicable year pursuant to the terms of the 8.625% Senior Notes Indenture, (b)
the aggregate principal amount of 8.625% Senior Notes redeemed with such Company
Excess Cash, (c) the date on which such redemption was consummated, and (d) the
redemption price at which such redemption was made.
Date Company Excess Cash Principal Amount of Dates of Redemption Price (expressed as percentage of
(approximately) notes redeemed principal amount being redeemed
- ---------------- ------------------- ------------------- -------------------- ---------------------------------
August 1, 2003 $ 5,568,000 $ 1,920,000 September 15, 2003 108.625%
February 1, 2004 $ 14,534,000 $ 7,302,000 March 15, 2004 108.625%
August 1, 2004 $ 11,695,000 $ 5,025,000 September 15, 2004 107.610%
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 of
funds in the IRA 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.
9
The fair value of the Company's senior notes payable at September 30, 2004 and
December 31, 2003 is estimated to be approximately $149,207,000 and
$163,804,000, respectively, based on the quoted market price for the 8.625%
Senior Notes.
Note 5. Certain Relationships and Related Transactions:
DEVELOPMENT SERVICES AGREEMENT PHASE II AND RELATED AGREEMENTS AND PAYMENTS
On February 9, 1998, TCA and Kerzner International Management Limited ("KIML"),
an affiliate of Kerzner Investments, the Company's partner in TCA, entered into
the Agreement Relating to Development Services (the "Development Services
Agreement Phase II"). Pursuant to the Development Services Agreement Phase II,
TCA subcontracted with KIML, 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. For a summary of
the Development Agreement, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Trading Cove Associates -
Material Agreements --Development Agreement". KIML assigned the Development
Services Agreement Phase II to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner
Investments a fee, as subcontractor (the "Development Services Fee Phase II"),
equal to 3% of the development costs of the Project Sunburst expansion at the
Mohegan Sun (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. 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% 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%
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.
TCA's accrued liability to Kerzner Investments with respect to the Development
Services Fee Phase II was approximately $459,000 at September 30, 2004.
EMPLOYMENT AGREEMENT WITH MR. LEN WOLMAN
Len Wolman, the Company's Chairman of the Board of Directors and Chief Executive
Officer, is the Company's designated representative to TCA under TCA's
partnership agreement.
On September 28, 1998, the Company entered into an employment agreement with Len
Wolman. The employment agreement provides for a base annual salary of $250,000
reduced by any amounts Mr. Wolman receives as a salary from TCA for such period.
In addition, pursuant to the employment agreement, the Company agreed to pay Mr.
Wolman incentive compensation in an amount equal to 0.05% of the revenues of the
Mohegan Sun including the Project Sunburst expansion to the extent Mr. Wolman
has not received such amounts from TCA. On and after January 1, 2004, the
Company agreed 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 0.00% to 0.10%) to be determined using a formula attached to the
employment agreement which compares actual revenues to predetermined revenue
targets. For the nine-months ended September 30, 2004 and 2003, the Company paid
and incurred $910,975 and $672,022, respectively, as an expense pursuant to Len
Wolman's employment agreement.
10
OTHER RELATED PARTY TRANSACTIONS
For each of the nine-month periods ended September 30, 2004 and 2003,
approximately $31,500, was paid and incurred by TCA to the principals and
affiliates of the Company as part of TCA's operating expenses. In addition, for
the nine-month periods ended September 30, 2004 and 2003, TCA incurred
approximately $701,600 and $682,800, 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. Depreciation
expense related to the office space renovation for the nine months ended
September 30, 2004 and 2003 was $916 and $4,860, respectively.
Waterford Group, Slavik Suites, Inc. ("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.
Note 6. Contingencies:
LEGAL PROCEEDINGS
On January 6, 1998, Leisure Resort Technology, Inc. and defendants Waterford
Gaming, L.L.C., Trading Cove Associates, LMW Investments, Inc., and Slavik
Suites, Inc. settled a prior lawsuit brought by Leisure. In connection with this
settlement, Leisure, TCA, the Company, LMW Investments, Inc., and Slavik Suites,
Inc. entered into a settlement and release agreement. Pursuant to this
settlement and release agreement, the Company bought Leisure's beneficial
interest in TCA.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a
four count complaint naming as defendants Waterford Gaming, L.L.C., Trading Cove
Associates, LMW Investments, Inc., Slavik Suites, Inc., Waterford Group, L.L.C.,
Len Wolman and Mark Wolman (collectively, the "Defendants"). The matter has been
transferred to the complex litigation docket and is pending in Waterbury,
Connecticut. The complaint alleged breach of fiduciary duties, fraudulent
non-disclosure, violation of Connecticut Statutes Section 42-110a, et seq. and
unjust enrichment in connection with the negotiation by certain of the
Defendants of the settlement and release agreement. The complaint also brought a
claim for an accounting. The complaint seeks unspecified legal and equitable
damages.
On February 29, 2000, Defendants filed a Motion to Strike and a Motion for
Summary Judgment, each with respect to all claims. The Court granted Defendants'
Motion to Strike in part and denied Defendants' Motion for Summary Judgment, on
October 13, 2000. The Court's order dismissed the claim for an accounting and
the claim under Connecticut Statutes Section 42-110a, et seq. The Court also
struck the alter ego allegations in the complaint against LMW Investments, Inc.,
Slavik Suites, Inc., Len Wolman and Mark Wolman. In a decision dated August 6,
2001, the Court dismissed all claims against LMW Investments, Inc., Slavik
Suites, Inc., Len Wolman and Mark Wolman.
On November 15, 2000, the Company and its co-defendants answered the complaint.
In addition, the Company and Trading Cove Associates asserted counterclaims for
breach of the settlement and release agreement and breach of the implied
covenant of good faith against Leisure and its president, Lee Tyrol. In a
decision dated June 6, 2001, the Court dismissed the counterclaims against Lee
Tyrol. Leisure moved for summary judgment seeking dismissal of the counter
claims in full, which motion was denied on April 14, 2003.
Fact discovery is completed. On April 15, 2004, the Company and its
co-defendants filed a motion for summary judgment as to all of Leisure's claims.
The Court heard argument on this Motion on June 23, 2004. In an August 4, 2004,
Memorandum of Decision, the Court granted summary judgment for the Defendants as
to each of the remaining three counts of the plaintiffs complaint. The plaintiff
has appealed this decision. Defendants' counterclaims are stayed pending this
appeal.
The Company believes that it has meritorious defenses and, if necessary, 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
possibility of an appeal and the disputed issues of law and/or facts on which
the outcome of this litigation depends.
11
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Company's condensed financial statements and the notes
thereto included elsewhere herein.
A - CERTAIN FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, in
particular, the statements about the Company's, TCA's and the Mohegan Sun's
plans, strategies and prospects. Although the Company believes that such
statements are based on reasonable assumptions, these forward-looking statements
are subject to numerous factors, risks and uncertainties that could cause actual
outcomes and results to be materially different from those projected. These
factors, risks and uncertainties include, among others, the risk factors
described below under the heading "Risk Factors" and the following:
a) the financial performance of the Mohegan Sun;
b) changes in laws or regulations (including, without limitation, gaming
laws or regulations);
c) the effects of new competition; and
d) general domestic and global economic conditions.
The Company's, 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 quarterly
report on Form 10-Q.
B - DEVELOPMENT AND OPERATIONAL ACTIVITIES
The Company is a special purpose company formed solely for the purpose of
holding its partnership interest, as a general partner, in TCA, a Connecticut
general partnership and the manager (until January 1, 2000) and developer of the
Mohegan Sun.
1 - TRADING COVE ASSOCIATES
TCA was organized on July 27, 1993. The primary purpose of TCA has been,
a) to assist the Mohegan Tribe of Indians of Connecticut (the "Tribe" or
"Mohegan Tribe") and the Authority in obtaining federal recognition,
b) to negotiate the tribal-state compact with the State of Connecticut on
behalf of the Tribe,
c) to obtain financing for the development of the Mohegan Sun,
d) to negotiate the Amended and Restated Gaming Facility Management
Agreement (the "Management Agreement"),
e) to oversee all operations of the Mohegan Sun 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
the Mohegan Sun until midnight December 31, 1999, TCA oversaw the Mohegan Sun's
day-to-day operations.
TCA's partnership agreement will terminate on December 31, 2040, or earlier, in
accordance with its terms. The Company has a 50% partnership interest in TCA.
The remaining 50% interest is owned by Kerzner Investments, an affiliate of
Kerzner International Limited ("Kerzner International"). The complete text of
(a) the Amended and Restated Partnership Agreement of Trading Cove Associates,
dated as of September 21, 1994, among Sun Cove Limited (now Kerzner
Investments), RJH Development Corp., Leisure Resort Technology, Inc., Slavik
Suites, Inc., and LMW Investments, Inc., and (b) the First Amendment to the
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. 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.
12
2 - TRADING COVE ASSOCIATES - MATERIAL AGREEMENTS
a) RELINQUISHMENT AGREEMENT
On February 7, 1998, TCA and the Authority entered into the Relinquishment
Agreement (the "Relinquishment Agreement"). Under the terms of the
Relinquishment Agreement, TCA continued to manage the Mohegan Sun under the
Management Agreement until midnight December 31, 1999, and on January 1, 2000,
the Management Agreement terminated and the Tribe assumed day-to-day management
of the Mohegan Sun.
Under the Relinquishment Agreement, to compensate TCA for terminating its rights
under the Management Agreement and the Hotel/Resort Management Agreement, the
Authority agreed to pay to TCA a fee (the "Relinquishment Fees") equal to 5% of
Revenues, as defined in the Relinquishment Agreement, generated by the Mohegan
Sun during the 15-year period commencing on January 1, 2000, including revenue
generated by the Project Sunburst expansion.
The Relinquishment Fees are divided into senior relinquishment payments and
junior relinquishment payments, each of which equals 2.5% 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".
For the nine months ended September 30, 2004 and 2003, total Relinquishment Fees
earned were $51,676,969 and $48,452,092, respectively. The amount of
Relinquishment Fees reported in this quarterly report on Form 10-Q are based
upon Revenues reported to TCA by the Authority.
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.
13
b) DEVELOPMENT AGREEMENT AND OTHER RELATED AGREEMENTS
On February 7, 1998, TCA and the Authority entered into the Development Services
Agreement (the "Development Agreement"). Pursuant to the Development Agreement,
TCA agreed to oversee the design, construction, furnishing, equipping and
staffing of the Project Sunburst expansion for a $14 million development fee
(the "Development Fee").
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. As of September 30, 2004 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 TCA quarterly beginning on January 15, 2000, based on
incremental completion of the Project Sunburst expansion as of each payment
date. A summary of the quarterly Development Fee payments received by TCA in
accordance with the terms of the Development Agreement is as follows:
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
============
As described in Note 5 to the condensed financial statements included in Item 1
of this quarterly report on Form 10-Q, on February 9, 1998, TCA and KIML entered
into the Development Services Agreement Phase II. Pursuant to the Development
Services Agreement Phase II, TCA subcontracted with KIML, 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 the Development Services Fee Phase II. Such fee equals 3% 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. 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.
Also as described in Note 5 to the condensed financial statements included in
Item 1 of this quarterly report on Form 10-Q, before KIML assigned the
Development Services Agreement Phase II to Kerzner Investments, it entered into
the Local Construction Services Agreement with Construction, pursuant to which
Construction agreed to provide certain of those services assigned to KIML by TCA
pursuant to the Development Services Agreement Phase II. KIML assigned the Local
Construction Services Agreement to Kerzner Investments.
Pursuant to the Local Construction Services Agreement, Kerzner Investments
agreed to pay to Construction, an affiliate of the Company, a fee equal to
20.83% 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%
of its fee under the Local Construction Services Agreement.
14
C - CERTAIN RISK FACTORS
1 - Lack of Operations; Dependence on the Mohegan Sun - The Company is entirely
dependent upon the performance of the Mohegan Sun to meet its operating
obligations including its debt service obligations.
The Company does not conduct any business operations other than in connection
with its role as a general partner of Trading Cove and activities incidental to
the issuance of the 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.
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 amounts wagered.
In addition, Trading Cove has entered into subcontracts with Kerzner Investments
(who has further subcontracted with certain of our affiliates) in connection
with the development and construction of the Project Sunburst expansion. Under
the subcontracts, Trading Cove has agreed to pay a Development Services Fee
Phase II equal to 3% of the total costs of the Project Sunburst expansion,
excluding capitalized interest, which is approximately $1 billion, less Trading
Cove's actual costs relating to the Project Sunburst expansion. The Company
expects Trading Cove will pay Kerzner Investments and our affiliates a
Development Services Fee Phase II of approximately $20 million pursuant to these
subcontracts. Pursuant to the Amended and Restated Omnibus Termination
Agreement, Trading Cove is required to pay the Development Services Fee Phase II
prior to making certain distributions to its partners, including the Company. To
date, Trading Cove has paid approximately $20 million to Kerzner Investments
under the Development Services Agreement. Any further payment of the Development
Services Fee Phase II reduces amounts available to be distributed to the
Company.
The Company cannot assure you that its future operating cash flow will be
sufficient to cover its expenses, including interest on the 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 September 30, 2004, the Company has an aggregate long-term senior
indebtedness of $140,761,000, consisting of the 8.625% Senior Notes. The
Authority is also highly leveraged. Trading Cove's agreements with the Authority
do not prohibit the Authority from incurring additional indebtedness.
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 at September 30, 2004:
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.
15
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.
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 Trading Cove or the Authority. The Company does not
have the power under Trading Cove's partnership agreement to cause Trading Cove
to make any distributions to the Company.
If Trading Cove becomes the debtor in a bankruptcy or similar proceeding, the
Company would have the status of an equity holder, not a creditor, and would not
be entitled to receive any distributions until all of Trading Cove's creditors
were paid in full.
If the Authority became the debtor in a bankruptcy or similar proceeding,
Trading Cove's rights and recovery would depend on numerous factors, including
the type and outcome of the proceeding. If the Authority ceased operations and
liquidated, under chapter 7 of the Bankruptcy Code or otherwise, Trading Cove's
claim would likely be limited to the amount of unpaid Relinquishment Fees as of
the time of liquidation. If the Authority reorganized under chapter 11 of the
Bankruptcy Code, Trading Cove's claim would likely be based on an estimate of
the Mohegan Sun's future revenues for the term of the Relinquishment Agreement.
In any event, any recovery by Trading Cove on its claims for senior or junior
relinquishment fees would be subject to the prior payment in full of all
indebtedness senior thereto.
As a result, the Company cannot give any assurance that, in the event of
bankruptcy or financial difficulty of either Trading Cove or the Authority, it
would ultimately recover sufficient (or any) funds to pay amounts outstanding
under the 8.625% Senior Notes.
The 8.625% Senior Notes are not secured by a pledge of the Company's partnership
interest in Trading Cove. Accordingly, in the event of an acceleration under the
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 partnership agreement with respect to Trading Cove requires consent by both
partners in order to take any action. Accordingly, neither the Company nor
Kerzner Investments has the authority to cause Trading Cove to make any
distributions, and Kerzner Investments has the ability to block any action taken
by Trading Cove. Although the partnership agreement requires Trading Cove to
make distributions of excess cash, the distributions are reduced by certain
undefined, discretionary amounts, including foreseeable needs of cash,
obligations to third parties, adequate working capital and reserves and the
amount needed by the partnership to conduct its business and carry out its
purposes. A dispute between the partners as to the appropriate amount of such
reductions could result in no or limited distributions by Trading Cove, which
could have a material adverse effect on the Company's ability to make required
payments of interest, principal and premium on the 8.625% Senior Notes.
Under the 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 million annually, payment of the difference to each of Kerzner
Investments and the principals of the Company;
16
(2) the development fee to be paid to Kerzner Investments, Construction,
and The Slavik Company and related development expenses equal to 3% of
the total cost of the Project Sunburst expansion, excluding
capitalized interest, less Trading Cove's actual costs relating to the
Project Sunburst expansion. Trading Cove's accrued liability to
Kerzner Investments with respect to such fee was approximately
$459,000 at September 30 2004; and
(3) a $5 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. For a description of the
complaint, see PART II--OTHER INFORMATION, Item 1--Legal Proceedings to this
Form 10Q.
5 - Risks Associated with the Buy/Sell Option Under Trading Cove Partnership
Agreement - If a dispute occurs between the Company and Kerzner Investments, the
buy/sell provision of the partnership agreement could be invoked. If the
buy/sell provision is invoked, the Company cannot assure you that it would have
sufficient funds to buy out Kerzner Investments or, if the Company agreed to
sell to Kerzner Investments, that the selling price would be sufficient to pay
all amounts due on the 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 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 its right to buy under the buy/sell provision of the
partnership agreement to the Waterford Group or the Waterford Group may fund the
purchase of Kerzner 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 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 receives 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 agreement.
17
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 of America in trust for the Mohegan Tribe, and creditors of
the Authority or the Mohegan Tribe may not force or obtain title to the land.
The Mohegan Tribe is permitted to amend the provisions of its constitution that
establish the Authority and the Gaming Disputes Court with the approval of
two-thirds of the members of the Tribal Council and a ratifying vote of a
two-thirds majority of all of the members of the Mohegan Tribe, with at least
40% of the registered voters of the Mohegan Tribe voting. However, prior to the
enactment of any such amendment by the Tribal Council, any non-tribal party will
have the opportunity to seek a ruling from the Appellate Branch of the Gaming
Disputes Court that the proposed amendment would constitute an impermissible
impairment of contract. Further, the Mohegan Tribe's constitution prohibits the
Mohegan Tribe from enacting any law that would impair the obligations of
contracts entered into in furtherance of the development, construction,
operation and promotion of gaming on Mohegan Tribal lands. Amendments to this
provision of the Mohegan Tribe's constitution require the affirmative vote of
75% of all registered voters of the Mohegan Tribe. As of September 30, 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% 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. 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."
18
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 ("Foxwoods") and, to a lesser extent, with
casinos in Atlantic City, New Jersey and upstate New York. Foxwoods is located
approximately 10 miles from the Mohegan Sun. Foxwood's recently completed a $99
million casino expansion.
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 race tracks in the state
but not full-scale casino gaming. To date, three separate race tracks operate
approximately 3,000 machines. The legislature also authorized three Indian
casinos in the Catskills region of New York (Sullivan and Ulster counties) and
three casinos to be operated by the Seneca Nation of Indians in the
Niagara/Buffalo area. The Seneca Nation opened a facility in Niagara Falls in
late December 2002 and opened another facility in Salamanca, New York, in early
May 2004. The validity of the New York State statute is currently being
litigated in the state's highest court of appeals.
The Oneida Indian Nation operates Turning Stone Casino Resort in Verona, New
York, approximately 270 miles from the Mohegan Sun. The St. Regis Mohawk Tribe
in Hogansburg, New York has entered into a gaming compact with the State of New
York to conduct gaming on its reservation near the Canadian border. There are
several proposals to develop casinos in the Catskills region of New York which
is about 185 miles from the Mogehan Sun. To date, only three tribes, the St.
Regis Mohawk Tribe, the Cayuga Tribe and the Stockbridge-Munsee Band of Mohican
Indians, 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. 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. These include the Historic Eastern
Pequot Tribe of Connecticut and the Schaghticoke Tribal Nation of Connecticut.
The status of both tribes is being challenged. In addition 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 continue to explore gaming opportunities. A recent state
wide referendum in Maine rejected any off-reservation Indian casino gaming.
The Narragansett Tribe of Rhode Island has partnered with Harrah's to open a
facility in West Warwick. The proposed casino would be operated under Rhode
Island law and not under the Indian Gaming Regulatory Act. This arrangement was
contained in a statewide ballot measure that was scheduled for a vote in
November 2004. However, the State Supreme Court in August 2004 issued an
advisory opinion that the referendum would violate the State's constitution. At
this writing, the status of the Narragansett/Harrah's effort remains uncertain.
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 Massachusetts, one such group is the Mashpee Wampanoag which is
awaiting a proposed finding.
19
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 Mohegan Sun's
President and Chief Executive Officer, Jeffrey Hartmann, the Mohegan Sun's
Executive Vice President and Chief Operating Officer, and Leo Chupaska, the
Authority's 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.
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.
20
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.
D - 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, paid and to be paid by the Authority.
2 - EQUITY INVESTMENTS - The Company's equity investment in TCA is accounted for
utilizing the equity method. Included in the investment is the purchase price
paid to a corporation for its 12.5% interest in TCA. This amount is amortized
over the 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.
21
E - TABLE OF CONTRACTUAL OBLIGATIONS
The following table provides an overview of the Company's aggregate contractual
obligations as of September 30, 2004.
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 September 30, 2004, the Company's long-term debt consists of
obligations under its 8.625% Senior Notes. $140,761,000 in aggregate principal
amount of 8.625% Senior Notes is currently outstanding. Interest on the
outstanding principal amount of 8.625% Senior Notes is payable by the Company
semi-annually in arrears on March 15th and September 15th 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 15th
and September 15th 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.
F - OVERVIEW OF CURRENT AND FUTURE CASH FLOWS
The Company expects to fund its operating, debt service and capital needs from
cash flows from the Company's distributions from TCA, and from the Company's
available cash. Based upon the Company's anticipated future operations,
management believes that available cash flow will be sufficient to meet the
Company's anticipated requirements for future operating expenses, future
scheduled payments of principal and interest on the 8.625% 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
The Company expects that TCA's major source of revenue for 2004 will be
Relinquishment Fees payable by the Authority.
On April 27, 2004 the Company received $2,620,000, on July 27, 2004 the Company
received $11,925,000 and on October 26, 2004 the Company received $4,073,386,
from TCA as distributions, which represents the Company's share under the
Amended and Restated Omnibus Termination Agreement of approximately $51,677,000
in Relinquishment Fees earned by TCA pursuant to the Relinquishment Agreement
for the period January 1 through September 30, 2004. On April 28, 2003 the
Company received $2,876,707, on July 28, 2003 the Company received $6,365,797
and on October 28, 2003 the Company received $3,512,706, from TCA as
distributions, which represents the Company's share under the Amended and
Restated Omnibus Termination Agreement of approximately (a) $48,452,000 in
Relinquishment Fees earned by TCA pursuant to the Relinquishment Agreement for
the period January 1 through September 30, 2003 and (b) $168,000 in Development
Fee earned by TCA pursuant to the Development Agreement for the same period.
22
3 - AMENDED AND RESTATED OMNIBUS TERMINATION AGREEMENT
Effective March 18, 1999, the Amended and Restated Omnibus Termination Agreement
(the " Amended and Restated Omnibus Termination Agreement") was entered into by
TCA, Kerzner International, the Company, KIML, LMW Investments, Inc., 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 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 nine months ended September 30,
2004 and 2003, $1,403,227 ($701,614 to Kerzner Investments and
$701,613 to affiliates of the Company) , and $1,365,579 ($682,790 to
Kerzner Investments and $682,789 to affiliates of the Company),
respectively, had been incurred by TCA in terms of this first
priority.
(b) Second, to return all capital contributions made by the partners of
TCA after September 29, 1995. TCA does not anticipate making further
capital calls to fund expenses related to the development of the
Project Sunburst expansion. From January 1, 2000 to September 30, 2004
these capital contributions aggregated $8,000,000. From January 1,
2000 to September 30, 2004 $8,000,000 had been repaid to the partners
of TCA, 50% to the Company and 50% to Kerzner Investments. As of
September 30, 2004, $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 September
30, 2004. The accrued liability to Kerzner Investments with respect to
such fee was approximately $459,000 at September 30, 2004.
(e) Fifth, to pay Kerzner Investments an annual fee (in the form of a
priority distribution) of $5 million payable in equal quarterly
installments of $1.25 million beginning March 31, 2000 and ending
December 31, 2006. On each of October 26, 2004 and October 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 25% of
the relinquishment payments as distributions. On October 26, 2004 and
on October 28, 2003, $4,582,546 ($2,291,273 to each of Kerzner
Investments and the Company) and $4,686,914 ($2,343,457 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 October 26, 2004 and on
October 28, 2003, $3,564,227 ($1,782,113 to Kerzner Investments and
$1,782,114 to the Company) and $2,338,499 ($1,169,250 to Kerzner
Investments and $1,169,249 to the Company), respectively, 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 TCA's 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.
23
G - RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED SEPTEMBER 30, 2004
AND 2003
Total expenses for the three months ended September 30, 2004 were $4,255,282
compared with $4,122,761 for the three months ended September 30, 2003.
(a)Interest expense increased by $6,882 and amortization on deferred financing
costs increased by $55,202 due primarily to the redemption of the 8.625% Senior
Notes in the principal amount of $5,025,000 at the redemption price of
approximately $5,407,000 on September 15, 2004, (b) salaries-related parties
increased by $82,784 due to (i) the increase in Revenues of the Mohegan Sun and
(ii) effective January 1, 2004 the incentive compensation in terms of Mr. Len
Wolman's employment agreement changed from a fixed 0.05% of the Revenues of the
Mohegan Sun to an amount that ranges from 0.00% to 0.10% of the Revenues of the
Mohegan Sun (for the quarter ended September 30, 2004 incentive compensation was
calculated at 0.07% of the Revenues of the Mohegan Sun) and (c) general and
administrative costs increased by $3,800 (primarily attributable to (i) an
increase in legal and other expenses related to the defense of the Leisure
litigation, as detailed under Part II -- OTHER INFORMATION: Item I -- Legal
Proceedings totaling approximately $22,100, (ii) by an increase in credit rating
service of approximately $3,000 and offset by (iii) a decrease in other legal
expenses of approximately $8,000 and (iv) by a decrease in accounting fees of
approximately $14,400), (d) 9.50% senior notes tender expense decreased by
$13,452 due to the redemption of the $125 Million Senior Notes in June of 2003
and (e) depreciation decreased by $2,695.
Equity in income of Trading Cove Associates for the three months ended September
30, 2004 was $7,689,143 compared with $7,679,699 for the three months ended
September 30, 2003. The Company has included amortization of purchased interests
of $110,007 in each quarter's equity income. The Company's share of TCA's
results fluctuates based upon revenues earned by TCA under the Relinquishment
Agreement. In addition, interest and dividend income increased by $12,373.
As a result of the foregoing factors, the Company experienced net income of
$3,466,995 for the three months ended September 30, 2004 compared with net
income of $3,577,699 for the three months ended September 30, 2003.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003
Total expenses for the nine months ended September 30, 2004 were $13,102,832
compared with $20,806,187 for the nine months ended September 30, 2003.
(a)Interest expense decreased by $5,627,895 and amortization on deferred
financing costs decreased by $2,245,109 due primarily to the redemption of the
$125 Million Senior Notes in the principal amount of $102,349,000 and the
issuance of the 8.625% Senior Notes in the principal amount of $155 million in
June 2003, (b) salaries-related parties increased by $238,953 due to (i) the
increase in Revenues of the Mohegan Sun and (ii) effective January 1, 2004 the
incentive compensation in terms of Mr. Len Wolman's employment agreement changed
from a fixed 0.05% of the Revenues of the Mohegan Sun to an amount that ranges
from 0.00% to 0.10% of the Revenues of the Mohegan Sun (for the nine months
ended September 30, 2004 incentive compensation was calculated at 0.07% of the
Revenues of the Mohegan Sun) and (c)general and administrative costs increased
by $447,279 (primarily attributable to (i) an increase in legal and other
expenses related to the defense of the Leisure litigation, as detailed under
Part II -- OTHER INFORMATION: Item I -- Legal Proceedings totaling approximately
$462,700, (ii) by an increase in other legal expenses of approximately $2,800,
(iii) by an increase in payroll taxes of approximately $2,800, (iv) by an
increase in insurance expense of approximately $2,400 and offset by (v) by a
decrease in Commission filing expense of approximately $8,700 and (vi) by a
decrease in accounting fees of approximately $11,600), (d) 9.50% senior notes
tender expense decreased by $509,414 due to the redemption of the $125 Million
Senior Notes in June 2003 and (e) depreciation decreased by $7,169.
Equity in income of Trading Cove Associates for the nine months ended September
30, 2004 was $22,803,342 compared with $21,208,884 for the nine months ended
September 30, 2003. The Company has included amortization of purchased interests
of $330,021 in each nine-month periods equity income. The Company's share of
TCA's results fluctuates based upon revenues earned by TCA under the
Relinquishment Agreement. In addition, interest and dividend income decreased by
$26,170.
As a result of the foregoing factors, the Company experienced net income of
$9,778,127 for the nine months ended September 30, 2004 compared with net income
of $506,484 for the nine months ended September 30, 2003.
H - 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 $65 Million Senior Notes, the Company used
approximately $25.1 million to purchase from Kerzner International $19.2 million
in principal amount of Authority subordinated notes plus accrued and unpaid
interest and subordinated notes fee amounts. In addition, TCA distributed
approximately $850,000 in principal amount of Authority subordinated notes to
the Company. In addition, the Company used approximately $10.6 million of the
proceeds from the $65 Million Senior Notes to purchase RJH Development Corp.'s
interests in TCA.
24
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% of the organizational and administrative fee
and excess cash of TCA and any other claims it may have had against the Company,
TCA and TCA's partners and former partner.
In connection with the offering of the $125 Million Senior Notes, the Company
used approximately $72 million to repurchase the $65 Million Senior Notes,
distributed approximately $37 million to its member, 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 $125 Million 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 $125 Million Senior
Notes Indenture, the Company distributed $34,671,789 to 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 $125 Million Senior
Notes Indenture.
In connection with the offering of the 8.625% Senior Notes, the Company used
approximately $111.8 million to repurchase the $125 Million Senior Notes and
distributed $44.5 million to Waterford Group.
During 1999, 2000, 2001, 2002, 2003 and on June 11, 2004 the Company distributed
$886,285, $3,059,393, $1,739,660, $3,520,562, $3,238,241 and $2,005,725,
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.
On March 15, 2004 $349,247 was distributed to Waterford Group in accordance with
the terms of the 8.625% Senior Notes Indenture.
On September 15, 2004 $249,567 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 $113,733,000 and
$124,292,000 at September 30, 2004 and 2003, respectively.
For the nine months ended September 30, 2004 and 2003, net cash provided by
(used in) operating activities (as shown in the Condensed Statements of Cash
Flows) was $10,904,481 and $(190,443), respectively.
Current assets decreased from $11,523,049 at December 31, 2003 to $7,540,957 at
September 30, 2004. The decrease was primarily attributable to (i) the scheduled
semi-annual payment of interest on March 15, 2004 and September 15, 2004 on the
8.625% Senior Notes in the amounts of approximately $6,602,000 and $6,287,000,
respectively, (ii) by the redemption on March 15, 2004 of 8.625% Senior Notes in
the principal amount of $7,302,000, at the redemption price of 108.625% of the
principal amount being redeemed, (iii) by the redemption on September 15, 2004
of 8.625% Senior Notes in the principal amount of $5,025,000, at the redemption
price of 107.610% of the principal amount being redeemed, (iv) by distributions
to Waterford Group on March 15, 2004 and September 15, 2004 of approximately
$349,200 and $249,600, respectively and (v) by a tax distribution to Waterford
Group on June 11, 2004 of approximately $2,005,700 and offset by (i)
approximately $10,904,500 of cash provided by operating activities and (ii) by
distributions by TCA in terms of the Amended and Restated Omnibus Termination
Agreement.
25
Current liabilities decreased from $4,038,332 at December 31, 2003 to $816,241
at September 30, 2004. The decrease was primarily attributable to (i)a decrease
in accrued interest on senior notes payable of approximately $3,348,200 (on
September 15, 2004 the scheduled semi-annual payment of interest on the 8.625%
Senior Notes in the amount of approximately $6,287,000 was paid) and offset by
(ii) an increase in accrued expenses and accounts payable of approximately
$126,100 (primarily attributable to (a) an increase in amounts due for legal and
other expenses related to the defense of the Leisure litigation, as detailed
under PART II -- OTHER INFORMATION: Item I -- Legal Proceedings in the amount of
approximately $9,000, (b) by an increase in the amount due for salaries-related
parties of approximately $116,100 and (c) by an increase in amounts due for
accounting services of approximately $3,000).
For the nine months ended September 30, 2004 and 2003 net cash provided by
investing activities (as shown in the Condensed Statements of Cash Flows) was
$547,415 and $3,937,476, respectively. The net cash provided by investing
activities in 2004 was the result of net maturities and purchases of restricted
investments of approximately $547,400. The net cash provided by investing
activities in 2003 was primarily the result of net maturities and purchases of
restricted investments of approximately $3,737,500, distributions from TCA of
$650,000,000, and offset by contributions to TCA of $450,000.
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). Through September 30,
2004 $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 nine months ended September 30, 2004 and 2003, net cash used in
financing activities (as shown in the Condensed Statements of Cash Flows) was
$14,931,539 and $6,598,352, respectively. The net cash used in financing
activities in 2004 was primarily the result of the redemption of the 8.625%
Senior Notes on March 15, 2004 and September 15, 2004 in the principal amounts
of $7,302,000 and $5,025,000, respectively, and by distributions to Waterford
Group of $2,604,539. The net cash used in financing activities in 2003 was due
to (i) the redemption of the $125 Million Senior Notes in the principal amounts
of $5,658,000 and $102,349,000 on March 15, 2003 and June 11, 2003,
respectively, (ii) distributions to Waterford Group of $47,836,321, (iii)
deferred financing costs of $3,843,031, (iv) the redemption of 8.625% Senior
Notes on September 15, 2003 in the principal amount of $1,912,000 and (v) offset
by the proceeds from the issuance of the 8.625% Senior Notes of $155,000,000.
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 1st or August 1st 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 15th or September 15th following such dates. Any such
redemption will be made at a price equal to a percentage of the principal amount
being redeemed.
The Company and Finance have periodically redeemed portions of the 8.625% Senior
Notes with Company Excess Cash pursuant to the terms of the 8.625% Senior Notes
Indenture. The table below summarizes (a) the amount of Company Excess Cash that
the Company and Finance have determined was available for the mandatory
redemption of the 8.625% Senior Notes on February 1st and August 1st of each
applicable year pursuant to the terms of the 8.625% Senior Notes Indenture, (b)
the aggregate principal amount of 8.625% Senior Notes redeemed with such Company
Excess Cash, (c) the date on which such redemption was consummated, and (d) the
redemption price at which such redemption was made.
Date Company Excess Cash Principal Amount of Dates of Redemption Price (expressed as percentage of
(approximately) notes redeemed principal amount being redeemed
- ---------------- ------------------- ------------------- -------------------- ---------------------------------
August 1, 2003 $ 5,568,000 $ 1,920,000 September 15, 2003 108.625%
February 1, 2004 $ 14,534,000 $ 7,302,000 March 15, 2004 108.625%
August 1, 2004 $ 11,695,000 $ 5,025,000 September 15, 2004 107.610%
26
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, premium and interest on the 8.625% Senior
Notes. No assurance, however, can be given that the operating cash flow will be
sufficient for that purpose.
Item 3 -- Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. Changes in these factors could cause
fluctuations in earnings and cash flows.
For fixed rate debt, changes in interest rates generally affect the fair value
of the debt instrument, but not earnings or cash flows. Therefore, interest rate
risk and changes in the fair 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 value of the debt instrument, but do affect future earnings and
cash flows. The Company did not have any variable rate debt outstanding at
September 30, 2004 and December 31, 2003. The fair value of the Company's
long-term debt at September 30, 2004 and December 31, 2003 is estimated to be
approximately $149,207,000 and $163,804,000, respectively, based on the quoted
market price for the same issue.
The Company is exposed to market risks from fluctuations in interest rates and
the effects of those fluctuations on market values of the Company's cash
equivalents and restricted investments. Cash equivalents generally consist of
overnight investments while the restricted investments at September 30, 2004 are
principally comprised of an investment in a Federal Home Loan Bank Discount Note
which was purchased at a discount of 1.82%, and matures March 2, 2005 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.
27
Item 4 -- Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange 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 quarter
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.
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings:
On January 6, 1998, Leisure Resort Technology, Inc. ("Leisure") and defendants
Waterford Gaming, L.L.C., Trading Cove Associates, LMW Investments, Inc., and
Slavik Suites, Inc. settled a prior lawsuit brought by Leisure. In connection
with this settlement, Leisure, TCA, the Company, LMW Investments, Inc., and
Slavik Suites, Inc. entered into a settlement and release agreement. Pursuant to
this settlement and release agreement, the Company bought Leisure's beneficial
interest in TCA.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a
four count complaint naming as defendants Waterford Gaming, L.L.C., Trading Cove
Associates, LMW Investments, Inc., Slavik Suites, Inc., Waterford Group, L.L.C.,
Len Wolman and Mark Wolman (collectively, the "Defendants"). The matter has been
transferred to the complex litigation docket and is pending in Waterbury,
Connecticut. The complaint alleged breach of fiduciary duties, fraudulent
non-disclosure, violation of Connecticut Statutes Section 42-110a, et seq. and
unjust enrichment in connection with the negotiation by certain of the
Defendants of the settlement and release agreement. The complaint also brought a
claim for an accounting. The complaint seeks unspecified legal and equitable
damages.
On February 29, 2000, Defendants filed a Motion to Strike and a Motion for
Summary 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.
28
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. This motion for summary judgment was denied on April 14, 2003.
Fact discovery is completed. On April 15, 2004, the Company and its
co-defendants filed a motion for summary judgment as to all of Leisure's claims.
The Court heard argument on this Motion on June 23, 2004. In an August 4, 2004,
Memorandum of Decision, the Court granted summary judgment for the Defendants as
to each of the remaining three counts of the plaintiffs complaint. The plaintiff
has appealed this decision. Defendants' counterclaims are stayed pending this
appeal.
The Company believes that it has meritorious defenses and, if necessary, 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
possibility of an appeal and the disputed issues of law and/or facts on which
the outcome of this litigation depends.
Item 2 -- Changes in Securities:
None
Item 3 -- Defaults upon Senior Securities:
None
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
quarter ended September 30, 2004.
Item 5 -- Other Information:
None
Item 6 -- Exhibits and Reports on Form 8-K:
(a) Exhibits
--------
Exhibit No. Description
3.1 Certificate of Formation, as amended, of Waterford
Gaming, L.L.C. (i)
3.2 Certificate of Incorporation of Waterford Gaming
Finance Corp. (i)
3.3 Bylaws of Waterford Gaming Finance
Corp. (i)
4.1 Indenture, dated as of November 8, 1996, between
Waterford Gaming, L.L.C. and Waterford Gaming
Finance Corp., the issuers, and Fleet National
Bank, as trustee, relating to $65,000,000 12-3/4%
Senior Notes due 2003. (i)
4.1.1 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)
29
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)
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)
30
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)
(i) Incorporated by reference to the Registrant's Registration Statement
on Form S-4, Securities and Exchange Commission (the "Commission")
File No. 333-17795, declared effective on May 15, 1997.
(ii) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1997, Commission File No.
333-17795, as accepted by the Commission on November 14, 1997.
(iii) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, Commission File No.
333-17795, as accepted by the Commission on March 30, 1998.
(iv) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1998, Commission File No.
333-17795, as accepted by the Commission on May 14, 1998.
(v) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1998, Commission File No.
333-17795, as accepted by the Commission on November 13, 1998.
(vi) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 1999, Commission File No.
333-17795 as accepted by the Commission on May 17, 1999.
(vii) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 2001, Commission File No.
333-17795 as accepted by the Commission on May 14, 2001.
(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.
31
(b) REPORTS ON FORM 8-K
(i) Form 8-K Filed on August 18, 2004
Item 5.
On August 16, 2004, the Mohegan Tribal Gaming Authority (the
"Authority") filed its quarterly report on Form 10-Q for the quarter
ended June 30, 2004, 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: August 16, 2004
(ii) Form 8-K Filed on August 25, 2004
Item 5.
On August 24, 2004, the Mohegan Tribal Gaming Authority (the
"Authority") filed Form 8-K announcing that it had issued a press
release announcing a reorganization of top management of its Mohegan
Sun operation effective September 6, 2004, 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: August 24, 2004
(iii) Form 8-K Filed on September 8, 2004
Item 8.01
On September 2, 2004, the Mohegan Tribal Gaming Authority (the
"Authority") filed Form 8-K, announcing a change in the composition of
the Mohegan Tribal Council, 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: September 2, 2004
(iv) Form 8-K Filed on September 28, 2004
Item 8.01
On September 27, 2004, the Mohegan Tribal Gaming Authority (the
"Authority") filed Form 8-K, reporting that the Authority had issued a
press release announcing that it had entered into development and
management agreements with the Cowlitz Indian Tribe (the "Cowlitz
Tribe"), a federally recognized Indian Tribe located in southwestern
Washington on September 21, 2004, 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: September 27, 2004
(v) Form 8-K Filed on October 19, 2004
Item 8.01
a) On October 18, 2004, the Mohegan Tribal Gaming Authority (the
"Authority") filed Form 8-K, relating to the posting on October 15,
2004, on its website of its Slot Machine Statistical Report on a
monthly basis for the fiscal years ended September 30, 2004 and 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 8-K, Securities and Exchange Commission file reference
no. 033-80655.
b) On October, 18, 2004 the Authority filed Form 8-K, reporting that (i)
on October 15, 2004 the Authority had issued a press release
announcing that it had entered into an agreement to purchase The Downs
Racing, Inc. and its subsidiaries from Penn National Gaming, Inc. and
(ii) on October 14, 2004 the Authority received the requisite consent
of its lenders to Amendment No. 3 to the amended and restated loan
agreement by and among the Mohegan Tribe of Indians of Connecticut,
the Authority, the lenders named therein and Bank of America, N.A., as
administrative agent, 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: October 18, 2004
32
(vi) Form 8-K Filed on October 27, 2004
Item 8.01
On October 26, 2004, the Mohegan Tribal Gaming Authority (the
"Authority") filed Form 8-K, reporting that the Authority had issued a
press release announcing that it had entered into a management
agreement with the Menominee Indian Tribe of Wisconsin, a federally
recognized Indian tribe, and the Menominee Kenosha Gaming Authority on
October 21, 2004, 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: October 26, 2004
(vii) Form 8-K Filed on November 1, 2004
Item 8.01
On November 1, 2004, the Mohegan Tribal Gaming Authority (the
"Authority") filed Form S-4, Registration Statement under The
Securities Act of 1933, a copy of which has been filed as an exhibit
to this report and is incorporated by reference to the Authority's
electronic filing of such report on Form S-4, Securities and Exchange
Commission file reference no. 033-80655.
Date of Report: November 1, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 2004 By: /s/ Len Wolman
Len Wolman, Chief Executive Officer
Date: November 12, 2004 By: /s/ Alan Angel
Alan Angel, Chief Financial Officer
33