UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 03/31/03
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______ to________
Commission file number 333-17795
WATERFORD GAMING, L.L.C.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1465402
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
914 Hartford Turnpike, P.O. Box 715
Waterford , CT 06385
------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 442-4559
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No.
Prefatory Note
--------------
Waterford Gaming, L.L.C. (the "Company"), has determined that a restatement of
its financial statements for each of the fiscal years 1997 through 2002 is
required.
The Company is a general partner of Trading Cove Associates ("Trading Cove" or
"TCA") and its investment in TCA is accounted for under the equity method. TCA
has determined a need to restate its financial statements as described below. As
the Company accounts for its investment in TCA under the equity method, the
Company's financial statements will also be restated to reflect the changes
recorded by TCA. While amounts are unaudited and subject to change, the effect
on the Company's financial statements is described below and included in the
table which follows this note.
The restatement is the result of a change by TCA in the way it has historically
recorded certain contractual liabilities to its partners and their affiliates,
recognized certain revenue, and classified certain distributions to its
partners. As described in more detail below, TCA will restate its historical
financial statements to,
i) recognize as an expense certain contractual liabilities owed its partners
and their affiliates for prior services performed under contract when their
payment becomes probable pursuant to Statement of Financial Accounting
Standard No. 5 ("SFAS 5"), as opposed to when such expenses were paid or
payable (these expenses were previously disclosed as contingent
obligations);
ii) recognize as revenue junior relinquishment fees from the Mohegan Tribe of
Indians of Connecticut (the "Mohegan Tribe" or "Tribe") pursuant to the
Relinquishment Agreement in the quarter in which such fees are earned, as
opposed to at the end of every six months, when such fees became payable;
and
iii) reclassify certain payments by TCA to its partners as distributions on its
partnership interests which were previously classified as expenses in the
statement of operations.
The Company's interest in Trading Cove is its principal asset and source of
income and cash flows.
To the extent these changes affected TCA's reported net income, the Company's
net income would be affected by its proportionate share of TCA's income recorded
under the equity method. To the extent these changes cause TCA to recognize
income from relinquishment fees earlier than it previously had, the Company's
equity income of TCA would be increased by its proportionate share of such
income. Payments by TCA to the Company are reclassified as distributions, rather
than as "Revenue - 25% of relinquishment payments - Trading Cove Associates" on
its statement of operations.
The effect of the restatement to TCA is to change the timing of the recognition
of certain revenues and certain liabilities of TCA, owed to its partners and
their affiliates, and not to change the amount of such revenues or such
liabilities or the amounts paid to its partners or their affiliates. As a result
of the restatement by TCA, the Company will restate its financial information
included in each Form 10-K and Form 10-Q filed by the Company since 1997. The
Company plans to include this restated financial information in an amendment to
its Form 10-K for the year ended December 31, 2002, after its independent
accountants complete their audit of any annual, and review of any interim,
restated financial information.
The restatement will not change the cash flow from operating, investing or
financing activities that would have been available for paying interest,
principal and premium on its outstanding 9-1/2% Senior Notes due 2010 (the "$125
Million Senior Notes"). The Company believes that if TCA had made the changes
described above at the beginning of the period covered by the restated financial
statements, it would change neither the timing or amount of the $125 Million
Senior Notes redeemed from Company Excess Cash, as defined in the indenture
governing the $125 Million Senior Notes (the "Indenture"), nor the release of
collateral or the interpretation of any covenant contained in the Indenture
during such period. Moreover, if TCA had made the changes described above at the
beginning of the period covered by the restated financial statements, no default
or event of default under the Indenture would have occurred during any of the
affected periods.
As noted above, TCA will change how it has accounted for certain contractual
liabilities it owes to its partners and their affiliates for services performed
under contract. TCA will record a liability for previously provided services
pursuant to SFAS 5 when it became probable that it had been incurred rather than
when such payments became payable. As a result of this change, some payments
will be recorded as liabilities and expenses on TCA's financial statements
several years before they are due and payable. Previously, these payments were
recorded as liabilities only when payment was certain. These payments are
related to amounts due under (a) the third, fourth, fifth, seventh, eighth,
ninth and eleventh priority distributions described in the Amended and Restated
Omnibus Financing Agreement and (b) the third and fourth priority distributions
described in the Amended and Restated Omnibus Termination Agreement. For a
description of the Amended and Restated Omnibus Termination Agreement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Amended and Restated Omnibus Termination Agreement". A copy of the
Amended and Restated Omnibus Termination Agreement is filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 2001
(Commission File No. 333-17795) and is incorporated herein by reference. A copy
of the Amended and Restated Omnibus Financing Agreement, which was terminated
pursuant to the terms of the Amended and Restated Omnibus Termination Agreement,
is filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997 (Commission File No. 333-17795) and is
incorporated herein by reference.
One effect of the change described in the preceding paragraph is that TCA will
recognize an additional loss on the Development Agreement between it and the
Mohegan Tribal Gaming Authority (the "Authority"), which is accounted for in
accordance with Statement of Position 81-1. This will result in a corresponding
reduction on the Company's balance sheet as of December 31, 2002 in "Trading
Cove Associates - equity investment" of $4,496,500 and an increase in member's
deficiency of $4,496,500. Through December 31, 2002 Trading Cove had recorded a
loss of $7,007,000. After the restatement, it will record a loss of $16,000,000.
The Company's 50% share of the difference is $4,496,500. Prior to making the
change described in the preceding paragraph, TCA would have recorded this loss
in the second quarter of 2003, when the related amount would have been paid.
Also as noted above, TCA will change its historical method of accruing junior
relinquishment payments it receives from the Authority pursuant to the
Relinquishment Agreement. TCA will now accrue for such payments in each quarter
as they are earned. Prior to the restatement, TCA recognized such payments as
revenue as they became payable every six months. The restatement will require
the Company to record its investment in TCA with a portion of each junior
relinquishment payment being accrued each quarter.
Also as noted above, TCA will reclassify certain payments to its partners as
distributions on TCA's partnership interests. The payments, the classification
of which will change, are payments TCA has historically made under the fifth and
seventh priorities under the Amended and Restated Omnibus Termination Agreement,
as described in paragraphs (e) and (g) of the section below titled "Item 2 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Sources of Revenues and Cash Flows - Amended and Restated Omnibus
Termination Agreement" for the periods commencing January 1, 2000. This
reclassification by TCA will result in the reclassification by the Company of
certain income it received from TCA as "Equity in income (loss) of Trading Cove
Associates" on its statement of operations. Prior to the restatement, the
Company had classified such payments on its statement of operations as "Revenue
- - 25% of relinquishment payments - Trading Cove Associates". Such
reclassification will not change or affect the Company's aggregate net income or
loss for the period covered by the restated financial statements. These payments
are considered a distribution to the Company on its partnership interests,
rather than revenue from TCA. Accordingly, at December 31, 2002, the restated
condensed balance sheet of the Company will show $0 as due from TCA, and
accordingly "Trading Cove Associates - equity investment" will be increased by
$11,021,500, which was the amount previously recorded as an amount due from TCA
prior to making the change described in this paragraph.
As a result of the restatement, net income or loss of the Company, which
principally consists of equity income of TCA, may vary considerably on a year to
year basis from prior reported amounts for the period 1997 through 2000. For
2001, net income would remain unchanged at approximately $6.6 million. In 2002,
net income would be decreased from approximately $13.0 million to approximately
$12.0 million. As noted above, the Company does not expect that the restatement
will change cash that would have been available for redeeming or for paying
interest, principal or premium on the $125 Million Senior Notes.
The table set forth below shows the anticipated effect of the restatement on
certain selected unaudited financial data for the years ended December 31, 1999,
2000, 2001 and 2002. The financial information set forth below should be read in
conjunction with the financial statements and notes, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the
financial and other data included in this Form 10-Q. None of the financial
information set forth below has been audited. The Company intends to have each
of its restated annual financial statements audited, and information relating to
restated interim periods reviewed, by PwC. If such audits or reviews result in
any change to the financial information set forth below, the Company will file
an amendment to this Form 10-Q indicating such change.
For the Year Ended (Unaudited)
Previously Previously Previously Previously
reported Restated reported Restated reported Restated reported Restated
2002 2002 2001 2001 2000 2000 1999 1999
------------- ------------ ------------ ------------ ------------ ------------ ----------- ------------
Revenue
Organizational and
administrative
fee income-
Trading Cove
Associates $ --- $ --- $ 11,810,877 $ --- $ 11,649,600 $ --- $ 14,252,209 $ 15,431,038
25% of
relinquishment
payments-Trading
Cove Associates 25,382,500 --- 9,728,580 --- --- --- --- ---
Interest and
dividend income 534,012 --- 1,330,711 --- 1,894,738 --- 6,144,502 6,144,502
Subordinated notes
fee income-Trading
Cove Associates --- --- --- --- 692,782 --- 3,731,806 4,424,588
Management services
income-Trading
Cove Associates 1,664,699 1,664,699
Completion guarantee
notes fee income-
Trading Cove
Associates --- --- --- --- 215,625 --- 903,438 1,119,063
------------- ------------ ------------ ------------ ----------- ----------- ----------- -------------
Total revenue 25,916,512 --- 22,870,168 --- 14,452,745 --- 26,696,654 28,783,890
Total expenses (13,102,082) (13,102,082) (13,579,600) (13,579,600) (13,490,367) (13,490,367) (24,789,253) (24,789,253)
Interest and dividend
income --- 534,012 --- 1,330,711 --- 1,894,738 --- ---
Equity in income
(loss)of Trading
Cove Associates 218,880 24,601,380 (2,715,996) 18,823,461 (574,002) 16,026,008 6,115,300 (3,510,438)
------------- ------------ ------------ ------------ ------------ ------------ ----------- ------------
Net income $ 13,033,310 $ 12,033,310 $ 6,574,572 $ 6,574,572 $ 388,376 $ 4,430,379 $ 8,022,701 $ 484,199
============= ============ ============ ============ ============ ============ =========== ============
OTHER DATA
Interest expense $ 11,080,139 $ 11,080,139 $ 11,560,994 $ 11,560,994 $ 11,641,049 $ 11,641,049 $ 19,045,076 $ 19,045,076
Net increase
(decrease) in
cash and cash
equivalents 1,087,653 1,087,653 (453,072) (453,072) (56,313,596) (56,313,596) 57,554,273 57,554,273
YEAR-END STATUS
Total current
assets $ 26,032,197 $ 15,010,697 $ 38,127,059 $ 29,769,455 $ 34,708,598 $ 46,519,473 $ 72,724,437 $ 97,093,319
Trading Cove
Associates-
equity
investment 5,447,338 11,972,338 5,778,458 10,639,562 7,944,454 (7,362,924) 9,041,568 (22,865,820)
Beneficial
interest-
Leisure Resort
Technology, Inc. 4,540,039 4,540,039 4,918,029 4,918,029 5,296,019 5,296,019 5,674,009 5,674,009
Deferred financing
costs net of
accumulated
amortization 2,643,338 2,643,338 3,010,202 3,010,202 3,377,066 3,377,066 3,781,051 3,781,051
Fixed assets, net
of accumulated
depreciation 11,696 11,696 22,476 22,476 33,256 33,256 44,036 44,036
------------ ------------ ------------ ------------ ------------ ------------ ----------- ------------
Total assets $ 38,674,608 $ 34,178,108 $ 51,856,224 $ 48,359,724 $ 51,359,393 $ 47,862,890 $ 91,265,101 $ 83,726,595
============ ============ ============ ============ ============ ============ =========== ============
Total current
liabilities $ 3,133,192 $ 3,133,192 $ 3,400,556 $ 3,400,556 $ 3,481,637 $ 3,481,637 $ 3,576,539 $ 3,576,539
9-1/2% senior
notes payable 108,007,000 108,007,000 115,434,000 115,434,000 119,691,000 119,691,000 122,159,000 122,159,000
------------ ------------ ------------ ------------ ------------ ------------ ----------- ------------
Total liabilities 111,140,192 111,140,192 118,834,556 118,834,556 123,172,637 123,172,637 125,735,539 125,735,539
Member's
deficiency $(72,465,584) $(76,962,084) $(66,978,332) $(70,474,832) $(71,813,244) $(75,309,747) $(34,470,438) $(42,008,944)
============ ============ ============ ============ ============ ============ =========== ============
WATERFORD GAMING, L.L.C.
INDEX TO FORM 10-Q
Page
Number
PART I -- FINANCIAL INFORMATION
- -------------------------------
Item 1 -- Financial Statements
Report of Independent Accountants 1
Financial Information 2
Condensed Balance Sheets of Waterford Gaming, L.L.C. as of
March 31, 2003 (unaudited) and December 31, 2002
(unaudited and restated) 3
Condensed Statements of Operations of Waterford Gaming, L.L.C.
for the three month periods ended March 31, 2003
(unaudited) and March 31, 2002 (unaudited and restated) 4
Condensed Statements of Changes in Member's Deficiency of Waterford
Gaming, L.L.C. for the three month periods ended
March 31, 2003 (unaudited) and March 31, 2002
(unaudited and restated) 5
Condensed Statements of Cash Flows of Waterford Gaming, L.L.C.
for the three month periods ended March 31, 2003(unaudited)
and March 31, 2002 (unaudited and restated) 6
Notes to Condensed Financial Statements for Waterford
Gaming, L.L.C. (unaudited) 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3 -- Quantitative and Qualitative Disclosures about
Market Risk 28
Item 4 -- Controls and Procedures 29
Part II -- OTHER INFORMATION
- ----------------------------
Item 1 -- Legal Proceedings 29
Item 2 -- Changes in Securities 29
Item 3 -- Defaults upon Senior Securities 29
Item 4 -- Submission of Matters to a Vote of Security Holders 29
Item 5 -- Other Information 29
Item 6 -- Exhibits and Reports on Form 8-K 30
Signatures- Waterford Gaming, L.L.C. 33
Certifications 34
PART I -- FINANCIAL INFORMATION
- -------------------------------
Item 1 -- Financial Statements
Report of Independent Accountants
---------------------------------
To the Member of Waterford Gaming, L.L.C.
We have reviewed the accompanying condensed balance sheet of Waterford Gaming,
L.L.C. (the "Company") as of March 31, 2003, and the related condensed
statements of operations, for each of the three-month periods ended March 31,
2003 and 2002 (as restated), and the related condensed statements of changes in
member's deficiency and cash flows for each of the three-month periods ended
March 31, 2003 and 2002 (as restated). These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
As described in Note 7, the financial statements as of and for the year ended
December 31, 2002 have been restated and are in the process of being audited.
Accordingly, we are unable and do not express any form of assurance thereon.
PricewaterhouseCoopers, LLP
May 20, 2003
Hartford, Connecticut
1
Financial Information
- ---------------------
The unaudited condensed financial information as of March 31, 2003 and 2002, and
for each of the three-month periods ended March 31, 2003 and 2002 included in
this report was reviewed by PricewaterhouseCoopers LLP, independent public
accountants, in accordance with the professional standards and procedures
established for such reviews by the American Institute of Certified Public
Accountants.
2
Waterford Gaming, L.L.C.
Condensed Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002 (Unaudited)
------------------------------------------------------------
March 31, December 31,
2003 2002
------------- ------------
(Restated
see Note 7)
ASSETS
Current assets
Cash and cash equivalents $ 3,787,526 $ 4,658,602
Restricted investments 9,731,175 10,344,130
Other current assets 83,330 7,965
------------- -------------
Total current assets 13,602,031 15,010,697
------------- -------------
Trading Cove Associates-equity investment 7,173,148 11,972,338
Beneficial interest-Leisure Resort
Technology, Inc. 4,446,836 4,540,039
Deferred financing costs, net of accumulated
amortization of $1,483,554 and $1,391,838 at
March 31, 2003 and December 31, 2002,
respectively 2,551,622 2,643,338
Fixed assets, net of accumulated depreciation
of $44,917 and $42,222 at March 31, 2003
and December 31, 2002, respectively 9,001 11,696
------------- -------------
Total assets $ 27,782,638 $ 34,178,108
============= =============
LIABILITIES AND MEMBER'S DEFICIENCY
Current liabilities
Accrued expenses and accounts payable $ 160,342 $ 111,996
Accrued interest on senior notes payable 432,140 3,021,196
------------- -------------
Total current liabilities 592,482 3,133,192
------------- -------------
9-1/2% senior notes payable 102,349,000 108,007,000
------------- -------------
Total liabilities 102,941,482 111,140,192
------------- -------------
Contingencies --- ---
Member's deficiency (75,158,844) (76,962,084)
------------- -------------
Total liabilities and
member's deficiency $ 27,782,638 $ 34,178,108
============= =============
The accompanying notes are an integral part of these condensed financial
statements.
3
Waterford Gaming, L.L.C.
Condensed Statements of Operations
For the Three Month Periods ended March 31, 2003 and 2002
(Unaudited)
-----------------------------
For the three For the three
months ended months ended
March 31, 2003 March 31, 2002
-------------- --------------
(Restated see
Note 7)
Expenses
Interest expense $ 2,883,303 $ 3,003,040
Salaries - related parties 211,163 187,069
General and administrative 98,693 114,348
Amortization of beneficial interest -
Leisure Resort Technology, Inc. 93,203 93,203
Amortization on deferred financing costs 91,716 91,716
Depreciation 2,695 2,695
-------------- -------------
Total expenses 3,380,773 3,492,071
------------- -------------
Interest and dividend income 52,603 194,727
Equity in income of
Trading Cove Associates 6,422,310 4,831,778
-------------- -------------
Net income $ 3,094,140 $ 1,534,434
============== =============
The accompanying notes are an integral part of these condensed financial
statements.
4
Waterford Gaming, L.L.C.
Condensed Statements of Changes in Member's Deficiency
For the Three Month Periods ended March 31, 2003 and 2002
(Unaudited)
---------------
For the Three Months Ended March 31, 2003
Balance, January 1, 2003 - (Restated see Note 7) $(76,962,084)
Distributions (1,290,900)
Net income 3,094,140
-------------
Balance, March 31, 2003 $(75,158,844)
=============
For the Three Months Ended March 31, 2002
(Restated see Note 7)
Balance, January 1, 2002 $(70,474,831)
Distributions (1,416,900)
Net income 1,534,434
-------------
Balance, March 31, 2002 $(70,357,297)
=============
The accompanying notes are an integral part of these condensed financial
statements.
5
Waterford Gaming, L.L.C.
Condensed Statements of Cash Flows
For the Three Month Periods ended March 31, 2003 and 2002
(Unaudited)
-----------------------------
2003 2002
--------------- ----------------
(Restated see
Note 7)
Cash flows from operating activities
Net income $ 3,094,140 $ 1,534,434
--------------- ----------------
Adjustments to reconcile net income
to net cash provided by operating
activities
Amortization 184,919 184,919
Depreciation 2,695 2,695
Equity in income of
Trading Cove Associates (6,422,310) (4,831,778)
Operating distributions from
Trading Cove
Associates 11,021,500 8,357,604
Changes in operating assets and
liabilities
Increase in other current assets (75,365) (42,751)
Increase (decrease) in accrued
expenses and accounts payable 48,346 (36,913)
Decrease in accrued interest on
senior notes payable (2,589,056) (2,758,577)
--------------- ----------------
Total adjustments 2,170,729 875,199
--------------- ----------------
Net cash provided by
operating activities 5,264,869 2,409,633
--------------- ----------------
Cash flows from investing activities
Contributions to Trading Cove Associates --- (200,000)
Distributions from Trading Cove Associates 200,000 750,000
Sales and (purchases) of restricted
investments - net 612,955 570,848
--------------- ----------------
Net cash provided by
investing activities 812,955 1,120,848
--------------- ----------------
Cash flows from financing activities
Redemption of 9-1/2% senior notes (5,658,000) (4,031,000)
Distributions to member (1,290,900) (1,416,900)
--------------- ----------------
Net cash used in
financing activities (6,948,900) (5,447,900)
--------------- ----------------
Net decrease in cash and cash equivalents (871,076) (1,917,419)
Cash and cash equivalents at beginning
of period 4,658,602 3,570,949
-------------- ----------------
Cash and cash equivalents at end of period $ 3,787,526 $ 1,653,530
=============== ================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 5,472,358 $ 5,761,617
=============== ================
The accompanying notes are an integral part of these condensed financial
statements.
6
WATERFORD GAMING, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
-----------
Note 1. Basis of Presentation:
The unaudited condensed interim financial statements include normal and
recurring adjustments which are, in the opinion of management, necessary to
present a fair statement of financial position as of March 31, 2003, the results
of operations for each of the three-month periods ended March 31, 2003 and 2002,
and statements of member's deficiency and of cash flows for each of the
three-month periods ended March 31, 2003 and 2002. Results of operations for the
period are not necessarily indicative of the results to be expected for the full
year. The significant accounting policies and certain financial information
which are normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America, but
are not required for interim reporting purposes are condensed or omitted.
In March 1999, the Company with its wholly-owned subsidiary Waterford Gaming
Finance Corp. ("Finance") issued the $125 Million Senior Notes in connection
with the redemption of the Company's and Finance's $65 million 12-3/4% senior
notes (the "$65 Million Senior Notes").
During December 1999, the Company received a payment on notes it held due from
the Mohegan Tribal Gaming Authority (the "Authority") and a distribution from
TCA. As contemplated in the $125 Million Senior Notes offering, the Company
distributed approximately $34,672,000 to Waterford Group, L.L.C. ("Waterford
Group") during January 2000. In connection with such offering the Company also
distributed $37,050,000 to Waterford Group during March 1999.
Certain amounts in the 2002 financial statements have been reclassified to
conform with the 2003 presentation. See Note 7 to these condensed financial
statements.
Note 2. Trading Cove Associates - Equity Investment:
As of March 31, 2003 and 2002, the following summary information relates to TCA.
Total revenues and net income are for the three-month periods ended March 31,
2003 and 2002:
2003 2002
(As restated)
------------ -------------
Total current assets $ 15,440,157 $ 13,473,742
============= =============
Total assets $ 18,049,070 $ 16,310,328
Total current liabilities (10,781,908) (11,142,044)
------------- -------------
Partners' capital $ 7,267,162 $ 5,168,284
============= =============
Total revenue $ 15,121,747 $ 12,896,221
============= =============
Net income $ 14,314,634 $ 11,133,571
============= =============
Company's interest:
Trading Cove Associates -
equity investment, beginning
of period $ 11,972,338 $ 10,639,563
Contributions --- 200,000
Distributions (11,221,500) (9,107,604)
------------ -------------
750,838 1,731,959
------------ -------------
Income from Trading Cove
Associates 6,532,317 4,941,785
Amortization of interests
purchased (110,007) (110,007)
------------ -------------
Equity in income of
Trading Cove Associates 6,422,310 4,831,778
------------ -------------
Trading Cove Associates -
equity investment, end of period $ 7,173,148 $ 6,563,737
============= =============
7
Note 3. Beneficial Interest - Leisure Resort Technology, Inc.:
On January 6, 1998, pursuant to the settlement and release agreement described
in Note 6 below, the Company paid $5,000,000 to Leisure Resort Technology, Inc.
("Leisure") and, among other things, Leisure (a) gave up its beneficial interest
in 5% of certain fees and excess cash flows, as defined, of TCA and (b) any
other claims it may have had against the Company, TCA and TCA's partners and
former partner. On August 6, 1997, Leisure, a former partner of TCA, filed a
lawsuit against TCA, Kerzner Investments Connecticut, Inc. (formerly Sun Cove
Limited, "Kerzner Investments"), RJH Development Corp. (a former partner of
TCA), the Company and its owners, claiming breach of contract, breach of
fiduciary duties and other matters in connection with the development of the
Mohegan Sun Casino (the "Mohegan Sun") by TCA. In connection with the settlement
of all matters related to such suit, pursuant to a settlement and release
agreement, the Company agreed to acquire Leisure's interests in TCA. As a result
of this acquisition, Leisure no longer has the right to 5% of the Organizational
and Administrative fee, as defined in the Organizational and Administrative
Services Agreement, and 5% of TCA's Excess Cash as defined in TCA's partnership
agreement, and the Company is now entitled to such fees and such cash.
On March 17, 1999, the $65 Million Senior Notes were retired, and on March 18,
1999, the Company paid an additional $2,000,000 to Leisure pursuant to the
settlement and release agreement. On January 7, 2000, Leisure filed a complaint
against the Company and certain other defendants relating to the settlement and
release agreement. For a description of the complaint, see Note 6 to these
condensed financial statements.
Until March 17, 1999, the payments made to Leisure pursuant to the settlement
and release agreement and associated costs were amortized on a straight-line
basis over the remaining term of the Management Agreement. As a result of the
Relinquishment Agreement becoming effective, the remaining balance will be
amortized over 189 months beginning March 18, 1999. Accumulated amortization at
March 31, 2003 and December 31, 2002 amounts to $2,610,375 and $2,232,385,
respectively.
Note 4. $125 Million 9-1/2% Senior Notes Payable:
On March 17, 1999, the Company and Finance issued the $125 Million Senior Notes.
Payment of the principal of, and interest on, the $125 Million Senior Notes is
parri passu in right of payment with all of the Company's and Finance's senior
debt, and effectively subordinate in right of payment to all of the Company's
and Finance's existing and future secured and subordinated debts.
Interest on the $125 Million Senior Notes is payable semi-annually in arrears on
March 15 and September 15 at a rate of 9-1/2% per annum, commencing September
15, 1999. The principal amount of the $125 Million Senior Notes is payable on
March 15, 2010.
The Company and Finance may elect to redeem all or any of the $125 Million
Senior Notes at any time on or after March 15, 2004 at a redemption price equal
to a percentage of the principal amount of notes being redeemed plus accrued
interest. Such percentage is set forth in the following table:
If notes are redeemed Percentage
- --------------------- ----------
after March 14, 2004 but
on or before March 14, 2005 105.182%
after March 14, 2005 but
on or before March 14, 2006 104.318%
after March 14, 2006
but on or before March 14, 2007 103.455%
after March 14, 2007 but
on or before March 14, 2008 102.591%
after March 14, 2008
but on or before March 14, 2009 101.727%
after March 14, 2009
but on or before March 14, 2010 100.864%
after March 14, 2010 100%
The $125 Million Senior Notes provide that upon the occurrence of a Change of
Control (as defined), the holders thereof will have the option to require the
redemption of the $125 Million Senior Notes at a redemption price equal to 101%
of the principal amount thereof plus accrued interest.
8
Pursuant to the terms of the Indenture, if the Company and Finance have any
Company Excess Cash, as defined, on February 1 or August 1 of any year, they
must redeem the $125 Million Senior Notes on the March 15 and September 15
following such dates. Any such redemption will be made at a premium equal to a
percentage of the principal amount being redeemed. Such percentage is set forth
in the following table:
If notes are redeemed with Premium (expressed as percentage of
Company Excess Cash principal amount being redeemed)
- ------------------------- -----------------------------------
after March 14, 1999 but
on or before March 14, 2000 109.500%
after March 14, 2000 but
on or before March 14, 2001 108.636%
after March 14, 2001 but
on or before March 14, 2002 107.773%
after March 14, 2002 but
on or before March 14, 2003 106.909%
after March 14, 2003 but
on or before March 14, 2004 106.045%
after March 14, 2004 but
on or before March 14, 2005 105.182%
after March 14, 2005 but
on or before March 14, 2006 104.318%
after March 14, 2006
but on or before March 14, 2007 103.455%
after March 14, 2007 but
on or before March 14, 2008 102.591%
after March 14, 2008
but on or before March 14, 2009 101.727%
after March 14, 2009
but on or before March 14, 2010 100.864%
after March 14, 2010 100%
The Company and Finance have periodically redeemed $125 Million Senior Notes
with Company Excess Cash, as defined, pursuant to the terms of the Indenture.
The table below summarizes (a) the amount of Company Excess Cash that the
Company and Finance have determined was available for the mandatory redemption
of the $125 Million Senior Notes on February 1st and August 1st of each
applicable year pursuant to the terms of the Indenture, (b) the aggregate
principal amount of $125 Million Notes redeemed with such Company Excess Cash,
(c) the date on which such redemption was consummated, and (d) the premium at
which such redemption was made.
Date Company Excess Cash Principal amount of Date of Redemption Premium
(approximately) notes redeemed
- ---------------- ------------------- ------------------- ------------------ -------
August 1, 1999 $8,983,000 $2,841,000 September 15, 1999 9.500%
February 1, 2000 $8,276,000 $2,277,000 March 15, 2000 8.636%
August 1, 2000 $5,902,000 $191,000 September 15, 2000 8.636%
February 1, 2001 $6,173,000 $452,000 March 15, 2001 7.773%
August 1, 2001 $9,765,000 $3,805,000 September 15, 2001 7.773%
February 1, 2002 $9,793,000 $4,031,000 March 15, 2002 6.909%
August 1, 2002 $8,923,000 $3,396,000 September 15, 2002 6.909%
February 1, 2003 $11,131,000 $5,658,000 March 15, 2003 6.045%
9
In some circumstances, if either the Company or its partner in TCA exercises the
option to buy or sell partnership interests in TCA, the Company and Finance must
redeem the $125 Million Senior Notes.
The Indenture contains certain affirmative and negative covenants customarily
contained in such agreements, including without limitation, covenants that
restrict, subject to specified exceptions the Company's and Finance's ability to
(i) borrow money, (ii) pay dividends on stock or make certain other restricted
payments, (iii) use assets as security in other transactions, (iv) make
investments, (v) sell other assets or merge with other companies, and (vi)
engage in any business except as currently conducted or contemplated or amend
their relationship with TCA. The Indenture also provides for customary events of
default and the establishment of a restricted investment fund with a trustee for
interest reserves.
The fair value of the Company's long term debt at March 31, 2003 and December
31, 2002 is estimated to be approximately $105,931,000 and $111,787,000,
respectively, based on the quoted market price for the same issue.
On April 15, 2003, the Company and Finance commenced an offer to repurchase all
of the $125 Million Senior Notes prior to maturity and a solicitation of
consents to amend the Indenture. Such amendments would have the effect of
eliminating substantially all of the restrictive covenants and security
provisions relating to the $125 Million Senior Notes. The tender offer and
amendment of the Indenture are conditioned upon, among other things, the
consummation of financing providing proceeds sufficient to pay the total costs
of the tender offer and consent solicitation.
On May 15, 2003, the Company and Finance announced the extension of its tender
offer for all of the outstanding $125 Million Senior Notes and related consent
solicitation. The tender offer will now expire at 12:00 midnight, New York City
time, on Wednesday, June 11, 2003, unless further extended or terminated. The
consent solicitation will now expire at 5:00 p.m., New York City time, on
Thursday, May 28, 2003, unless further extended or terminated, and holders of
$125 Million Senior Notes will have the right to withdraw their previous tenders
and consents prior to the expiration of the consent solicitation. As of today,
the Company and Finance have received duly executed tenders from holders of
$102,349,000 in principal amount of the $125 Million Senior Notes, representing
100% of the principal amount of the issued and outstanding $125 Million Senior
Notes.
10
Note 5. Certain Relationships and Related Transactions
Development Services Agreement Phase II and related agreements and payments
- ---------------------------------------------------------------------------
On February 9, 1998, TCA and Kerzner International Management Limited ("KIML"),
an affiliate of Kerzner Investments, the Company's partner in TCA, entered into
the Agreement Relating to Development Services (the "Development Services
Agreement Phase II"). Pursuant to the Development Services Agreement Phase II,
TCA subcontracted with KIML and KIML agreed to perform those services assigned
to KIML by TCA in order to facilitate TCA's fulfillment of its duties and
obligations to the Authority under the Development Agreement. For a summary of
the Development Agreement, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Trading Cove Associates -
Material Agreements --Development Agreement." KIML has assigned the Development
Services Agreement Phase II to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner
Investments a fee, as subcontractor (the "Development Services Fee Phase II"),
equal to 3% of the development costs of the Project Sunburst expansion (the
"Project" or "Project Sunburst expansion"), excluding capitalized interest, less
all costs incurred by TCA in connection with the Project. The Development
Services Fee Phase II is paid in installments on December 31, 1999 and 2000 and
on the Completion Date, as defined in the Development Agreement, with a final
payment being made when the actual development costs of the Project are known.
TCA pays the Development Services Fee Phase II from available cash flow, if any,
in accordance with the Amended and Restated Omnibus Termination Agreement.
Before KIML assigned the Development Services Agreement Phase II to Kerzner
Investments, it entered into the Local Construction Services Agreement (the
"Local Construction Services Agreement") with Wolman Construction, L.L.C.
("Construction"), an affiliate of the Company, pursuant to which Construction
agreed to provide certain of those services assigned to KIML by TCA pursuant to
the Development Services Agreement Phase II. KIML has assigned the Local
Construction Services Agreement to Kerzner Investments. Pursuant to the Local
Construction Service Agreement, Kerzner Investments agreed to pay to
Construction a fee equal to 20.83% of the Development Services Fee Phase II as
and when Kernzer Investments receives payment from TCA pursuant to the
Development Services Agreement Phase II.
Construction has subcontracted with The Slavik Company, an affiliate of the
Company, to provide certain services under the Local Construction Services
Agreement. In connection with this, Construction agreed that The Slavik Company
would be paid a fee equal to 14.30% of its fee under the Local Construction
Services Agreement.
On April 26, 2000, July 26, 2000 and January 26, 2001 TCA paid $3,095,000,
$1,238,000 and $6,474,000, respectively, as partial payment of the Development
Services Fee Phase II. Construction received $644,688, $257,875 and $1,348,534,
respectively, and Construction paid The Slavik Company $92,190, $36,876 and
$192,840 on April 26, 2000, July 26, 2000 and January 26, 2001, respectively.
At March 31, 2003 and December 31, 2002 TCA owed its affiliates approximately
$10.2 million pursuant to the Development Service Agreement Phase II.
Employment Agreement with Mr. Len Wolman
- ----------------------------------------
Len Wolman, the Company's Chairman of the Board of Directors and Chief Executive
Officer, is the Company's designated representative to TCA under TCA's
partnership agreement.
On September 28, 1998, the Company entered into an employment agreement with Len
Wolman. The employment agreement provides for a base annual salary of $250,000
reduced by any amounts Mr. Wolman receives as a salary from TCA for such period.
In addition, pursuant to such employment agreement, the Company agreed pay to
Mr. Wolman an amount equal to 0.05% of the revenues of the Mohegan Sun including
the Project Sunburst expansion to the extent Mr. Wolman has not received such
amounts from TCA. On and after January 1, 2004, the Company agreed pay to Mr.
Wolman incentive compensation based on the revenues of the Mohegan Sun,
including the Project Sunburst expansion, as a percentage (ranging from .00% to
..10%) to be determined using a formula attached to the employment agreement
which compares actual revenues to predetermined revenue targets. For the three
months ended March 31, 2003 and 2002 the Company paid and incurred $211,163 and
$187,069, respectively, as an expense pursuant to Len Wolman's employment
agreement.
Other Related Party Transactions
- --------------------------------
For the three months ended March 31, 2003 and 2002, approximately $10,500 and
$10,700, respectively, was paid and incurred by TCA to the principals and
affiliates of the Company as part of TCA's operating expenses. In addition, for
the three months ended March 31, 2003 and 2002, TCA incurred approximately
$231,000 and $0, respectively, to the principals of the Company in connection
with the first priority payments set forth under the section "Trading Cove
Associates Material Agreements - Amended and Restated Omnibus Termination
Agreement".
In 1999, the Company renovated Len Wolman's office space at a cost of $32,413,
of which $30,000 was paid to Wolman Homes Inc., an affiliate of the Company.
Cost of the improvement is being depreciated over five years. Expense for each
of the three months ended March 31, 2003 and 2002 was $1,620.
Waterford Group, Slavik Suites, Inc. ("Slavik") and the other principals of
Waterford Group have interests in and may acquire interests in hotels in
southeastern Connecticut which have or may have arrangements with the Mohegan
Sun to reserve and provide hotel rooms to patrons of the Mohegan Sun.
11
Note 6. Contingencies:
Legal Proceedings
- -----------------
On January 6, 1998, Leisure Resort Technology, Inc. and defendants Waterford
Gaming, L.L.C., Trading Cove Associates, LMW Investments, Inc., and Slavik
Suites, Inc. settled a prior lawsuit brought by Leisure. In connection with this
settlement, Leisure, TCA, the Company, LMW Investments, Inc., and Slavik Suites,
Inc. entered into a settlement and release agreement. Pursuant to this
settlement and release agreement, the Company bought Leisure's beneficial
interest in TCA.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a
four count complaint naming as defendants Waterford Gaming, L.L.C., Trading Cove
Associates, LMW Investments, Inc., Slavik Suites, Inc., Waterford Group, L.L.C.,
Len Wolman and Mark Wolman (collectively, the "Defendants"). The matter has been
transferred to the complex litigation docket and is pending in Waterbury,
Connecticut. The complaint alleged breach of fiduciary duties, fraudulent
non-disclosure, violation of Connecticut Statutes Section 42-110a, et seq., and
unjust enrichment in connection with the negotiation by certain of the
Defendants of the settlement and release agreement. The complaint also brought a
claim for an accounting. The complaint seeks unspecified legal and equitable
damages. On February 29, 2000, Defendants filed a Motion to Strike and a Motion
for Summary Judgment, each with respect to all claims. The Court granted
Defendants' Motion to Strike in part and denied Defendants' Motion for Summary
Judgment, on October 13, 2000. The Court's order dismissed the claim for an
accounting and the claim under Connecticut Statutes Section 42-110a, et seq. The
Court also struck the alter ego allegations in the complaint against LMW
Investments, Inc., Slavik Suites, Inc., Len Wolman and Mark Wolman. In a
decision dated August 6, 2001, the Court dismissed all claims against LMW
Investments, Inc., Slavik Suites, Inc., Len Wolman and Mark Wolman.
On November 15, 2000, the Company and its co-defendants answered the complaint.
In addition, the Company and Trading Cove Associates asserted counterclaims for
breach of the settlement and release agreement and breach of the implied
covenant of good faith against Leisure and its president, Lee Tyrol. In a
decision dated June 6, 2001, the Court dismissed the counterclaims against Lee
Tyrol. Leisure has moved for summary judgment seeking dismissal of the counter
claims in full. This motion for summary judgment was denied.
Discovery has commenced. Pursuant to the current scheduling order, all
depositions are to be completed by June 30, 2003. A trial date has not been set.
The Company believes that it has meritorious defenses and intends to vigorously
contest the claims in this action and to assert all available defenses. At the
present time, the Company is unable to express an opinion on the likelihood of
an unfavorable outcome or to give an estimate of the amount or range of possible
loss to the Company as a result of this litigation due to the disputed issues of
law and/or facts on which the outcome of this litigation depends and due to the
infancy of both the action and discovery in the action.
12
Note 7. Restatement, Reclassification and Subsequent Events
The Company has restated its financial statements for each of the fiscal years
1997 through 2002.
The Company is a general partner of Trading Cove Associates ("Trading Cove" or
"TCA") and its investment in TCA is accounted for under the equity method. TCA
has determined a need to restate its financial statements as described below. As
the Company accounts for its investment in TCA under the equity method, the
Company's financial statements will also be restated to reflect the changes
recorded by TCA. While amounts are unaudited and subject to change, the effect
on the Company's financial statements is described below and included in the
table which follows this note.
The restatement is the result of a change by TCA in the way it has historically
recorded certain contractual liabilities to its partners and their affiliates,
recognized certain revenue, and classified certain distributions to its
partners. As described in more detail below, TCA will restate its historical
financial statements to,
i) recognize as an expense certain contractual liabilities owed its partners
and their affiliates for prior services performed under contract when their
payment becomes probable pursuant to Statement of Financial Accounting
Standard No. 5 ("SFAS 5"), as opposed to when such expenses were paid or
payable (these expenses were previously disclosed as contingent
obligations);
ii) recognize as revenue junior relinquishment fees from the Mohegan Tribe of
Indians of Connecticut (the "Mohegan Tribe" or "Tribe") pursuant to the
Relinquishment Agreement in the quarter in which such fees are earned, as
opposed to at the end of every six months, when such fees became payable;
and
iii) reclassify certain payments by TCA to its partners as distributions on its
partnership interests which were previously classified as expenses in the
statement of operations.
The Company's interest in Trading Cove is its principal asset and source of
income and cash flows.
To the extent these changes affected TCA's reported net income, the Company's
net income would be affected by its proportionate share of TCA's income recorded
under the equity method. To the extent these changes cause TCA to recognize
income from relinquishment fees earlier than it previously had, the Company's
equity income of TCA would be increased by its proportionate share of such
income. Payments by TCA to the Company are reclassified as distributions, rather
than as "Revenue - 25% of relinquishment payments - Trading Cove Associates" on
its statement of operations.
The effect of the restatement to TCA is to change the timing of the recognition
of certain revenues and certain liabilities of TCA, owed to its partners and
their affiliates, and not to change the amount of such revenues or such
liabilities or the amounts paid to its partners or their affiliates. As a result
of the restatement by TCA, the Company will restate its financial information
included in each Form 10-K and Form 10-Q filed by the Company since 1997. The
Company plans to include this restated financial information in an amendment to
its Form 10-K for the year ended December 31, 2002, after its independent
accountants complete their audit of any annual, and review of any interim,
restated financial information.
The restatement will not change the cash flow from operating, investing or
financing activities that would have been available for paying interest,
principal and premium on its outstanding 9-1/2% Senior Notes due 2010 (the "$125
Million Senior Notes"). Moreover, if TCA had made the changes described above at
the beginning of the period covered by the restated financial statements, no
default or event of default under the Indenture would have occurred during any
of the affected periods.
As noted above, TCA will change how it has accounted for certain contractual
liabilities it owes to its partners and their affiliates for services performed
under contract. TCA will record a liability for previously provided services
pursuant to SFAS 5 when it became probable that it had been incurred rather than
when such payments became payable. As a result of this change, some payments
will be recorded as liabilities and expenses on TCA's financial statements
several years before they are due and payable. Previously, these payments were
recorded as liabilities only when payment was certain. These payments are
related to amounts due under (a) the third, fourth, fifth, seventh, eighth,
ninth and eleventh priority distributions described in the Amended and Restated
Omnibus Financing Agreement and (b) the third and fourth priority distributions
described in the Amended and Restated Omnibus Termination Agreement.
One effect of the change described in the preceding paragraph is that TCA will
recognize an additional loss on the Development Agreement between it and the
Mohegan Tribal Gaming Authority (the "Authority"), which is accounted for in
accordance with Statement of Position 81-1. This will result in a corresponding
reduction on the Company's balance sheet as of December 31, 2002 in "Trading
Cove Associates - equity investment" of $4,496,500 and an increase in member's
deficiency of $4,496,500. Through December 31, 2002 Trading Cove had recorded a
loss of $7,007,000. After the restatement, it will record a loss of $16,000,000.
The Company's 50% share of the difference is $4,496,500. Prior to making the
change described in the preceding paragraph, TCA would have recorded this loss
in the second quarter of 2003, when the related amount would have been paid.
Also as noted above, TCA will change its historical method of accruing junior
relinquishment payments it receives from the Authority pursuant to the
Relinquishment Agreement. TCA will now accrue for such payments in each quarter
as they are earned. Prior to the restatement, TCA recognized such payments as
revenue as they became payable every six months. The restatement will require
the Company to record its investment in TCA with a portion of each junior
relinquishment payment being accrued each quarter.
Also as noted above, TCA will reclassify certain payments to its partners as
distributions on TCA's partnership interests. The payments, the classification
of which will change, are payments TCA has historically made under the fifth and
seventh priorities under the Amended and Restated Omnibus Termination Agreement,
for the periods commencing January 1, 2000. This reclassification by TCA will
result in the reclassification by the Company of certain income it received from
TCA as "Equity in income (loss) of Trading Cove Associates" on its statement of
operations. Prior to the restatement, the Company had classified such payments
on its statement of operations as "Revenue - 25% of relinquishment payments -
Trading Cove Associates". Such reclassification will not change or affect the
Company's aggregate net income or loss for the period covered by the restated
financial statements. These payments are considered a distribution to the
Company on its partnership interests, rather than revenue from TCA. Accordingly,
at December 31, 2002, the restated condensed balance sheet of the Company will
show $0 as due from TCA, and accordingly "Trading Cove Associates - equity
investment" will be increased by $11,021,500, which was the amount previously
recorded as an amount due from TCA prior to making the change described in this
paragraph.
The Condensed Balance Sheet at December 31, 2002, Condensed Statement of
Operations for the three months ended March 31, 2002, Condensed Statement of
Changes in Member's Deficiency for the three months ended March 31, 2002, and
Condensed Statement of Cash Flows for the three months ended March 31, 2002
contained herein have been updated to reflect these restatements.
The following tables show the effect of the restatement on the Company's
Condensed Balance Sheet as of December 31, 2002, as well as the Company's
Condensed Statement of Operations, Condensed Statement of Changes in Member's
Deficiency, and Condensed Statement of Cash Flows for the three months ended
March 31, 2002. The restatement adjustments outlined below do not impact total
cash flows of the Company or its reported cash balances.
Waterford Gaming, L.L.C.
Condensed Balance Sheet
as of December 31, 2002
(Unaudited)
---------------------------------
Previously
reported Restated
December 31, Restatement December 31,
2002 * adjustments ** 2002
-------------- -------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 4,658,602 $ --- $ 4,658,602
Restricted investments 10,344,130 --- 10,344,130
Due from Trading Cove Associates 11,021,500 (11,021,500) (a) ---
Other current assets 7,965 --- 7,965
-------------- -------------- ------------
Total current assets 26,032,197 (11,021,500) 15,010,697
-------------- -------------- ------------
Trading Cove Associates - equity investment 5,447,338 6,525,000 (d) 11,972,338
Beneficial interest - Leisure Resort Technology, Inc. 4,540,039 --- 4,540,039
Deferred financing costs, net of accumulated amortization of $1,391,838
at December 31, 2002 2,643,338 --- 2,643,338
Fixed assets, net of accumulated depreciation of $42,222 at
December 31, 2002 11,696 --- 11,696
-------------- -------------- ------------
Total assets $ 38,674,608 $ (4,496,500) $ 34,178,108
============== ============== ============
LIABILITIES AND MEMBER'S DEFICIENCY
Current liabilities
Accrued expenses and accounts payable $ 111,996 $ --- $ 111,996
Accrued interest on senior notes payable 3,021,196 3,021,196
-------------- -------------- ------------
Total current liabilities 3,133,192 --- 3,133,192
-------------- -------------- ------------
9-1/2% senior notes payable 108,007,000 --- 108,007,000
-------------- ------------- ------------
Total liabilities 111,140,192 --- 111,140,192
-------------- ------------- ------------
Contingencies --- --- ---
Member's deficiency (72,465,584) (4,496,500) (b) (76,962,084)
-------------- ------------- ------------
Total liabilities and member's deficiency $ 38,674,608 $ (4,496,500) $ 34,178,108
============== ============= ============
* Previously reported in Form 10-K filed by the Company on March 26, 2003
** See page 15 of the notes to the Company's financial statements for the
description of the restatement adjustments
13
Waterford Gaming, L.L.C.
Condensed Statement of Operations
for the three months ended March 31, 2002
(Unaudited)
-----------------------------
Previously reported Restated
for the three months Restatement for the three months
ended March 31, 2002 * adjustments ** ended March 31, 2002
---------------------- -------------- ---------------------
Revenue
25% of relinquishment payments - Trading
Cove Associates $ 1,621,000 $ (1,621,000) (a) ---
Interest and dividend income 194,727 (194,727) (c) ---
---------------- -------------- ---------------------
Total revenue 1,815,727 (1,815,727) ---
---------------- -------------- ---------------------
Expenses
Interest expense 3,003,040 --- $ 3,003,040
Salaries - related parties 187,069 --- 187,069
General and administrative 114,348 --- 114,348
Amortization of beneficial interest -
Leisure Resort Technology, Inc. 93,203 --- 93,203
Amortization on deferred financing costs 91,716 --- 91,716
Depreciation 2,695 --- 2,695
---------------- -------------- ---------------------
Total expenses 3,492,071 --- 3,492,071
---------------- -------------- ---------------------
(1,676,344) (1,815,727) (3,492,071)
Interest and dividend income 194,727 (c) 194,727
Equity in income of
Trading Cove Associates 696,500 4,135,278 (e) 4,831,778
---------------- -------------- ---------------------
Net income (loss) $ (979,844) $ 2,514,278 $ 1,534,434
================ ============== =====================
* Previously reported in Form 10-Q filed by the Company on May 14, 2002
** See page 15 of the notes to the Company's financial statements for the
description of the restatement adjustments
Waterford Gaming, L.L.C.
Condensed Statement of Changes in Member's Deficiency
for the three months ended March 31, 2002
(Unaudited)
-----------------------------
Previously reported Restated
for the three months Restatement for the three months
ended March 31, 2002 * adjustments ** ended March 31, 2002
--------------------- -------------- ---------------------
Balance, January 1, 2002 $ (66,978,332) $ (3,496,499) (b) $ (70,474,831)
Distributions (1,416,900) --- (1,416,900)
Net income (loss) (979,844) 2,514,278 (d) 1,534,434
--------------------- -------------- ---------------------
Balance, March 31, 2002 $ (69,375,076) $ (982,221) $ (70,357,297)
===================== ============== =====================
* Previously reported in Form 10-Q filed by the Company on May 14, 2002
** See page 15 of the notes to the Company's financial statements for the
description of the restatement adjustments
14
Waterford Gaming, L.L.C.
Condensed Statement of Cash Flows
for the three months ended March 31, 2002
(Unaudited)
-----------------------------
Previously reported Restated
for the three months Restatement for the three months
ended March 31, 2002 * adjustments ** ended March 31, 2002
---------------------- --------------- --------------------
Cash flows from operating activities
Net income (loss) $ (979,844) $ 2,514,278 $ 1,534,434
---------------- --------------- --------------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Amortization 184,919 --- 184,919
Depreciation 2,695 --- 2,695
Equity in income of Trading Cove Associates (696,500) (4,135,278) (d) (4,831,778)
Operating distributions from
Trading Cove Associates --- 8,357,604 (a) 8,357,604
Changes in operating assets and liabilities
Decrease in due from Trading Cove Associates 6,736,604 (6,736,604) (a) ---
Increase in other current assets (42,751) --- (42,751)
Decrease in accrued expenses and accounts payable (36,913) --- (36,913)
Decrease in accrued interest on senior notes payable (2,758,577) --- (2,758,577)
--------------- --------------- --------------------
Total adjustments 3,389,477 (2,514,278) 875,199
---------------- --------------- --------------------
Net cash provided by
operating activities 2,409,633 --- 2,409,633
---------------- --------------- --------------------
Cash flows from investing activities
Contributions to Trading Cove Associates (200,000) --- (200,000)
Distributions from Trading Cove Associates 750,000 --- 750,000
Sales and (purchases) of restricted investments - net 570,848 --- 570,848
---------------- --------------- --------------------
Net cash provided by
investing activities 1,120,848 --- 1,120,848
---------------- --------------- --------------------
Cash flows from financing activities
Redemption of 9-1/2% senior notes (4,031,000) --- (4,031,000)
Distributions to member (1,416,900) --- (1,416,900)
---------------- --------------- --------------------
Net cash used in
financing activities (5,447,900) --- (5,447,900)
---------------- --------------- --------------------
Net decrease in cash and cash equivalents (1,917,419) --- (1,917,419)
Cash and cash equivalents at beginning of quarter 3,570,949 --- 3,570,949
---------------- --------------- --------------------
Cash and cash equivalents at end of quarter $ 1,653,530 $ --- $ 1,653,530
================ =============== ====================
Supplemental disclosure of cash flow information:
Cash paid during the quarter for interest $ 5,761,617 $ --- $ 5,761,617
================== =============== ====================
* Previously reported in Form 10-Q filed by the Company on May 14, 2002
** See page 15 of the notes to the Company's financial statements for the
description of the restatement adjustments
Waterford Gaming, L.L.C.
FOOTNOTES TO RESTATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(a) To reflect receipt of 25% of the relinquishment payments (as detailed under
point (g) set forth below under the section "Amended and Restated Omnibus
Termination Agreement") as a distribution of operating income of TCA rather
than revenue in the period received.
(b) To reflect a cumulative adjustment of equity income from TCA to reflect the
Company's share of TCA's loss on an uncompleted development services
subcontract with affiliated entities of TCA (the Agreement Relating to
Development Services Phase II).
(c) Reclassification from revenue to other income.
(d) To reflect the impact on its equity in the income of Trading Cove
Associates caused by the explanations in notes (a) and (e) to the Restated
Condensed Financial Statements.
(e) To reflect the impact of TCA recording the junior relinquishment revenue in
the period earned, rather than every six months, when such payments became
due, and to reflect certain payments to affiliates of TCA, as distributions
by TCA rather than as an expense to TCA. (See note (a), above).
15
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Company's condensed financial statements and the notes
thereto included elsewhere herein.
A - Certain Forward Looking Statements
- --------------------------------------
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, in
particular, the statements about the Company's and Mohegan Sun's plans,
strategies and prospects. Although the Company believes that such statements are
based on reasonable assumptions, these forward-looking statements are subject to
numerous factors, risks and uncertainties that could cause actual outcomes and
results to be materially different from those projected. These factors, risks
and uncertainties include, among others, the risk factors described below under
the heading "Risk Factors" and the following:
a) the financial performance of the Mohegan Sun;
b) changes in laws or regulations (including, without limitation, gaming
laws or regulations);
c) the effects of new competition; and
d) general domestic and global economic conditions.
The Company's and Mohegan Sun's actual results, performance or achievements
could differ materially from those expressed in, or implied by, the
forward-looking statements contained herein. The Company can give no assurances
that any of the events anticipated by the forward-looking statements will occur
or, if any of them do, what impact they will have on our results of operations
and financial condition. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this quarterly
report on Form 10-Q.
B - Development and Operational Activities
- ------------------------------------------
The Company is a special purpose company formed solely for the purpose of
holding its partnership interest in TCA, a Connecticut general partnership and
the manager (until January 1, 2000) and developer of the Mohegan Sun.
1 - Trading Cove Associates
- ---------------------------
TCA was organized on July 27, 1993. The primary purpose of TCA has been,
a) to assist the Tribe and the Authority, in obtaining federal
recognition,
b) to negotiate the tribal-state compact with the State of Connecticut on
behalf of the Tribe,
c) to obtain financing for the development of the Mohegan Sun,
d) to negotiate the Amended and Restated Gaming Facility Management
Agreement (the "Management Agreement"),
e) to oversee all operations of the Mohegan Sun Casino pursuant to the
terms of the Management Agreement until December 31, 1999, and
f) to participate in the design and development of the Mohegan Sun.
The Mohegan Sun commenced operations on October 12, 1996. Since the opening of
the casino, and until January 1, 2000, TCA had overseen the Mohegan Sun's
day-to-day operations.
The TCA partnership will terminate on December 31, 2040, or earlier, in
accordance with the terms of it partnership agreement. The Company has a 50%
voting and profits interest in TCA. The remaining 50% interest is owned by
Kerzner Investments, an affiliate of Kerzner International Limited ("Kerzner
International"). The complete text of (a) the Amended and Restated Partnership
Agreement of Trading Cove Associates, dated as of September 21, 1994, among Sun
Cove Limited (now Kerzner Investments), RJH Development Corp., Leisure Resort
Technology, Inc., Suites, Inc., and LMW Investments, Inc., and (b) the First
Amendment to Amended and Restated Partnership Agreement of Trading Cove
Associates, dated as of October 22, 1996, among Sun Cove Limited, Slavik Suites,
Inc., RJH Development Corp., LMW Investments, Inc. and Waterford Gaming, L.L.C.
is filed as exhibits to the Company's Registration Statement on Form S-4, filed
with Securities and Exchange Commission (File No. 333-17795) and declared
effective on May 15, 1997 and each is incorporated herin by reference.
16
2 - Trading Cove Associates - Material Agreements
- -------------------------------------------------
a) Relinquishment Agreement
- ----------------------------
On February 7, 1998, TCA and the Authority entered into the Relinquishment
Agreement (the "Relinquishment Agreement"). Under the terms of the
Relinquishment Agreement, TCA continued to manage the Mohegan Sun under the
Management Agreement until midnight December 31, 1999, and on January 1, 2000,
the Management Agreement terminated and the Tribe assumed day-to-day management
of the Mohegan Sun.
Under the Relinquishment Agreement, to compensate TCA for terminating its rights
under the Management Agreement and the Hotel/Resort Management Agreement, the
Authority agreed to pay to TCA a fee (the "Relinquishment Fees") equal to 5% of
Revenues, as defined in the Relinquishment Agreement, generated by the Mohegan
Sun during the 15-year period commencing on January 1, 2000, including revenue
generated by the Project Sunburst expansion project (the "Project").
The Development Fees are divided into senior relinquishment payments and junior
relinquishment payments, each of which equals 2.5% of "Revenues". Revenues are
defined as gross gaming revenues (other than Class II gaming revenue, i.e.
bingo) and all other facility revenues. Such revenue includes, hotel revenues,
food and beverage sales, parking revenues, ticket revenues and other fees or
receipts from the convention/events center in the Project Sunburst expansion and
all rental or other receipts from lessees, licensees and concessionaires
operating in the facility, but not the gross receipts of such lessees, licensees
and concessionaires. Such revenues exclude revenues generated by any other
expansion of the Mohegan Sun.
Senior relinquishment payments are payable quarterly in arrears commencing on
April 25, 2000 for the quarter ended March 31, 2000, and the junior
relinquishment payments are payable semi-annually in arrears commencing on July
25, 2000 for the six months ended June 30, 2000, assuming sufficient funds are
available after satisfaction of the Tribe's senior obligations, as defined in
the Relinquishment Agreement. (See section below titled "Risk Factors - Trading
Cove's right to receive the relinquishment payments from the Authority is junior
to certain payments by the Authority to the Mohegan Tribe and holders of its
indebtedness".)
For the quarters ended March 31, 2003 and 2002, total Relinquishment Fees earned
were $14,866,320 and $12,457,116, respectively. The amount of Relinquishment
Fees reported in this quarterly report on Form 10-Q are based upon amounts
reported to TCA by the Authority.
The complete text of the Relinquishment Agreement is filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the period ended September 30, 1998
(Commission File No. 333-17795), as accepted by the Commission on November 13,
1998.
b) Development Agreement and Other Related Agreements
- -----------------------------------------------------
On February 7, 1998, TCA and the Authority entered into the Development Services
Agreement (the "Development Agreement"). Pursuant to the Development Agreement,
TCA agreed to oversee the design, construction, furnishing, equipping and
staffing of the Project for a $14.0 million development fee (the "Development
Fee").
On May 24, 2000, TCA and the Authority agreed that TCA had performed and
completed all its obligations relating to the staffing of the Project and that
TCA has no further obligations relating to the staffing of the Project.
The first phase of the Project, including the Casino of the Sky, The Shops at
Mohegan Sun, and the 10,000-seat Mohegan Sun Arena opened in September 2001. In
April 2002, 734 of the 1,200-hotel rooms in the 34-story luxury hotel as well as
the meeting and convention space and spa opened. The balance of the 1,200-hotel
rooms opened during June 2002. At March 31, 2003 the Project has been
substantially completed.
Pursuant to the Development Agreement, the Authority agreed to pay the
Development Fee to TCA quarterly beginning on January 15, 2000, based on
incremental completion of the Project as of each payment date. The last payment
of the Development Fee is to be paid on the Completion Date, as defined in the
Development Agreement, of the Project. A summary of the quarterly Development
Fee payments received by TCA in accordance with the terms of the Development
Agreement is as follows:
Date Received by TCA Relinquishment Fee Received
January 15, 2000 $ 1,372,000
April 20, 2000 896,000
July 17, 2000 1,260,000
October 13, 2000 1,372,000
January 23, 2001 588,000
April 16, 2001 1,582,000
July 20, 2001 2,212,000
October 17, 2001 1,974,000
January 25, 2002 1,260,000
April 22, 2002 413,000
July 19, 2002 581,000
October 18, 2002 238,000
January 24, 2003 84,000
April 15, 2003 112,000
-----------
$13,944,000
===========
The Development Agreement terminates after the earlier of the completion of the
Project or 10 years. In addition, each party has the right to terminate the
Development Agreement if there is a default or failure to perform by the other
party. The parties must submit disputes arising under the agreement to
arbitration and have agreed that punitive damages may not be awarded to either
party by an arbitrator. The Authority has waived sovereign immunity for the
purpose of permitting, compelling or enforcing arbitration and has agreed to be
sued by TCA in any court of competent jurisdiction for the purposes of
compelling arbitration or enforcing any arbitration or judicial award arising
out of the Development Agreement.
As described in Note 5 to the financial statements included in Item 1 of this
quarterly report on Form 10-Q, on February 9, 1998, TCA and KIML entered into
the Development Services Agreement Phase II. Pursuant to the Development
Services Agreement Phase II, TCA subcontracted with KIML, and KIML agreed to
perform, those services assigned to KIML by TCA, in order to facilitate TCA's
fulfillment of its duties and obligations to the Authority under the Development
Agreement. After entering into the Development Services Agreement Phase II, KIML
assigned it to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner
Investments the Development Services Fee Phase II. Such fee equals 3% of the
development costs of the Project, as defined in the Development Services
Agreement Phase II, less all costs incurred by TCA in connection with the
Project. The Development Services Fee Phase II is paid in three installments -
on December 31, 1999, December 31, 2000 and on the Completion Date, as defined
in the Development Agreement - with the final payment being made when the actual
development costs of the Project are known. TCA pays the Development Services
Fee Phase II from available cash flow, if any, in accordance with the Amended
and Restated Omnibus Termination Agreement. The total payments will exceed the
related revenue by $16 million which has been reflected in the accompanying
financial statements. At March 31, 2003 and December 31, 2002, approximately
$10.2 million was payable to affiliates.
17
Also as described in Note 5 to the financial statements included in Item 1 of
this quarterly report on Form 10-Q, before KIML assigned the Development
Services Agreement Phase II to Kerzner Investments, it entered into the Local
Construction Services Agreement with Construction, pursuant to which
Construction agreed to provide certain of those services assigned to KIML by TCA
pursuant to the Development Services Agreement Phase II. KIML has assigned the
Local Construction Services Agreement to Kerzner Investments. Pursuant to the
Local Construction Services Agreement, Kerzner Investments agreed to pay to
Construction a fee equal to 20.83% of the Development Services Fee Phase II as
and when Kernzer Investments receives payment from TCA pursuant to the
Development Services Agreement Phase II. Construction has subcontracted with The
Slavik Company to provide certain services under the Local Construction Services
Agreement. In connection with this subcontracting, Construction agreed that The
Slavik Company would be paid a fee equal to 14.30% of its fee under the Local
Construction Services Agreement.
C - Certain Risk Factors
- ------------------------
1 - Lack of Operations; Dependence on the Mohegan Sun - The Company is entirely
dependent upon the performance of the Mohegan Sun to meet its debt service
obligations.
The Company does not conduct any business operations other than in connection
with its role as a general partner of Trading Cove and activities incidental to
the issuance of the $125 Million Senior Notes and the making of restricted and
temporary investments. The Company is prohibited by the terms of the Indenture
from engaging in any other business activities. The Company intends to fund its
operating debt service and capital needs from cash flows from Trading Cove and
from cash flows (dividend and interest) from temporary investments.
Trading Cove's only material source of revenue and cash flows is the
Relinquishment Fees it receives from the Mohegan Sun. There can be no assurance
that the Mohegan Sun will continue to generate sufficient revenues for the
Authority to be profitable or to service its debt obligations, or to pay
Relinquishment Fees. The Company's ability to meet its obligations under the
$125 Million Senior Notes is entirely dependent upon the performance of the
Mohegan Sun, which is subject to matters over which Trading Cove and the Company
have no control, including, without limitation, general economic conditions,
effects of competition, political, regulatory and other factors, the actual
number of gaming customers and the amount wagered.
In addition, Trading Cove has entered into subcontracts with Kerzner Investments
(who has further subcontracted with certain of our affiliates) in connection
with the development and construction of the Project Sunburst expansion. Under
the subcontracts, Trading Cove has agreed to pay a development fee equal to 3%
of the total costs of the Project Sunburst expansion, excluding capitalized
interest, which is estimated to be $1.0 billion, less Trading Cove's actual
costs relating to the Project Sunburst expansion. The Company expects Trading
Cove will pay Kerzner Investments and our affiliates a development fee of
approximately $20 million pursuant to these subcontracts. Pursuant to the
Amended and Restated Omnibus Termination Agreement, Trading Cove is required to
pay the development fee prior to making any distribution to its partners,
including the Company. To date, Trading Cove has paid approximately $10.8
million to Kerzner Investments and the Company's affiliates under the
Development Services Agreement and expects to pay the remaining approximately
$9.2 million in July 2003. Any payment of the development fee reduces amounts
available to be distributed to the Company.
The Company cannot assure you that its future operating cash flow will be
sufficient to cover its expenses, including interest on the $125 Million Senior
Notes.
18
2 - Leverage - The Company's and the Authority's substantial indebtedness could
adversely affect the Company's ability to fulfill its obligations under the $125
Million Senior Notes.
The Company has an aggregate long-term senior indebtedness of $102,349,000,
consisting of the $125 Million Senior Notes. The Authority is also highly
leveraged. As of March 31, 2003, the Authority had a total of approximately
$1.13 billion of indebtedness outstanding. On March 25, 2003, the Authority
closed a new $391.0 million bank credit facility. At March 31, 2003 the
Authority has approximately $170 million available for borrowing under the bank
credit facility. Pursuant to the terms of the bank credit facility, the
Authority may incur additional indebtedness, including senior secured
indebtedness. Substantially all of the Authority's assets secure its bank credit
facility.
The Company's agreements with the Authority do not prohibit the Authority from
incurring indebtedness. In addition to its bank credit facility, the Authority
had the following indebtedness outstanding:
a) $200.0 million of 8.125% senior notes due 2006;
b) $300.0 million of 8.75% senior subordinated notes due 2009;
c) $150.0 million of 8.375% senior subordinated notes due 2011; and
d) $250.0 million of 8.0% senior subordinated notes due 2012.
The degree to which the Authority is leveraged could have significant
consequences for the holders of the $125 Million Senior Notes, including,
without limitation, the following:
a) making it more difficult for the Authority to pay the fees owed
to Trading Cove under the Relinquishment Agreement; and
b) the Authority's high degree of leverage may make it vulnerable to
an economic downturn, which may hamper the Mohegan Sun's ability
to meet expected operating results.
3 - Subordination - Trading Cove's right to receive the relinquishment payments
from the Authority is junior to certain payments by the Authority to the Mohegan
Tribe and holders of its indebtedness.
The senior and junior relinquishment payments from the Authority to Trading Cove
rank behind all of the Authority's obligations to pay the minimum priority
distributions to the Mohegan Tribe and all of the Authority's existing and
future senior secured indebtedness, including the Authority's bank credit
facility.
As a result, upon any distribution by the Authority to its creditors in a
bankruptcy, liquidation, reorganization or similar proceeding relating to the
Authority or its property, the priority distributions owed to the Mohegan Tribe
and the holders of the Authority's senior secured indebtedness will be entitled
to be paid in full and in cash before any senior or junior relinquishment
payments may be made to Trading Cove. In addition, the junior relinquishment
payments rank behind all of the Authority's existing and future senior
indebtedness. As a result, in any such proceedings, the holders of the
Authority's senior indebtedness will be entitled to be paid in full and in cash
before any junior relinquishment payments may be made to Trading Cove.
In addition, all relinquishment payments will be blocked in the event of a
payment default on senior secured indebtedness of the Authority, and all junior
relinquishment payments will be blocked in the event of a payment default on
senior indebtedness of the Authority and, in each case, may be blocked for up to
179 of 360 consecutive days in the event of certain non-payment defaults on
senior secured indebtedness or senior indebtedness of the Authority, as
applicable.
In the event of a bankruptcy, liquidation, reorganization or similar proceeding
relating to the Authority, Trading Cove will receive distributions (if at all)
on a pari passu basis with all other holders of the Authority's senior unsecured
indebtedness with respect to the senior relinquishment payments from the assets
remaining after the Authority has paid all of its senior secured indebtedness
and with all other holders of subordinated indebtedness with respect to the
junior relinquishment payments from the assets remaining after the Authority has
paid all of its senior indebtedness. However, the Relinquishment Agreement
requires that amounts otherwise payable to Trading Cove in a bankruptcy or
similar proceeding of the Authority be paid to holders of senior secured
indebtedness, with respect to the senior relinquishment payments, and to holders
of senior indebtedness until they are paid in full, with respect to junior
relinquishment payments, instead of to Trading Cove. For that reason, Trading
Cove may receive less, ratably, than holders of senior unsecured indebtedness of
the Authority in any such proceeding. In any of these cases, the Authority may
not have sufficient funds to pay all of its creditors and Trading Cove may
receive less, ratably, than the holders of the Authority's senior indebtedness.
As of March 31, 2003, the senior relinquishment payments are subordinated to
$221.0 million of senior secured indebtedness of the Authority and the junior
relinquishment payments are subordinated to $421.0 million of senior
indebtedness of the Authority. In addition, at March 31, 2003, the Authority has
approximately $170 million available for borrowing under its bank credit
facility. For the year ending September 30, 2002, the annual minimum priority
distribution to the Mohegan Tribe was $15.1 million. The minimum priority
distribution is adjusted annually to reflect the cumulative increase in the
consumer price index. The Authority will be permitted to borrow substantial
additional indebtedness, including senior secured indebtedness, in the future.
19
4 - Risks Associated with Trading Cove and the Trading Cove Partnership
Agreement - The Company would not be a creditor of Trading Cove and we have no
rights to the assets of the Authority in the event of a bankruptcy or similar
proceeding against either. The Company does not have the power under Trading
Cove's partnership agreement to cause Trading Cove to make any distributions to
the Company.
If Trading Cove becomes the debtor in a bankruptcy or similar proceeding, the
Company would have the status of an equity holder, not a creditor, and would not
be entitled to receive any distributions until all of Trading Cove's creditors
were paid in full.
If the Authority became the debtor in a bankruptcy or similar proceeding,
Trading Cove's rights and recovery would depend on numerous factors, including
the type and outcome of the proceeding. If the Authority ceased operations and
liquidated, under chapter 7 of the Bankruptcy Code or otherwise, Trading Cove's
claim would likely be limited to the amount of unpaid relinquishment fees as of
the time of liquidation. If the Authority reorganized under chapter 11 of the
Bankruptcy Code, Trading Cove's claim would likely be based on an estimate of
the Mohegan Sun's future revenues for the term of the Relinquishment Agreement.
In any event, any recovery by Trading Cove on its claims for senior or junior
relinquishment fees would be subject to the prior payment in full of all
indebtedness senior thereto.
As a result, the Company cannot give any assurance that, in the event of
bankruptcy or financial difficulty of either Trading Cove or the Authority, it
would ultimately recover sufficient (or any) funds to pay amounts outstanding
under the $125 Million Senior Notes.
The $125 Million Senior Notes are not secured by a pledge of the Company's
partnership interest in Trading Cove. Accordingly, in the event of an
acceleration under the Indenture, the trustee under the Indenture will not be
able to foreclose upon the equity in Trading Cove.
The partnership agreement with respect to Trading Cove requires consent by both
partners in order to take any action. Accordingly, neither the Company nor
Kerzner Investments has the authority to cause Trading Cove to make any
distributions, and Kerzner Investments has the ability to block any action taken
by Trading Cove. Although the partnership agreement requires Trading Cove to
make distributions of excess cash, the distributions are reduced by certain
undefined, discretionary amounts, including foreseeable needs of cash,
obligations to third parties, adequate working capital and reserves and the
amount needed by the partnership to conduct its business and carry out its
purposes. A dispute between the partners as to the appropriate amount of such
reductions could result in no or limited distributions by Trading Cove, which
could have a material adverse effect on the Company's ability to make required
payments of interest, principal and premium on the $125 Million Senior Notes.
Under the partnership agreement and certain other existing agreements, Trading
Cove must make certain payments and pay expenses prior to making distributions
to its members, including Waterford. Such payments and expenses include
(1) the development fee to be paid to Kerzner Investments,
Construction, and The Slavik Company and related development
expenses equal to 3% of the total cost of the Project Sunburst
expansion, excluding capitalized interest, less Trading Cove's
actual costs relating to the Project Sunburst expansion (the
remaining development fee payment, expected to be approximately
$9.2 million, is expected to be made in July 2003), and
(2) a $5.0 million annual payment to Kerzner Investments, payable
quarterly until December 31, 2006.
In addition, Trading Cove will pay its operating expenses prior to making any
distributions to its partners. To the extent its operating expenses are less
than $2.0 million, Trading Cove is required to pay the difference to each of
Kerzner Investments and the principals of the Company. All of these amounts
reduce the amounts distributable to the Company. Finally, the Company and
Trading Cove are party to litigation with a former partner of Trading Cove,
which, if adversely determined, could materially and adversely affect its future
distributions from Trading Cove.
5 - Risks Associated with the Buy/Sell Option Under Trading Cove Partnership
Agreement - If a dispute occurs between the Company and Kerzner Investments, the
buy/sell provision of the partnership agreement could be invoked. If the
buy/sell provision is invoked, the Company cannot assure you that it would have
sufficient funds to buy out Kerzner Investments or, if the Company agreed to
sell to Kerzner Investments, that the selling price would be sufficient to pay
all amounts due on the $125 Million Senior Notes.
In the event of any dispute between the partners in Trading Cove, either partner
could invoke the buy/sell provision contained in the partnership agreement.
Pursuant to the buy/sell provision, the party invoking the buy/sell provision
would deliver a notice to the other party requiring it to sell its interest or
buy the invoking party's interest, in each case at the price set forth in such
notice. The party receiving the notice must make the election within 45 days of
receipt of the notice or be deemed to have accepted the offer to sell. If the
offer to buy is elected, the party must close the purchase within 75 days of the
end of the 45-day period. Any party may terminate the option at any time prior
to closing by accepting the position of the other party. In the event Kerzner
Investments were to invoke the buy/sell provision, the Company could:
a) buy Kerzner Investments' interest;
b) sell its interest; or
c) agree with Kerzner Investments on the point of dispute.
The Company may transfer it right to buy under the buy/sell provision of the
partnership agreement to the Waterford Group or the Waterford Group may fund the
purchase of Kerzner Investment' partnership interest. If the Company were to
elect to buy Kerzner Investments' partnership interest other than with funds
provided by the Waterford Group, the Indenture requires the Company to redeem
the $125 Million Senior Notes; however the Company cannot assure you that it
would be able to raise funds sufficient for us to redeem the $125 Million Notes
on satisfactory terms, or at all.
If the Company were to sell its partnership interest in Trading Cove, it is
possible that the amount we receive would be insufficient to pay all amounts due
on the $125 Million Senior Notes. If the Company were to concur with Kerzner
Investments with respect to the point of dispute, it cannot assure you that
Kerzner Investments' position would not have a material adverse effect on the
Company's ability to pay principal, interest and premium on the $125 Million
Senior Notes.
20
6 - Difficulties in Enforcing Obligations Against the Authority - The ability to
enforce obligations against the Authority and the Mohegan Tribe is limited by
the Mohegan Tribe's sovereign immunity.
Although the Mohegan Tribe and the Authority have sovereign immunity and may not
be sued without their consent, both the Mohegan Tribe and the Authority have
granted a limited waiver of sovereign immunity and consent to suit in connection
with the Relinquishment Agreement, including suits against the Authority to
enforce the obligation to pay fees due under the Relinquishment Agreement. In
the event that such waiver of sovereign immunity is held to be ineffective,
Trading Cove could be precluded from judicially enforcing its rights and
remedies. Generally, waivers of sovereign immunity have been held to be
enforceable against Indian tribes such as the Mohegan Tribe. In addition, the
Company has no standing to enforce the Relinquishment Agreement and therefore
would have to rely on Trading Cove to enforce such agreements.
The Relinquishment Agreement provides that disputes shall be resolved in any
court of competent jurisdiction including the Gaming Disputes Court of the
Mohegan Tribe, which was established under the Mohegan Tribe's constitution to
rule on disputes with respect to the Mohegan Sun. Appeals of the decisions of
the Trial Division are heard by the Appellate Branch of the Gaming Disputes
Court. Matters as to which applicable federal or state courts have jurisdiction
may be brought in such courts. However, the federal courts may not have
jurisdiction over disputes not arising under federal law, and the state courts
may not have jurisdiction over any disputes arising on the Mohegan reservation.
Moreover, the federal and state courts, under the doctrines of comity and
exhaustion of tribal remedies, may be required to (1) defer to the jurisdiction
of the Gaming Disputes Court or (2) require that any plaintiff exhaust its
remedies in the Gaming Disputes Court before bringing any action in the federal
or state court. Thus, there may be no federal or state court forum with respect
to a dispute with the Authority or the Mohegan Tribe relating to the
Relinquishment Agreement. In addition, the Authority may not be subject to the
federal bankruptcy laws. Thus, no assurance can be given that, if an event of
default occurs, any forum will be available other than an arbitration panel of
the Gaming Disputes Court. In the Gaming Disputes Court, there are few guiding
precedents for the interpretation of Mohegan Tribal law. Any execution of a
judgment of the Gaming Disputes Court will require the cooperation of the
Mohegan Tribe's officials in the exercise of their police powers. Thus, to the
extent that a judgment of the Gaming Disputes Court must be executed on Mohegan
Tribal lands, the practical realization of any benefit of such a judgment will
be dependent upon the willingness and ability of the Mohegan Tribal officials to
carry out such judgment. In addition, the land under the casino facility is
owned b