UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 333-17795
WATERFORD GAMING, L.L.C.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1465402
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
914 Hartford Turnpike, P.O. Box 715
Waterford, CT 06385
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (860) 442-4559
Securities registered pursuant to Section 12(b) of the Act: NONE
Title of each class Name of each exchange on which registered
Not applicable Not applicable
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes /X/ No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: Not applicable.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes / / No /X/
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter. - Not applicable
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). - Not Applicable
WATERFORD GAMING, L.L.C.
INDEX TO FORM 10-K
PAGE
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS 14
ITEM 6. SELECTED FINANCIAL DATA 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 26
ITEM 9A. CONTROLS AND PROCEDURES 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 27
ITEM 11. EXECUTIVE COMPENSATION 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28
ITEM 14. PRINCPAL ACCOUNTANT'S FEES AND SERVICES 30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 31
Signatures 36
CERTAIN FORWARD LOOKING STATEMENTS
This annual report on Form 10-K contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"SECURITIES ACT") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), including, in particular, the statements about
Waterford Gaming, L.L.C. (the "COMPANY"), Trading Cove Associates ("TCA" or
"TRADING COVE") and the Mohegan Sun Casino's (the "MOHEGAN SUN") plans,
strategies and prospects. Although the Company believes that such statements are
based on reasonable assumptions, these forward-looking statements are subject to
numerous factors, risks and uncertainties that could cause actual outcomes and
results to be materially different from those projected. These factors, risks
and uncertainties include, among others, the risk factors described below under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors" and the following:
a) the financial performance of the Mohegan Sun;
b) changes in laws or regulations (including, without limitation, gaming laws or
regulations);
c) the effects of new competition; and d) general domestic and global economic
conditions.
The Company's, TCA's and Mohegan Sun's actual results, performance or
achievements could differ materially from those expressed in, or implied by, the
forward-looking statements contained herein. The Company can give no assurances
that any of the events anticipated by the forward-looking statements will occur
or, if any of them do, what impact they will have on its results of operations
and financial condition. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this annual
report on Form 10-K.
PART I
Item 1. BUSINESS
A. THE COMPANY
The Company was formed solely for the purpose of holding its partnership
interest in Trading Cove Associates, a Connecticut general partnership. Trading
Cove is the former manager and original developer of the Mohegan Sun located in
Uncasville, Connecticut, a casino owned by the Mohegan Tribe of Indians of
Connecticut (the "MOHEGAN TRIBE" or the "TRIBE"). The Company's interest in TCA
is its principal asset and source of income and cash flow.
Trading Cove developed the Mohegan Sun and managed the property from its opening
in 1996 until December 31, 1999. On January 1, 2000, Trading Cove turned over
management of the Mohegan Sun to the Mohegan Tribal Gaming Authority (the
"AUTHORITY"). TCA and the Company's principals assisted the Mohegan Tribe in
obtaining federal recognition, negotiating the tribal-state compact with the
State of Connecticut, obtaining numerous governmental approvals, raising debt
financing for the initial construction and development of the Mohegan Sun, and
developing the Project Sunburst expansion (the "PROJECT SUNBURST EXPANSION"), an
approximately $1.0 billion expansion at the Mohegan Sun, the final phase of
which opened in June 2002.
The Company is a wholly owned subsidiary of Waterford Group, L.L.C. ("WATERFORD
GROUP"). The Limited Liability Company Agreement of the Company (the "LLC
AGREEMENT") is effective until September 30, 2020 and may be terminated by the
Company's sole member or upon the occurrence of certain events as stated in the
LLC Agreement.
The LLC Agreement provides for the property, affairs and business of the Company
to be managed by a four-member Board of Directors (the "BOARD OF DIRECTORS"),
which consists of two directors appointed by Slavik Suites, Inc. ("SLAVIK") and
two directors appointed by LMW Investments, Inc. ("LMW"). A quorum for the Board
of Directors requires all four members. LMW and Slavik initially contributed
capital to the Company consisting of all of their respective interests in
Trading Cove.
Prior to the offering of the Company's $65 Million 12.75% Senior Notes (the
"12.75% SENIOR NOTES"), Slavik and LMW were partners of Trading Cove. In
connection with the formation of the Company, Slavik and LMW each contributed to
the Company its interests in Trading Cove in exchange for a 66-2/3 percent and
33-1/3 percent ownership interest, respectively, of the Company. Upon
consummation of the offering of the 12.75% Senior Notes, (i) $6.7 million of the
proceeds of such offering were distributed directly to Slavik for the purpose of
redeeming certain ownership interests in Slavik, and (ii) $3.3 million of the
proceeds were distributed to LMW, which in turn loaned such proceeds to Len and
Mark Wolman, as individuals, who used such funds to purchase certain interests
in Slavik. The Company used $10.6 million of the proceeds from the offering of
the 12.75% Senior Notes to purchase RJH Development Corp.'s ownership interest
in Trading Cove. As a result of these transactions (collectively the
"REORGANIZATION"), Slavik and LMW owned 67.7967 percent and 32.2033 percent of
the Company, respectively. The Company is a managing general partner of Trading
Cove. As a result of the Reorganization, the only two partners of Trading Cove
are the Company and Kerzner Investments Connecticut, Inc. ("KERZNER
INVESTMENTS"), formerly Sun Cove Limited.
1
In connection with the issuance on March 17, 1999 of the $125 Million 9.50%
Senior Notes (the "9.50% SENIOR NOTES"), each of Slavik and LMW contributed
their respective interests in the Company concurrently to Waterford Group.
Waterford Group is now the sole member of the Company. Slavik and LMW own
Waterford Group in the same respective interest as they had in the Company,
which are as follows:
Slavik Suites, Inc. 67.7967%
LMW Investments, Inc. 32.2033%
-----------
100.0000%
===========
Additional capital contributions may be made to the Company by its member,
Waterford Group. If it is determined that the Company requires additional funds,
such funds may be loaned to the Company by its member pursuant to the terms set
forth in the LLC Agreement; however, the indenture governing the $155 Million
8.625% Senior Notes (the "8.625% SENIOR NOTES"), prohibits the Company from
incurring additional indebtedness. The LLC Agreement also provides that any
disputes which arise under the LLC Agreement and which remain unresolved after
30 days will be settled through arbitration.
LMW, one of the two members of Waterford Group, is a development firm based in
southeastern Connecticut. LMW is owned by Len Wolman and Mark Wolman. The other
member of Waterford Group, Slavik, is based in Detroit, Michigan. The directors
of Slavik are Del J. Lauria, Len Wolman, Mark Wolman and Stephan F. Slavik.
For the fiscal years 2003, 2002 and 2001, the Company had net income of
$3,891,633, $12,033,310 and $6,574,572, respectively. At the end of fiscal years
2003, 2002 and 2001, the Company had total assets of $36,219,560, $34,178,108
and $48,359,724, respectively.
As of December 31, 2003, the Company employed one full-time employee and no
part-time employees. The Company's employee is not covered by a collective
bargaining agreement.
B. $155 MILLION 8.625% SENIOR NOTES PAYABLE:
On June 11, 2003, the Company and Waterford Gaming Finance Corp. ("FINANCE")
issued the 8.625% Senior Notes. Payment of the principal of, and interest on,
the 8.625% Senior Notes is pari passu in right of payment with all of the
Company's and Finance's senior debt, and effectively subordinate in right of
payment to all of the Company's and Finance's existing and future collateralized
and subordinated debts.
The 8.625% Senior Notes bear interest at a rate of 8.625% per annum, payable
semi-annually in arrears on March 15 and September 15 of each year, commencing
September 15, 2003. The principal amount due on the 8.625% Senior Notes is
payable on September 15, 2012.
The Company and Finance may elect to redeem all or any of the 8.625% Senior
Notes at any time on or after September 15, 2008 at a redemption price equal to
a percentage of the principal amount of notes being redeemed plus accrued
interest. Such percentage is set forth in the following table:
If notes are redeemed Percentage
--------------------- ----------
after September 14, 2008 but
on or before September 14, 2009 103.551%
after September 14, 2009 but
on or before September 14, 2010 102.537%
after September 14, 2010
but on or before September 14, 2011 101.522%
after September 14, 2011 but
on or before September 14, 2012 100.507%
after September 14, 2012 100.000%
The 8.625% Senior Notes provide that upon the occurrence of a Change of Control
as defined in the indenture governing the 8.625% Senior Notes (the "8.625%
SENIOR NOTES INDENTURE"), the holders thereof will have the option to require
the redemption of the 8.625% Senior Notes at a redemption price equal to 101% of
the principal amount thereof plus accrued interest.
2
Pursuant to the terms of the 8.625% Senior Notes Indenture, if the Company and
Finance have any Company Excess Cash, as defined in the 8.625% Senior Notes
Indenture, on February 1 or August 1 of any year, they must use such Company
Excess Cash less all Required IRA True-Up Payments, as defined in the 8.625%
Senior Notes Indenture, and less any amount set aside for the payment of accrued
and unpaid interest on the interest payment date that corresponds to the
redemption date for which the determination is being made, to redeem the 8.625%
Senior Notes on the March 15 or September 15 following such dates. Any such
redemption will be made at a price equal to a percentage of the principal amount
being redeemed. Such percentage is set forth in the following table:
If notes are redeemed with Redemption Price (expressed as a percentage
Company Excess Cash of the principal amount being redeemed)
------------------------- --------------------------------------------
after September 14, 2003 but
on or before September 14, 2004 108.625%
after September 14, 2004 but
on or before September 14, 2005 107.610%
after September 14, 2005 but
on or before September 14, 2006 106.596%
after September 14, 2006 but
on or before September 14, 2007 105.581%
after September 14, 2007 but
on or before September 14, 2008 104.566%
after September 14, 2008 but
on or before September 14, 2009 103.551%
after September 14, 2009 but
on or before September 14, 2010 102.537%
after September 14, 2010
but on or before September 14, 2011 101.522%
after September 14, 2011 but
on or before September 14, 2012 100.507%
after September 14, 2012 100.000%
On August 1, 2003 the Company and Finance had Company Excess Cash (which totaled
$5,568,186), as defined in the 8.625% Senior Notes Indenture, and after
deducting (i) all Required IRA True-Up Payments, as defined in the 8.625% Senior
Notes Indenture, (which totaled $0) and (ii) the amount set aside for the
payment of accrued and unpaid interest on the interest payment date that
corresponds to the redemption date for which the determination is being made
(which totaled $3,490,729), the amount available for a mandatory redemption of
the 8.625% Senior Notes totaled $2,077,457, and accordingly on September 15,
2003 the Company and Finance made a mandatory redemption of the 8.625% Senior
Notes in the principal amount of $1,912,000 at the redemption price of 108.625%.
Such redemption price is expressed as a percentage of the principal amount being
redeemed.
On February 1, 2004 the Company and Finance had Company Excess Cash (which
totaled $14,533,996), as defined in the 8.625% Senior Notes Indenture, and after
deducting (i) all Required IRA True-Up Payments, as defined in the 8.625% Senior
Notes Indenture, (which totaled $0) and (ii) the amount set aside for the
payment of accrued and unpaid interest on the interest payment date that
corresponds to the redemption date for which the determination is being made
(which totaled $6,601,920), the amount available for a mandatory redemption of
the 8.625% Senior Notes totaled $7,932,076, and accordingly on March 15, 2004
the Company and Finance made a mandatory redemption of the 8.625% Senior Notes
in the principal amount of $7,302,000 at the redemption price of 108.625%. Such
redemption price is expressed as a percentage of the principal amount being
redeemed.
In certain circumstances, if either the Company or Kerzner Investments, the
Company's partner in TCA, exercises the option to buy or sell partnership
interests in TCA, the Company and Finance must redeem the 8.625% Senior Notes.
The 8.625% Senior Notes Indenture contains certain affirmative and negative
covenants customarily contained in such agreements, including without
limitation, covenants that restrict, subject to specified exceptions the
Company's and Finance's ability to (i) borrow money, (ii) make distributions on
its equity interests or certain other restricted payments, (iii) use assets as
security in other transactions, (iv) make investments, (v) sell other assets or
merge with other companies, and (vi) engage in any business except as currently
conducted or contemplated or amend their relationship with TCA. The 8.625%
Senior Notes Indenture also provides for customary events of default and the
establishment of a restricted investment account with a trustee for interest
reserves ("IRA"). The IRA consists of an amount of funds equal to the interest
payment due on the 8.625% Senior Notes on the following interest payment date.
The IRA will be released and the Company can make a permitted distribution to
Waterford Group once the Leverage Ratio, as defined in the 8.625% Senior Notes
Indenture, is less than or equal to 3.0 to 1.0.
3
The fair market value of the Company's long term debt at December 31, 2003 and
2002 is estimated to be approximately $163,804,000 and $111,787,000,
respectively, based on the quoted market price for the 8.625% Senior Notes and
the 9.50% Senior Notes, respectively.
The 8.625% Senior Notes Indenture is filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2003 (Securities and
Exchange Commission (the "COMMISSION") File No. 333-17795) as accepted by
Commission on August 12, 2003 and is incorporated herein by reference.
C. TRADING COVE ASSOCIATES
TCA was organized on July 27, 1993. The primary purpose of TCA has been,
- - to assist the Tribe and the Authority in obtaining federal recognition, - to
negotiate the tribal-state compact with the State of Connecticut
on behalf of the Tribe,
- - to obtain financing for the development of the Mohegan Sun,
- - to negotiate the Amended and Restated Gaming Facility Management
Agreement (the "MANAGEMENT AGREEMENT"),
- - to oversee all operations of the Mohegan Sun pursuant to the terms of
the Management Agreement until midnight December 31, 1999, and
- - to participate in the design and development of the Mohegan Sun.
The Mohegan Sun commenced operations on October 12, 1996. From the opening of
the Mohegan Sun until midnight December 31, 1999, TCA oversaw the Mohegan Sun's
day-to-day operations.
TCA's partnership agreement (the "TCA PARTNERSHIP AGREEMENT") will terminate on
December 31, 2040, or earlier, in accordance with its terms. The Company has a
50 percent partnership interest in TCA. The remaining 50 percent interest is
owned by Kerzner Investments, an affiliate of Kerzner International Limited
("KERZNER INTERNATIONAL").
TCA's sole source of revenue is payment under the Relinquishment Agreement and
Development Agreement, each as described below.
D. TRADING COVE ASSOCIATES MATERIAL AGREEMENTS
1 - RELINQUISHMENT AGREEMENT
On February 7, 1998, TCA and the Authority entered into the Relinquishment
Agreement (the "RELINQUISHMENT AGREEMENT"). Under the terms of the
Relinquishment Agreement, TCA continued to manage the Mohegan Sun under the
Management Agreement (described below) until midnight December 31, 1999, and on
January 1, 2000, the Management Agreement terminated and the Tribe assumed
day-to-day management of the Mohegan Sun.
Under the Relinquishment Agreement, to compensate TCA for terminating its rights
under the Management Agreement and the Hotel/Resort Management Agreement, the
Authority agreed to pay to TCA a fee (the "RELINQUISHMENT FEES") equal to 5
percent of Revenues, as defined in the Relinquishment Agreement, generated by
the Mohegan Sun during the 15-year period commencing on January 1, 2000,
including revenue generated by the Project Sunburst expansion.
The Relinquishment Fees are divided into senior relinquishment payments and
junior relinquishment payments, each of which equals 2.5 percent of "Revenues."
Revenues are defined in the Relinquishment Agreement as gross gaming revenues
(other than Class II gaming revenue) and all other facility revenues. Such
revenue includes hotel revenues, food and beverage sales, parking revenues,
ticket revenues and other fees or receipts from the convention/events center in
the Project Sunburst expansion and all rental or other receipts from lessees,
licensees and concessionaires operating in the facility, but not the gross
receipts of such lessees, licensees and concessionaires. Such revenues exclude
revenues generated by any other expansion of the Mohegan Sun.
Senior relinquishment payments are payable quarterly in arrears commencing on
April 25, 2000 for the quarter ended March 31, 2000, and the junior
relinquishment payments are payable semi-annually in arrears commencing on July
25, 2000 for the six months ended June 30, 2000, assuming sufficient funds are
available after satisfaction of the Authority's senior obligations, as defined
in the Relinquishment Agreement. See section below titled "Risk Factors -
Subordination - Trading Cove's right to receive the relinquishment payments from
the Authority is junior to certain payments by the Authority to the Mohegan
Tribe and holders of its indebtedness."
4
A summary of relinquishment payments received by TCA for 2003, 2002 and 2001 is
as follows:
DATE SENIOR JUNIOR TOTAL
- ------------------------------------- ------------- ------------- -------------
April 25, 2003 $ 7,433,160 $ -- $ 7,433,160
July 25, 2003 8,101,075 15,534,235 23,635,310
October 27, 2003 8,691,811 -- 8,691,811
January 26, 2004 8,323,731 17,015,541 25,339,272
------------- ------------- -------------
Relinquishment Fees for the year
ended December 31, 2003 $ 32,549,777 $ 32,549,776 $ 65,099,553
============= ============= =============
April 25, 2002 $ 6,228,559 $ -- $ 6,228,559
July 25, 2002 7,104,939 13,333,500 20,438,439
October 25, 2002 8,171,882 -- 8,171,882
January 27, 2003 7,748,971 15,920,852 23,669,823
------------- ------------- -------------
Relinquishment Fees for the year
ended December 31, 2002 $ 29,254,351 $ 29,254,352 $ 58,508,703
============= ============= =============
April 25, 2001 $ 5,090,622 $ -- $ 5,090,622
July 25, 2001 5,472,900 10,563,521 16,036,421
September 7, 2001 68,233 68,234 136,467
October 25, 2001 5,765,232 -- 5,765,232
January 25, 2002 6,460,672 12,225,904 18,686,576
------------- ------------- -------------
Relinquishment Fees for the year
ended December 31, 2001 $ 22,857,659 $ 22,857,659 $ 45,715,318
============= ============= =============
The amount of Relinquishment Fees reported in this annual report on Form 10-K
are based upon Revenues reported to TCA by the Authority.
The senior and junior relinquishment payments rank behind the Authority's
obligation to pay an annual minimum priority distribution to the Mohegan Tribe
and all of the Authority's existing and future senior secured indebtedness,
including the Authority's bank credit facility under which the Authority has the
ability to incur up to $500.0 million of indebtedness. As a result, upon any
distribution by the Authority to its creditors in a bankruptcy, liquidation,
reorganization or similar proceeding relating to the Authority or its property,
the priority distributions owed to the Mohegan Tribe and the holders of the
Authority's senior secured indebtedness will be entitled to be paid in full and
in cash before any senior or junior relinquishment payments may be made to
Trading Cove. In addition, the junior relinquishment payments rank behind all of
the Authority's existing and future senior indebtedness. As a result, in any
such proceedings, the holders of the Authority's senior indebtedness will be
entitled to be paid in full and in cash before any junior relinquishment
payments may be made to Trading Cove.
In the event of a bankruptcy, liquidation, reorganization or similar proceeding
relating to the Authority, Trading Cove will receive distributions (if at all)
on a pari passu basis with all other holders of the Authority's senior unsecured
indebtedness with respect to the senior relinquishment payments from the assets
remaining after the Authority has paid all of its senior secured indebtedness
and with all other holders of subordinated indebtedness with respect to the
junior relinquishment payments from the assets remaining after the Authority has
paid all of its senior indebtedness. However, the Relinquishment Agreement
requires that amounts otherwise payable to Trading Cove in a bankruptcy or
similar proceeding of the Authority be paid to holders of senior secured
indebtedness until they are paid in full, with respect to the senior
relinquishment payments, and to holders of senior secured indebtedness, with
respect to junior relinquishment payments, instead of to Trading Cove. For that
reason Trading Cove may receive less, ratably, than holders of senior
indebtedness of the Authority in any such proceeding. In any of these cases, the
Authority may not have sufficient funds to pay all of its creditors and Trading
Cove may receive less, ratably, than the holders of the Authority's senior
indebtedness.
In the event of an acceleration of any indebtedness of the Authority, the senior
and junior relinquishment payments that are not yet due under the Relinquishment
Agreement would be effectively subordinated to the Authority's indebtedness
since the payment obligations under the Relinquishment Agreement cannot be
accelerated by their terms and have no blockage rights as designated senior debt
of the Authority.
5
If Trading Cove becomes the debtor in a bankruptcy or similar proceeding, the
Company would have the status of an equity holder, not a creditor, and would not
be entitled to receive any distributions until all of Trading Cove's creditors
were paid in full.
If the Authority became the debtor in a bankruptcy or similar proceeding,
Trading Cove's rights and recovery would depend on numerous factors, including
the type and outcome of the proceeding. If the Authority ceased operations and
liquidated, under chapter 7 of the Bankruptcy Code or otherwise, Trading Cove's
claim would likely be limited to the amount of unpaid Relinquishment Fees as of
the time of liquidation. If the Authority reorganized under chapter 11 of the
Bankruptcy Code, Trading Cove's claim would likely be based on an estimate of
the Mohegan Sun's future revenues for the term of the Relinquishment Agreement.
In any event, any recovery by Trading Cove on its claims for senior or junior
Relinquishment Fees would be subject to the prior payment in full of all
indebtedness senior thereto.
As a result, there is no assurance that, in the event of bankruptcy or financial
difficulty of either Trading Cove or the Authority, the Company would ultimately
recover sufficient (or any) funds to pay amounts outstanding under the 8.625%
Senior Notes.
Under the Relinquishment Agreement, the Authority makes certain covenants for
the benefit of Trading Cove, including the following:
(1) PAYMENTS TO THE MOHEGAN TRIBE. Except for payments of the minimum priority
distributions and reasonable charges for utilities or other governmental
services supplied by the Mohegan Tribe to the Authority, the Authority may not
make any distributions to the Mohegan Tribe or its members at any time any
relinquishment payments are outstanding.
(2) AFFILIATE TRANSACTIONS. Except for payments of the minimum priority
distributions and reasonable charges for utilities or other governmental
services supplied by the Mohegan Tribe to the Authority, the Authority agrees to
abide by certain restrictions on transactions with the Mohegan Tribe and its
members, all as set forth in the Relinquishment Agreement.
(3) REPLACEMENT/RESTORATION OF THE MOHEGAN SUN. If any portion of the Mohegan
Sun facilities is damaged by fire or other casualty, the Authority shall replace
or restore such facilities to substantially the same condition as prior to such
casualty, but only to the extent insurance proceeds are available to do so. If
sufficient insurance proceeds are not available, the Authority will use
reasonable efforts to obtain the required financing, on commercially reasonable
terms, to undertake and complete such replacement or restoration.
(4) BUSINESS PURPOSE. The Authority has agreed that during the term of the
Relinquishment Agreement it will engage only in the casino gaming and resort
business (and any incidental business or activity) and will continue to operate
the Mohegan Sun as currently operated.
Under the Relinquishment Agreement, the Authority and Trading Cove have each
agreed not to solicit any employee of the other party or any affiliate of the
other party for five years.
With certain limitations set forth in the Relinquishment Agreement, both the
Mohegan Tribe and the Authority waive immunity from uncontested suit for certain
enforcement rights of Trading Cove arising under the Relinquishment Agreement.
The Company's right to receive a portion of the relinquishment payments from
Trading Cove is governed by the Amended and Restated Omnibus Termination
Agreement discussed below.
The Relinquishment Agreement is filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1998 (Commission File No.
333-17795), as accepted by the Commission on November 13, 1998, and is
incorporated herein by reference.
2 - DEVELOPMENT AGREEMENT AND RELATED AGREEMENTS
On February 7, 1998, TCA and the Authority entered into the Development Services
Agreement (the "DEVELOPMENT AGREEMENT"). Pursuant to the Development Agreement,
TCA agreed to oversee the design, construction, furnishing, equipping and
staffing of the Project Sunburst expansion for a $14.0 million development fee
(the "DEVELOPMENT FEE").
On May 24, 2000, TCA and the Authority agreed that TCA had performed and
completed all its obligations relating to the staffing of the Project Sunburst
expansion and that TCA has no further obligations relating to the staffing of
the Project Sunburst expansion.
The first phase of the Project Sunburst expansion, including the Casino of the
Sky, The Shops at Mohegan Sun, and the 10,000-seat Mohegan Sun Arena opened in
September 2001.
In April 2002, 734 of the approximately 1,200-hotel rooms in the 34-story luxury
hotel as well as the meeting and convention space and spa opened. The balance of
the approximately 1,200-hotel rooms opened during June 2002. At December 31,
2003 the Project Sunburst expansion was substantially completed.
6
Pursuant to the Development Agreement, the Authority agreed to pay the
Development Fee to TCA quarterly beginning on January 15, 2000, based on
incremental completion of the Project Sunburst expansion as of each payment
date. The last payment of the Development Fee is to be paid on the Completion
Date, as defined in the Development Agreement, of the Project Sunburst
expansion. A summary of the quarterly Development Fee payments received by TCA
in accordance with the terms of the Development Agreement is as follows:
Date Received by TCA Development Fee Received
- -------------------- ------------------------
January 15, 2000 $ 1,372,000
April 20, 2000 896,000
July 17, 2000 1,260,000
October 13, 2000 1,372,000
January 23, 2001 588,000
April 16, 2001 1,582,000
July 20, 2001 2,212,000
October 17, 2001 1,974,000
January 25, 2002 1,260,000
April 22, 2002 413,000
July 19, 2002 581,000
October 18, 2002 238,000
January 24, 2003 84,000
April 15, 2003 112,000
October 30, 2003 56,000
-------------
$ 14,000,000
=============
The Development Agreement terminates after the earlier of the completion of the
Project Sunburst expansion or 10 years. In addition, each party has the right to
terminate the Development Agreement if there is a default or failure to perform
by the other party. The parties must submit disputes arising under the
Development Agreement to arbitration and each has agreed that punitive damages
may not be awarded to either party by an arbitrator. The Authority has waived
sovereign immunity for the purpose of permitting, compelling or enforcing
arbitration and has agreed to be sued by TCA in any court of competent
jurisdiction for the purposes of compelling arbitration or enforcing any
arbitration or judicial award arising out of the Development Agreement.
On February 9, 1998, TCA and Kerzner International Management Limited ("KIML"),
an affiliate of Kerzner Investments, the Company's partner in TCA, entered into
the Agreement Relating to Development Services (the "DEVELOPMENT SERVICES
AGREEMENT PHASE II"). Pursuant to the Development Services Agreement Phase II,
TCA subcontracted with KIML, who agreed to perform those services assigned to
KIML by TCA in order to facilitate TCA's fulfillment of its duties and
obligations to the Authority under the Development Agreement. KIML assigned the
Development Services Agreement Phase II to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner
Investments a fee, as subcontractor (the "DEVELOPMENT SERVICES FEE PHASE II"),
equal to 3 percent of the development costs of the Project Sunburst expansion,
excluding capitalized interest, less all costs incurred by TCA in connection
with the Project Sunburst expansion. The Development Services Fee Phase II is
paid in three installments - on December 31, 1999, December 31, 2000 and on the
Completion Date, as defined in the Development Agreement - with the final
payment being made when the actual development costs of the Project Sunburst
expansion are known. TCA pays the Development Services Fee Phase II from
available cash flow, if any, in accordance with the Amended and Restated Omnibus
Termination Agreement described below. The total of the Development Services Fee
Phase II and TCA's costs related to the development of the Project Sunburst
expansion will exceed the related revenue received by TCA under the Development
Agreement by approximately $15,964,000.
Before KIML assigned the Development Services Agreement Phase II to Kerzner
Investments, it entered into the Local Construction Services Agreement (the
"LOCAL CONSTRUCTION SERVICES AGREEMENT") with Wolman Construction, L.L.C.
("CONSTRUCTION"), an affiliate of the Company, pursuant to which Construction
agreed to provide certain of those services assigned to KIML by TCA pursuant to
the Development Services Agreement Phase II. KIML assigned the Local
Construction Services Agreement to Kerzner Investments.
Pursuant to the Local Construction Services Agreement, Kerzner Investments
agreed to pay to Construction a fee equal to 20.83 percent of the Development
Services Fee Phase II as and when Kerzner Investments receives payment from TCA
pursuant to the Development Services Agreement Phase II.
Pursuant to a Letter Agreement, Construction has subcontracted with The Slavik
Company, an affiliate of the Company, to provide certain services under the
Local Construction Services Agreement. In exchange for providing such services,
Construction agreed that The Slavik Company would be paid a fee equal to 14.30
percent of its fee under the Local Construction Services Agreement.
7
On April 26, 2000, July 26, 2000, January 26, 2003 and July 28, 2003 TCA paid
$3,095,000, $1,238,000, $6,474,000 and $9,157,000, respectively, as partial
payment of the Development Services Fee Phase II. Construction received
$644,688, $257,875, $1,348,534 and $1,907,403, respectively, and Construction
paid The Slavik Company $92,190, $36,876, $192,840 and $259,121 on April 26,
2000, July 26, 2000, January 26, 2001 and July 28, 2003, respectively.
At December 31, 2003 TCA's accrued liability to Kerzner Investments with respect
to such fee was approximately $507,000 pursuant to the Development Service
Agreement Phase II.
The Development Services Agreement is filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1998
(Commission File No. 333-17795), as accepted by the Commission on November 13,
1998, and is incorporated herein by reference.
3 - TCA PARTNERSHIP AGREEMENT
In September 1994, Kerzner Investments, RJH Development Corp., a New York
corporation, Leisure Resort Technology, Inc. ("LEISURE"), Slavik and LMW entered
into an amended and restated partnership agreement to, among other things: (i)
admit Kerzner Investments as a partner to the Trading Cove partnership; (ii) act
as the exclusive agent of the Mohegan Tribe to manage and develop an
entertainment and gaming facility on the Mohegan Tribal Reservation; and (iii)
engage in any other activities incidental or related to the foregoing.
In February 1995, the parties entered into an acknowledgment and release
agreement whereby Leisure withdrew from Trading Cove for all purposes, except
that Leisure retained a 5 percent "beneficial interest" in Trading Cove.
Leisure's beneficial interest is defined as the right to receive certain
distributions of excess cash and the organizational and administrative fee on
the earlier to occur of (i) 14 years from the date of commencement of the
management agreement and (ii) the termination of the Management Agreement.
On January 6, 1998, pursuant to the Settlement and Release Agreement described
in Item 3 (Legal Proceedings) the Company paid $5.0 million to Leisure and,
among other things, Leisure gave up (a) its beneficial interest of 5 percent in
certain fees and excess cash flows, as defined, of Trading Cove and (b) any
other claims it may have had against the Company, Kerzner Investments and
Trading Cove's partners and former partner.
As a result of (i) a First Amendment to the Amended and Restated Partnership
Agreement of Trading Cove, dated October 22, 1996 and (ii) an Agreement for
Purchase and Sale of Partnership Interest, dated September 12, 1996 whereby RJH
Development Corp. agreed to sell and the Company agreed to buy RJH Development
Corp.'s partnership interest for $10.6 million, the Company and Kerzner
Investments are the only partners in Trading Cove.
Pursuant to the TCA Partnership Agreement, Trading Cove will continue to exist
until the first to occur of: (i) December 31, 2040; (ii) a final disposition of
Trading Cove's interest in the Mohegan Sun (or any alternative facility that may
be developed or acquired pursuant to the terms of the TCA Partnership
Agreement); (iii) the decision of the managing partners to terminate Trading
Cove; and (iv) any other event which results in dissolution of Trading Cove.
In connection with its entry into the partnership, Kerzner Investments made a
capital contribution in an amount sufficient to equal a 50 percent partnership
interest. The TCA Partnership Agreement provides for additional capital
contributions. In the event that Trading Cove requires additional funds, and
subject to unanimous approval by the partners, the partners may make loans on a
PRO RATA basis, based on their respective partnership interests. Such loans are
non-recourse and unsecured and bear interest at an annual rate of 2 percent
above the prime rate.
In the event that the Company and Kerzner Investments determine that additional
capital is required to fund TCA's obligations, either may make a capital call.
In the event that a capital call is made and Kerzner Investments does not make
the requested additional capital contribution within 30 days, generally Kerzner
Investments is automatically deemed to have withdrawn from Trading Cove. In such
event, Kerzner Investments is not entitled to any return of any of its previous
capital contributions or additional contributions, but it is generally entitled
to receive repayment of any loans.
In the event that a capital call is made and the Company elects not to make the
requested capital contribution, Kerzner Investments may, at its election, pay
such contributions, which payment shall be deemed, at the election of Kerzner
Investments, to be either (i) a loan to the Company or (ii) a capital
contribution by Kerzner Investments, thereby increasing Kerzner Investments'
partnership interest and diluting the Company's partnership interest. The 8.625%
Senior Notes Indenture limits the Company's ability to make further capital
contributions to TCA.
No partner is obligated to restore a capital account deficit.
8
The partners are required to bring to the attention of the partnership all
opportunities to manage or operate (1) any gaming activities on Native American
reservations and involving Native Americans or (2) any other gaming activity
within 100 miles of the Mohegan Sun. Any such opportunities will be pursued by
an affiliate of Trading Cove, in which the Company will not have any economic
interest. The Company and Kerzner Investments are the managing partners of
Trading Cove, and as such, have the full, exclusive and absolute right, power
and authority to manage and control the partnership and the property, assets and
business thereof. All decisions relating to the management of Trading Cove
require unanimous agreement between the Company and Kerzner Investments.
The TCA Partnership Agreement provides that Howard Kerzner will serve as the
designated representative of Kerzner Investments in its capacity as managing
partner. In the absence of Mr. Kerzner, John Allison will serve as Kerzner
Investments' designated representative. Each designated representative has the
right, power and authority to act for and on behalf of and to bind Kerzner
Investments with respect to all matters relating to the partnership. The TCA
Partnership Agreement grants Mr. Kerzner the right to appoint a proxy upon
written notice to the Company. Len Wolman serves as the designated
representative of the Company.
In the event that a dispute arises under the TCA Partnership Agreement, upon
notice by one disputing party to the other, the parties have ten days to resolve
the dispute. If the dispute is not resolved in such ten-day period then, in
accordance with specific notice procedures set forth in the TCA Partnership
Agreement, either party has the right to deliver a buy-out notice to the other
to require such party to elect to either (i) sell their partnership interest to
the party delivering the notice (at a price and under the terms set forth in
such buy-out notice), or (ii) have the other party or its designee purchase the
interest of the party giving notice at the buy-out price. In the event that the
party receiving the buy-out notice fails to respond, such party is deemed to
have agreed to sell its partnership interest to the party delivering such notice
at the buy-out price specified therein. See "Risk Factors--Risks Associated with
the Buy/Sell Option Under Trading Cove Partnership Agreement."
Subject to the following exceptions, Kerzner Investments is generally prohibited
from assigning its partnership interest. Kerzner Investments may assign its
interest to (1) certain of its affiliates and (2) to any party making a bona
fide written offer to purchase any or all of Kerzner Investments' partnership
interest if, after offering its interest to the Company at the same price and on
the same terms and conditions as set forth in such written offer, the Company
elects not to purchase Kerzner Investments' partnership interest.
The Company is generally prohibited from assigning its partnership interest. The
Company may not assign its interest except (1) to an affiliate of the Company,
(2) to any party making a bona fide written offer to purchase all, but not less
than all, of the Company's partnership interest if, after offering its interest
to Kerzner Investments at the same price and on the same terms and conditions as
set forth in such written offer, Kerzner Investments elects not to purchase the
Company's partnership interest.
Except as otherwise permitted by the TCA Partnership Agreement, no partner may
withdraw from the partnership without the consent of the remaining partners. In
the event that a partner withdraws from the partnership in violation of the TCA
Partnership Agreement, such partner will be liable to the remaining partners for
all damages caused by such withdrawal and shall immediately cease to have any
rights (including rights to receive any monies) in the partnership.
The Amended and Restated Partnership Agreement of Trading Cove Associates, dated
as of September 21, 1994, among Sun Cove Limited (now, Kerzner Investments
Connecticut, Inc.), RJH Development Corp., Leisure Resort Technology, Inc.,
Slavik Suites, Inc., and LMW Investments, Inc., and the First Amendment to
Amended and Restated Partnership Agreement of Trading Cove Associates, dated as
of October 22, 1996, among Sun Cove Limited (now, Kerzner Investments
Connecticut, Inc.), Slavik Suites, Inc., RJH Development Corp., LMW Investments,
Inc. and Waterford Gaming, L.L.C. are filed as exhibits to the Company's
Registration Statement on Form S-4, filed with the Commission (File No.
333-17795) and declared effective on May 15, 1997, and each is incorporated
herein by reference.
4 - MANAGEMENT AGREEMENT
On August 30, 1995, TCA and the Tribe entered into the Management Agreement.
After entering into the Management Agreement, the Tribe assigned it to the
Authority.
9
Until midnight December 31, 1999, TCA was the exclusive manager of the Mohegan
Sun. Under the Management Agreement, the Tribe had granted to TCA the exclusive
right and obligation to develop, manage, operate and maintain the Mohegan Sun
and all other related facilities that are owned by the Tribe or any of its
instrumentalities, including the Authority, and to train members of the Tribe
and others in the management of the Mohegan Sun.
Until January 1, 2000 TCA's primary source of revenue was management fees under
the Management Agreement (the "MANAGEMENT Fees"). The Management Fees were paid
monthly and were calculated in three tiers based upon Net Revenues, as defined
in the Management Agreement, of the Mohegan Sun set forth below (in thousands):
I II III
------------------------- ------------------ ---------------------
Revenues in Tier I Revenues in Tiers I &
plus 35% of Net II plus 30% of Net
40% of Net Revenues up to Revenues between Revenues above
------------------------- ------------------ ---------------------
Year 1 $ 50,546 $50,547-$63,183 $ 63,183
Year 2 $ 73,115 $73,116-$91,394 $ 91,394
Year 3 $ 91,798 $91,799-$114,747 $ 114,747
Year 4 $ 95,693 $95,694-$119,616 $ 119,616
In addition, TCA was required to fund $1.2 million per year ($100,000 per month)
from its Management Fees into a capital replacement reserve. The capital
replacement reserve is the property of the Authority.
The Management Agreement is filed as an exhibit to the Company's Registration
Statement on Form S-4, filed with the Commission (File No. 333-17795) and
declared effective on May 15, 1997, and is incorporated herein by reference.
5 - AMENDED AND RESTATED OMNIBUS TERMINATION AGREEMENT
Effective March 18, 1999, the Amended and Restated Omnibus Termination Agreement
(the "AMENDED AND RESTATED OMNIBUS TERMINATION AGREEMENT") was entered into by
TCA, Kerzner International, the Company, KIML, LMW, Kerzner Investments, Slavik
and Construction. The Amended and Restated Omnibus Termination Agreement (i)
terminated the Memorandum of Understanding, dated February 7, 1998; and (ii)
effective January 1, 2000 terminated a) the Amended and Restated Omnibus
Financing Agreement, b) Completion Guarantee and Investment Banking and
Financing Arrangement Fee Agreement (the "FINANCING ARRANGEMENT AGREEMENT"); c)
the Management Services Agreement; d) the Organizational and Administrative
Services Agreement; e) the Marketing Services Agreement; and f) a Letter
Agreement relating to expenses, dated October 19, 1996.
In consideration for the termination of such agreements, TCA agreed to use its
cash to pay the following obligations in the priority set forth below:
(a) First, to pay all unpaid amounts which may be due under the terminated
letter agreement and to pay certain affiliates of the Company and to Kerzner
Investments a percentage of an annual fee of $2.0 million less the actual
expenses incurred by TCA during such year. Such annual fee is payable in equal
quarterly installments beginning March 31, 2000 and ending December 31, 2014.
For the years ended December 31, 2003 and 2002, $1,840,346 ($920,173 to each of
Kerzner Investments and affiliates of the Company)and $0, respectively, had been
incurred by TCA in terms of the first priority.
(b) Second, to return all capital contributions made by the partners of TCA
after September 29, 1995. The Company does not anticipate TCA making further
capital calls to fund expenses related to the development of the Project
Sunburst expansion. From January 1, 2000 to December 31, 2003, these capital
contributions aggregated $8,000,000. From January 1, 2000 to December 31, 2003,
$8,000,000 has been repaid to the partners of TCA, 50 percent to the Company and
50 percent to Kerzner Investments.
As of December 31, 2003, $0 in capital contributions remained outstanding.
(c) Third, to pay any accrued amounts for obligations performed prior to January
1, 2000 under the Financing Arrangement Agreement. All such required payments
were made during 2000.
(d) Fourth, to make the payments set forth in the agreements relating to the
Development Services Agreement Phase II and the Local Construction Services
Agreement. No such payments are required or due at December 31, 2003. The
accrued liability to Kerzner Investments with respect to such fee at December
31, 2003 was approximately $507,000.
(e) Fifth, to pay Kerzner Investments an annual fee (in the form of a priority
distribution) of $5.0 million payable in equal quarterly installments of $1.25
million beginning March 31, 2000 and ending December 31, 2006. On January 27,
2004 and on January 28, 2003, $1,250,000 was distributed in terms of the fifth
priority.
10
(f) Sixth, to pay any accrued amounts for obligations performed with respect to
periods prior to January 1, 2000 under the Management Services Agreement, the
Organizational and Administrative Services Agreement and the Marketing Services
Agreement. The final required payments under this sixth priority were made
during 2001.
(g) Seventh, for the period beginning March 31, 2000 and ending December 31,
2014, to pay each of Kerzner Investments and the Company twenty-five percent
(25%) of the relinquishment payments as distributions. On January 27, 2004 and
January 28, 2003, $12,669,636 ($6,334,818 to each of Kerzner Investments and the
Company) and $22,043,000 ($11,025,500 to each of Kerzner Investments and the
Company), respectively, was distributed by TCA in terms of the seventh priority.
(h) Eighth, to distribute all excess cash. On January 27, 2004, $10,926,597
($5,463,298 to Kerzner Investments and $5,463,299 to the Company) was
distributed as excess cash.
In addition, TCA will not make any distributions pursuant to the Amended and
Restated Omnibus Termination Agreement until it has annually distributed to its
partners pro rata, the amounts related to its partners tax obligations as
described in Section 3.03a(1) of the TCA Partnership Agreement less twice the
amount of all other funds paid or distributed to the Company during such year
pursuant to the Amended and Restated Omnibus Termination Agreement.
To the extent TCA does not have adequate cash to make the payments pursuant to
the Amended and Restated Omnibus Termination Agreement, such amount due shall be
deferred without the accrual of interest until TCA has sufficient cash to pay
them.
The Amended and Restated Omnibus Termination Agreement is filed as an exhibit to
the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2001
(Commission File No. 333-17795) as accepted by the Commission on May 14, 2001,
and is incorporated herein by reference.
6 - AMENDED AND RESTATED OMNIBUS FINANCING AGREEMENT
Until January 1, 2000 TCA's primary source of revenue was Management Fees. Those
fees were utilized by TCA pursuant to the Amended and Restated Omnibus Financing
Agreement which was terminated effective January 1, 2000.
The Amended and Restated Omnibus Financing Agreement is filed as an exhibit to
the Company's Quarterly Report on Form 10-Q for the period ended September 30,
1997 (Commission File No. 333-17795), as accepted by the Commission on November
14, 1997, and is incorporated herein by reference.
E. THE MOHEGAN TRIBAL GAMING AUTHORITY
The Tribe is a federally recognized Indian tribe with an approximately 405-acre
reservation located in southeastern Connecticut. The Tribe established the
Authority on July 15, 1995 with the exclusive power to conduct and regulate
gaming activities for the Tribe. Under the Indian Gaming Regulatory Act of 1988,
as amended ("IGRA"), federally recognized Indian tribes are permitted to conduct
full-scale casino gaming operations on tribal-land, subject to, among other
things, the negotiation of a tribal state compact with the affected state. The
Tribe and the State of Connecticut have entered into such a compact (the
"MOHEGAN COMPACT") that has been approved by the U.S. Secretary of the Interior.
The Authority is governed by a management board (the "MANAGEMENT BOARD"), which
consists of the nine members of the Tribal Council (the governing body of the
Tribe).
Under the terms of the Relinquishment Agreement, at midnight December 31, 1999,
the Management Agreement terminated, and on January 1, 2000 the Tribe assumed
day-to-day management of the Mohegan Sun.
The Tribe and the Authority have entered into a land lease ("LEASE") pursuant to
which the Tribe is leasing to the Authority the land on which the Mohegan Sun is
located (the "SITE"). The Site is part of the Tribe's approximately 405-acre
reservation which was acquired and is held in trust for the Tribe by the United
States of America with the Tribe retaining perpetual rights to the use of the
Site.
F. THE MOHEGAN SUN
The Authority owns and operates the Mohegan Sun, an approximately 3.0 million
square foot full-service gaming and entertainment complex on a 240-acre site
overlooking the Thames River on the Tribe's reservation in southeastern
Connecticut. The Mohegan Sun is located approximately one mile from the
interchange of Interstate 395 and Route 2A in Uncasville, Connecticut. The
Authority constructed a four-lane access road and entrance/exit ramps off of
Route 2A, providing guests direct access to Interstate 395 and Interstate 95,
the main highways connecting Boston, Providence and New York City. The Mohegan
Sun opened in October 1996. The Mohegan Sun is one of two legally authorized
gaming operations in New England offering both traditional slot machines and
table games.
11
The full-service gaming and entertainment complex includes the following:
CASINO OF THE EARTH. The Casino of the Earth, the original casino at the Mohegan
Sun, has approximately 176,500 square feet of gaming space and offers
approximately 3,640 slot machines and 160 table games (including, but not
limited to, blackjack, roulette, craps and baccarat). Food and beverage
amenities, include three full-service themed fine dining restaurants with a
fourth area featuring cuisine from all three themes, a 610-seat buffet, a New
York style delicatessen, a coffee shop, a ten-station food court featuring
international and domestic cuisine and multiple service bars for a total of
approximately 1,800 restaurant seats. An approximately 10,000 square foot,
410-seat lounge features live entertainment seven days a week. There is an
approximately 9,000 square foot simulcasting race book facility, and four retail
shops providing shopping opportunities ranging from Mohegan Sun logo souvenirs
to cigars.
CASINO OF THE SKY. The Casino of the Sky has approximately 119,000 square feet
of gaming space and offers approximately 2,400 slot machines and 110 table games
(including, but not limited to, blackjack, roulette, craps and baccarat). Food
and beverage amenities, include two full-service restaurants, two quick-service
restaurants, a 24-hour coffee shop, a 320-seat buffet, a six station food court
featuring international and domestic cuisine and five lounges and bars operated
by the Mohegan Sun, as well as four full-service and three quick-service
restaurants operated by third-parties, for a total of approximately 2,200
restaurant seats, Mohegan After Dark, consisting of a nightclub, a lounge and a
pub, which are all operated by a third party, the Mohegan Sun Arena with seating
for up to 10,000, a 300-seat cabaret, a child care facility and an arcade-style
recreation area operated by a third party, The Shops at Mohegan Sun containing
approximately 29 different retail shops, four of which are owned by the
Authority, an approximately 1,200-room luxury hotel with room service, a 20,000
square foot spa operated by a third party and approximately 100,000 square feet
of convention space.
As of September 30, 2003, Mohegan Sun had parking spaces for approximately
13,000 guests and 3,100 employees. In addition, the Authority operates an
approximately 4,000 square foot, 20-pump gasoline station and convenience center
located adjacent to the Mohegan Sun.
The Authority formed the Mohegan Basketball Club, ("MBC") , for the purpose of
holding a membership in the Women's National Basketball Association ("WNBA") and
owning and operating a professional basketball team in the WNBA. In January
2003, MBC entered into a membership agreement with the WNBA permitting it to
operate the Connecticut Sun basketball team. The team plays its home games in
the Mohegan Sun Arena.
The information concerning Kerzner International, the Tribe and the Authority
has been derived from publicly filed information.
G. CONTACT INFORMATION; INTERNET ADDRESS
The principal executive offices of the Company is located at 914 Hartford
Turnpike, Waterford, Connecticut 06385 and its telephone number is (860)
442-4559. The Company's internet address is http://www.waterfordgroup.net. In
light of the limited trading market for the Company's securities, the Company
does not currently make its periodic and current reports available, free of
charge, on its website. The Company's periodic and current reports are
available, however, free of charge, on the Commission's website, at www.sec.gov.
The Company will provide electronic or paper copies of its filings free of
charge upon request.
Item 2. PROPERTIES
The Company does not own or lease any real property.
Item 3. LEGAL PROCEEDINGS
On January 6, 1998, Leisure Resort Technology, Inc. and defendants Waterford
Gaming, L.L.C., Trading Cove Associates, LMW Investments, Inc., and Slavik
Suites, Inc. settled a prior lawsuit brought by Leisure. In connection with this
settlement, Leisure, TCA, the Company, LMW Investments, Inc., and Slavik Suites,
Inc. entered into a settlement and release agreement. Pursuant to this
settlement and release agreement, the Company bought Leisure's beneficial
interest in TCA.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a
four count complaint naming as defendants Waterford Gaming, L.L.C., Trading Cove
Associates, LMW Investments, Inc., Slavik Suites, Inc., Waterford Group, L.L.C.,
Len Wolman and Mark Wolman (collectively, the "Defendants"). The matter has been
transferred to the complex litigation docket and is pending in State Court in
Waterbury, Connecticut. The complaint alleged breach of fiduciary duties,
fraudulent non-disclosure, violation of Connecticut Statutes Section 42-110a, et
seq. and unjust enrichment in connection with the negotiation by certain of the
Defendants of the settlement and release agreement. The complaint also brought a
claim for an accounting. The complaint seeks unspecified legal and equitable
damages.
12
On February 29, 2000, Defendants filed a Motion to Strike and a Motion for
Summary Judgment, each with respect to all claims. The Court granted Defendants'
Motion to Strike in part and denied Defendants' Motion for Summary Judgment, on
October 13, 2000. The Court's order dismissed the claim for an accounting and
the claim under Connecticut Statutes Section 42-110a, et seq. The Court also
struck the alter ego allegations in the complaint against LMW Investments, Inc.,
Slavik Suites, Inc., Len Wolman and Mark Wolman. In a decision dated August 6,
2001, the Court dismissed all claims against LMW Investments, Inc., Slavik
Suites, Inc., Len Wolman and Mark Wolman.
On November 15, 2000, the Company and its co-defendants answered the complaint.
In addition, the Company and Trading Cove Associates asserted counterclaims for
breach of the settlement and release agreement and breach of the implied
covenant of good faith against Leisure and its president, Lee Tyrol. In a
decision dated June 6, 2001, the Court dismissed the counterclaims against Lee
Tyrol. Leisure moved for summary judgment seeking dismissal of the counter
claims in full, which motion was denied on April 14, 2003.
Discovery has commenced and is ongoing. Jury selection is scheduled to commence
on October 19, 2004, with presentation of evidence to begin on October 26, 2004.
The Company believes that it has meritorious defenses and intends vigorously to
contest the claims in this action and to assert all available defenses. At the
present time, the Company is unable to express an opinion on the likelihood of
an unfavorable outcome or to give an estimate of the amount or range of possible
loss to the Company as a result of this litigation due to the disputed issues of
law and/or facts on which the outcome of this litigation depends.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders for a vote for the
fiscal year ended December 31, 2003.
13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Not applicable. The Company did not sell any of its equity securities during the
period covered by this report.
Item 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
(UNAUDITED)
------------- ------------- ------------- ------------- -------------
Revenue
Organizational and
administrative
fee income-
Trading Cove
Associates $ -- $ -- $ -- $ -- $ 15,431,038
25% of
relinquishment
payments-
Trading Cove
Associates -- -- -- -- --
Interest and
dividend income -- -- -- -- --
Subordinated notes
fee income-
Trading Cove
Associates -- -- -- -- 4,424,588
Management
services income-
Trading Cove
Associates -- -- -- -- 1,664,699
Completion
guarantee notes
fee income-
Trading Cove
Associates -- -- -- -- 1,119,063
------------- ------------- ------------- ------------- -------------
Total revenue -- -- -- -- 22,639,388
Total expenses (24,751,861) (13,102,082) (13,579,600) (13,490,367) (24,789,253)
Interest and
dividend income 123,634 534,012 1,330,711 1,894,738 6,144,502
Equity in income
(loss) of Trading
Cove Associates 28,519,860 24,601,380 18,823,461 14,068,067 (1,552,494)
------------- ------------- ------------- ------------- -------------
Net income $ 3,891,633 $ 12,033,310 $ 6,574,572 $ 2,472,438 $ 2,442,143
============= ============= ============= ============= =============
OTHER DATA
Interest expense $ 19,481,783 $ 11,080,139 $ 11,560,994 $ 11,641,049 $ 19,045,076
Net increase
(decrease) in cash and cash
equivalents $ 233,470 $ 1,087,653 $ (453,072) $ (56,313,596) $ 57,554,273
14
FOR THE YEAR ENDED
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
(UNAUDITED)
------------- ------------- ------------- ------------- -------------
YEAR-END STATUS
Total current assets $ 11,523,049 $ 15,010,697 $ 29,769,455 $ 46,519,473 $ 97,093,319
Trading Cove
Associates-equity
investment 16,965,487 11,972,338 10,639,562 (7,362,921) (20,907,876)
Beneficial
Interest-Leisure
Resort
Technology, Inc. 4,162,049 4,540,039 4,918,029 5,296,019 5,674,009
Deferred financing
costs net of
accumulated
amortization 3,568,059 2,643,338 3,010,202 3,377,066 3,781,051
Fixed assets, net
of accumulated
depreciation 916 11,696 22,476 33,256 44,036
------------- ------------- ------------- ------------- -------------
Total assets $ 36,219,560 $ 34,178,108 $ 48,359,724 $ 47,862,893 $ 85,684,539
============= ============= ============= ============= =============
Total current
liabilities $ 4,038,332 $ 3,133,192 $ 3,400,556 $ 3,481,637 3,576,539
9.50% senior
notes payable -- 108,007,000 115,434,000 119,691,000 122,159,000
8.625% senior
notes payable 153,088,000 -- -- -- --
------------- ------------- ------------- ------------- -------------
Total liabilities $ 157,126,332 $ 111,140,192 $ 118,834,556 $ 123,172,637 $ 125,735,539
------------- ------------- ------------- ------------- -------------
Member's
deficiency $(120,906,772) $ (76,962,084) $ (70,474,832) $ (75,309,744) $ (40,051,000)
============= ============= ============= ============= =============
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in
its entirety by, the Company's financial statements and the notes thereto
included elsewhere herein.
A - DEVELOPMENT AND OPERATIONAL ACTIVITIES
The Company was formed solely for the purpose of holding its partnership
interest in Trading Cove. Trading Cove is the former manager and original
developer of the Mohegan Sun. The Company's interest in Trading Cove is its
principal asset and source of income and cash flow.
B - CERTAIN RISK FACTORS
1 - LACK OF OPERATIONS; DEPENDENCE ON THE MOHEGAN SUN - The Company is entirely
dependent upon the performance of the Mohegan Sun to meet its debt service
obligations.
The Company does not conduct any business operations other than in connection
with its role as a general partner of Trading Cove, activities incidental to the
issuance of the 8.625% Senior Notes and the making of restricted and temporary
investments. The Company is prohibited by the terms of the 8.625% Senior Notes
Indenture from engaging in any other business activities. The Company intends to
fund its operating debt service and capital needs from cash flows from Trading
Cove and from cash flows (dividend and interest) from temporary investments.
Trading Cove's only material source of revenue and cash flows is the
Relinquishment Fees it receives from the Authority. There can be no assurance
that the Mohegan Sun will continue to generate sufficient revenues for the
Authority to be profitable or to service its debt obligations, or to pay
Relinquishment Fees. The Company's ability to meet its obligations under the
8.625% Senior Notes is entirely dependent upon the performance of the Mohegan
Sun, which is subject to matters over which Trading Cove and the Company have no
control, including, without limitation, general economic conditions, effects of
competition, political, regulatory and other factors, the actual number of
gaming customers and the amount wagered.
The Company cannot assure you that its future operating cash flow will be
sufficient to cover its expenses, including interest on the 8.625% Senior Notes.
2 - LEVERAGE - The Company's and the Authority's substantial indebtedness could
adversely affect the Company's ability to fulfill its obligations under the
8.625% Senior Notes.
As of December 31, 2003, the Company has an aggregate long-term senior
indebtedness of $153,088,000, consisting of the 8.625% Senior Notes. On March
15, 2004, $7,302,00 of principal amount of 8.625% Senior Notes was redeemed at
the redemption price of 108.625%. The Authority is also highly leveraged. As of
December 31, 2003, the Authority had a total of approximately $1.087 billion of
indebtedness outstanding.
The degree to which the Authority is leveraged could have significant
consequences for the holders of the 8.625% Senior Notes, including, without
limitation, the following:
a) making it more difficult for the Authority to pay the fees owed to Trading
Cove under the Relinquishment Agreement; and
b) the Authority's high degree of leverage may make it vulnerable to an economic
downturn, which may hamper the Mohegan Sun's ability to meet expected operating
results.
3 - SUBORDINATION - Trading Cove's right to receive the relinquishment payments
from the Authority is junior to certain payments by the Authority to the Mohegan
Tribe and holders of its indebtedness.
The senior and junior relinquishment payments from the Authority to Trading Cove
rank behind all of the Authority's obligations to pay the minimum priority
distributions to the Mohegan Tribe and all of the Authority's existing and
future senior secured indebtedness.
As a result, upon any distribution by the Authority to its creditors in a
bankruptcy, liquidation, reorganization or similar proceeding relating to the
Authority or its property, the priority distributions owed to the Mohegan Tribe
and the holders of the Authority's senior secured indebtedness will be entitled
to be paid in full and in cash before any senior or junior relinquishment
payments may be made to Trading Cove. In addition, the junior relinquishment
payments rank behind all of the Authority's existing and future senior
indebtedness. As a result, in any such proceedings, the holders of the
Authority's senior indebtedness will be entitled to be paid in full and in cash
before any junior relinquishment payments may be made to Trading Cove.
16
In addition, all relinquishment payments will be blocked in the event of a
payment default on senior secured indebtedness of the Authority, and all junior
relinquishment payments will be blocked in the event of a payment default on
senior indebtedness of the Authority and, in each case, may be blocked for up to
179 of 360 consecutive days in the event of certain non-payment defaults on
senior secured indebtedness or senior indebtedness of the Authority, as
applicable.
In the event of a bankruptcy, liquidation, reorganization or similar proceeding
relating to the Authority, Trading Cove will receive distributions (if at all)
on a pari passu basis with all other holders of the Authority's senior unsecured
indebtedness with respect to the senior relinquishment payments from the assets
remaining after the Authority has paid all of its senior secured indebtedness
and with all other holders of subordinated indebtedness with respect to the
junior relinquishment payments from the assets remaining after the Authority has
paid all of its senior indebtedness. However, the Relinquishment Agreement
requires that amounts otherwise payable to Trading Cove in a bankruptcy or
similar proceeding of the Authority be paid to holders of senior secured
indebtedness, with respect to the senior and junior relinquishment payments, and
to holders of senior indebtedness, with respect to junior relinquishment
payments, until they are paid in full, instead of to Trading Cove. For that
reason, Trading Cove may receive less, ratably, than holders of senior unsecured
indebtedness and junior indebtedness of the Authority in any such proceeding. In
any of these cases, the Authority may not have sufficient funds to pay all of
its creditors and Trading Cove may receive less, ratably, than the holders of
the Authority's senior indebtedness.
For the year ending September 30, 2003, the annual minimum priority distribution
to the Mohegan Tribe was $15.1 million. The minimum priority distribution is
adjusted annually to reflect the cumulative increase in the consumer price
index. The Authority will be permitted to borrow substantial additional
indebtedness, including senior secured indebtedness, in the future.
4 - RISKS ASSOCIATED WITH TRADING COVE AND THE TRADING COVE PARTNERSHIP
AGREEMENT - The Company would not be a creditor of Trading Cove and it has no
rights to the assets of the Authority in the event of a bankruptcy or similar
proceeding against either. The Company does not have the power under the TCA
Partnership Agreement to cause Trading Cove to make any distributions to the
Company.
If Trading Cove becomes the debtor in a bankruptcy or similar proceeding, the
Company would have the status of an equity holder, not a creditor, and would not
be entitled to receive any distributions until all of Trading Cove's creditors
were paid in full.
If the Authority became the debtor in a bankruptcy or similar proceeding,
Trading Cove's rights and recovery would depend on numerous factors, including
the type and outcome of the proceeding. If the Authority ceased operations and
liquidated, under chapter 7 of the Bankruptcy Code or otherwise, Trading Cove's
claim would likely be limited to the amount of unpaid Relinquishment Fees as of
the time of liquidation. If the Authority reorganized under chapter 11 of the
Bankruptcy Code, Trading Cove's claim would likely be based on an estimate of
the Mohegan Sun's future revenues for the term of the Relinquishment Agreement.
In any event, any recovery by Trading Cove on its claims for senior or junior
relinquishment fees would be subject to the prior payment in full of all
indebtedness senior thereto.
As a result, the Company cannot give any assurance that, in the event of
bankruptcy or financial difficulty of either Trading Cove or the Authority, it
would ultimately recover sufficient (or any) funds to pay amounts outstanding
under the 8.625% Senior Notes.
The 8.625% Senior Notes are not collateralized by a pledge of the Company's
partnership interest in Trading Cove. Accordingly, in the event of an
acceleration under the 8.625% Senior Notes Indenture, the trustee under the
8.625% Senior Notes Indenture will not be able to foreclose upon the equity in
Trading Cove.
The TCA Partnership Agreement requires consent by both partners in order to take
any action. Accordingly, neither the Company nor Kerzner Investments has the
authority to cause Trading Cove to make any distributions, and Kerzner
Investments has the ability to block any action taken by Trading Cove. Although
the TCA Partnership Agreement requires Trading Cove to make distributions of
excess cash, the distributions are reduced by certain undefined, discretionary
amounts, including foreseeable needs of cash, obligations to third parties,
adequate working capital and reserves and the amount needed by the partnership
to conduct its business and carry out its purposes. A dispute between the
partners as to the appropriate amount of such reductions could result in no or
limited distributions by Trading Cove, which could have a material adverse
effect on the Company's ability to make required payments of interest, principal
and premium on the 8.625% Senior Notes.
Under the TCA Partnership Agreement and certain other existing agreements,
Trading Cove must pay expenses and make certain payments and priority
distributions prior to making distributions to the Company. Such expenses,
payments and priority distributions include,
(1) operating expenses and to the extent operating expenses are less than $2.0
million annually, payment of the difference to each of Kerzner Investments and
the principals of the Company;
17
(2) the development fee to be paid to Kerzner Investments, Construction, and The
Slavik Company and related development expenses equal to 3 percent of the total
cost of the Project Sunburst expansion, excluding capitalized interest, less
Trading Cove's actual costs relating to the Project Sunburst expansion (Trading
Cove's accrued liability to Kerzner Investments with respect to such fee at
December 31, 2003 was approximately $507,00), and
(3) a $5.0 million annual payment to Kerzner Investments, payable quarterly
until December 31, 2006.
All of these amounts reduce the amounts distributable to the Company. Finally,
the Company and Trading Cove are party to litigation with a former partner of
Trading Cove, which, if adversely determined, could materially and adversely
affect its future distributions from Trading Cove.
5 - RISKS ASSOCIATED WITH THE BUY/SELL OPTION UNDER TRADING COVE PARTNERSHIP
AGREEMENT - If a dispute occurs between the Company and Kerzner Investments, the
buy/sell provision of the TCA Partnership Agreement could be invoked. If the
buy/sell provision is invoked, the Company cannot assure you that it would have
sufficient funds to buy out Kerzner Investments or, if the Company agreed to
sell to Kerzner Investments, that the selling price would be sufficient to pay
all amounts due on the 8.625% Senior Notes.
In the event of any dispute between the partners in Trading Cove, either partner
could invoke the buy/sell provision contained in the TCA Partnership Agreement.
Pursuant to the buy/sell provision, the party invoking the buy/sell provision
would deliver a notice to the other party requiring it to sell its interest or
buy the invoking party's interest, in each case at the price set forth in such
notice. The party receiving the notice must make the election within 45 days of
receipt of the notice or be deemed to have accepted the offer to sell. If the
offer to buy is elected, the party must close the purchase within 75 days of the
end of the 45-day period. Any party may terminate the option at any time prior
to closing by accepting the position of the other party. In the event Kerzner
Investments were to invoke the buy/sell provision, the Company could:
a) buy Kerzner Investments' interest;
b) sell its interest; or
c) agree with Kerzner Investments on the point of dispute.
The Company may transfer it right to buy under the buy/sell provision of the TCA
Partnership Agreement to the Waterford Group or the Waterford Group may fund the
purchase of Kerzner Investments partnership interest. If the Company were to
elect to buy Kerzner Investments partnership interest other than with funds
provided by the Waterford Group, the 8.625% Senior Notes Indenture requires the
Company to redeem the 8.625% Senior Notes; however the Company cannot assure you
that it would be able to raise funds sufficient for the Company to redeem the
8.625% Senior Notes on satisfactory terms, or at all.
If the Company were to sell its partnership interest in Trading Cove, it is
possible that the amount the Company receive's would be insufficient to pay all
amounts due on the 8.625% Senior Notes. If the Company were to concur with
Kerzner Investments with respect to the point of dispute, it cannot assure you
that Kerzner Investments' position would not have a material adverse effect on
the Company's ability to pay principal, interest and premium on the 8.625%
Senior Notes.
6 - DIFFICULTIES IN ENFORCING OBLIGATIONS AGAINST THE AUTHORITY - The ability to
enforce obligations against the Authority and the Mohegan Tribe is limited by
the Mohegan Tribe's sovereign immunity.
Although the Mohegan Tribe and the Authority have sovereign immunity and may not
be sued without their consent, both the Mohegan Tribe and the Authority have
granted a limited waiver of sovereign immunity and consent to suit in connection
with the Relinquishment Agreement, including suits against the Authority to
enforce the obligation to pay fees due under the Relinquishment Agreement. In
the event that such waiver of sovereign immunity is held to be ineffective,
Trading Cove could be precluded from judicially enforcing its rights and
remedies. Generally, waivers of sovereign immunity have been held to be
enforceable against Indian tribes such as the Mohegan Tribe. In addition, the
Company has no standing to enforce the Relinquishment Agreement and therefore
would have to rely on Trading Cove to enforce such agreements.
18
The Relinquishment Agreement provides that disputes shall be resolved in any
court of competent jurisdiction including the Gaming Disputes Court of the
Mohegan Tribe, which was established under the Mohegan Tribe's constitution to
rule on disputes with respect to the Mohegan Sun. Appeals of the decisions of
the Trial Division are heard by the Appellate Branch of the Gaming Disputes
Court. Matters as to which applicable federal or state courts have jurisdiction
may be brought in such courts. However, the federal courts may not have
jurisdiction over disputes not arising under federal law, and the state courts
may not have jurisdiction over any disputes arising on the Mohegan reservation.
Moreover, the federal and state courts, under the doctrines of comity and
exhaustion of tribal remedies, may be required to (1) defer to the jurisdiction
of the Gaming Disputes Court or (2) require that any plaintiff exhaust its
remedies in the Gaming Disputes Court before bringing any action in the federal
or state court. Thus, there may be no federal or state court forum with respect
to a dispute with the Authority or the Mohegan Tribe relating to the
Relinquishment Agreement. In addition, the Authority may not be subject to the
federal bankruptcy laws. Thus, no assurance can be given that, if an event of
default occurs, any forum will be available other than an arbitration panel of
the Gaming Disputes Court. In the Gaming Disputes Court, there are few guiding
precedents for the interpretation of Mohegan Tribal law. Any execution of a
judgment of the Gaming Disputes Court will require the cooperation of the
Mohegan Tribe's officials in the exercise of their police powers. Thus, to the
extent that a judgment of the Gaming Disputes Court must be executed on Mohegan
Tribal lands, the practical realization of any benefit of such a judgment will
be dependent upon the willingness and ability of the Mohegan Tribal officials to
carry out such judgment. In addition, the land under the Mohegan Sun is owned by
the United States in trust for the Mohegan Tribe, and creditors of the Authority
or the Mohegan Tribe may not force or obtain title to the land.
The Mohegan Tribe is permitted to amend the provisions of its constitution that
establish the Authority and the Gaming Disputes Court with the approval of
two-thirds of the members of the Tribal Council and a ratifying vote of a
two-thirds majority of all of the members of the Mohegan Tribe, with at least 40
percent of the registered voters of the Mohegan Tribe voting. However, prior to
the enactment of any such amendment by the Tribal Council, any non-tribal party
will have the opportunity to seek a ruling from the Appellate Branch of the
Gaming Disputes Court that the proposed amendment would constitute an
impermissible impairment of contract. Further, the Mohegan Tribe's constitution
prohibits the Mohegan Tribe from enacting any law that would impair the
obligations of contracts entered into in furtherance of the development,
construction, operation and promotion of gaming on Mohegan Tribal lands.
Amendments to this provision of the Mohegan Tribe's constitution require the
affirmative vote of 75 percent of all registered voters of the Mohegan Tribe. As
of September 30, 2003, the Mohegan Tribe had approximately 960 voting members.
Amendment to any of such provisions of the Mohegan Tribe's constitution could
adversely affect the ability of Trading Cove to enforce the obligations of the
Authority, which, in turn would adversely affect the Company's ability to pay
principal, interest and premium on the 8.625% Senior Notes.
7 - FUTURE EXPANSION OF THE MOHEGAN SUN - In the event that the Mohegan Tribe
decides to expand the Mohegan Sun, Trading Cove has no rights associated with
such expansion.
The Mohegan Tribe may in the future decide to expand the Mohegan Sun. Under the
terms of the Relinquishment Agreement, Trading Cove is entitled to 5 percent of
all revenues derived directly or indirectly from the Mohegan Sun, including the
Project Sunburst expansion but excluding revenues derived from any future
expansions and from Class II gaming activities (including bingo). If the Mohegan
Sun is further expanded, Trading Cove, under the terms of the Relinquishment
Agreement will not be entitled to any of the revenues generated by the
incremental expansion. The Relinquishment Agreement does not describe how the
Authority would allocate which revenues were covered by the Relinquishment
Agreement and which revenues were not. In addition, Trading Cove has no rights
to act as developer of any such expansion. The Company cannot assure you that
any future expansion of the Mohegan Sun will not have a material adverse affect
on the Authority, including by disrupting the current operations of the Mohegan
Sun thereby affecting revenues and the Authority's ability to pay Relinquishment
Fees to Trading Cove. In addition, the Company cannot assure you that any future
expansion will not draw guests to those portions of the Mohegan Sun from which
Trading Cove is not entitled to a percentage of revenues, thereby impacting the
Relinquishment Fees. If the Mohegan Tribe were to take any action that would
prejudice or have a material adverse effect on the rights of Trading Cove under
the Relinquishment Agreement, Trading Cove could sue the Mohegan Tribe for
breach of contract. The Company cannot assure you that any such lawsuit would be
successful. See "Difficulties in Enforcing Obligations Against the Authority."
8 - COMPETITION FROM OTHER GAMING OPERATIONS -The Mohegan Sun may face
significant competition from other persons who may receive approval to engage in
gaming in the region.
The gaming industry is highly competitive. The Mohegan Sun currently competes
primarily with Foxwoods Resort Casino and, to a lesser extent, with casinos in
Atlantic City, New Jersey and upstate New York. Foxwoods, which is located
approximately 10 miles from the Mohegan Sun, recently announced its intention to
build a $99 million casino expansion. With the completion of the Project
Sunburst expansion of the Mohegan Sun, the two facilities are comparable in
gaming space as well as in amenities such as hotel accommodations and non-gaming
entertainment.
19
Currently, other than Atlantic City, New Jersey, casino gaming in the
Northeastern United States is conducted only by federally recognized Indian
tribes operating under federal Indian gaming law. The New York State legislature
authorized certain limited machine gaming at several racetracks in the state but
not full-scale casino gaming. To date, none of the racetracks have installed
these machines, but several of them reportedly intend to have devices in
operation by the beginning of 2004. The legislature also authorized three Indian
casinos in the Catskills region of New York (Sullivan and Ulster counties) and
three casinos to be operated by the Seneca Nation of Indians in the
Niagara/Buffalo area. The Seneca Nation opened a facility in Niagara Falls in
late December 2002. The validity of the New York State statute is currently
being litigated in state court.
The Oneida Indian Nation operates Turning Stone Casino Resort in Verona, New
York, approximately 270 miles from the Mohegan Sun. The St. Regis Mohawk Tribe
in Hogansburg, New York has entered into a gaming compact with the State of New
York to conduct gaming on its reservation near the Canadian border. Last year
the New York courts rejected the validity of the St. Regis Mohawk compact
because it had not been approved by the legislature. Bills have been introduced
this year in both the New York State Senate and Assembly to approve the compact
but neither body has yet passed a bill. There are several proposals to develop
casinos in the Catskills region of New York. To date, only three tribes, the St.
Regis Mohawk Tribe, the Cayuga Tribe and the Stockbridge-Munsee Band of Mohican
Indians (the "Stockbridge-Munsee Tribe"), have submitted Land into Trust
Applications to the United States Department of the Interior. In addition,
public reports indicate that several other tribes have expressed interest in
developing a casino in the Catskills region. The St. Regis Mohawk Tribe signed a
memorandum of understanding with the State of New York to conduct full scale
gaming in the Catskills region. The agreement has three sections, one of which
is gaming. Because of a change in tribal leadership, all three parts are now
subject to renegotiation and all final agreements will be subject to tribal
referendum. The Cayuga Nation of New York recently partnered with Empire
Resorts, Inc. to develop a gaming business in the Catskills region. Federal and
state approvals are still needed for all projects in the Catskills region.
In addition, several other federally recognized tribes in New England are
seeking to establish gaming operations, including the Historic Eastern Pequot
Tribe of Connecticut (whose status is being challenged), the Schaghticoke Tribal
Nation of Connecticut (whose status is subject to challenge), the Narragansett
Tribe of Rhode Island, the Aquinnah Wampanoag Tribe of Massachusetts and all
four of the tribes in the State of Maine: the Penobscot, Passamaquoddy, Houlton
Band and Micmac Tribes. A recent state wide referendum in Maine rejected any
off-reservation Indian casino gaming.
There are several other groups in New England seeking federal recognition as
tribes. If successful, these groups will most likely seek to establish casino
operations. In Connecticut, these include the Golden Hill Paugussett Tribe; in
Massachusetts, the groups include the Mashpee Wampanoag and the two Nipmuck
Bands that border on the State of Connecticut - the Hassanamisco Band and the
Chaubunagungamaug Band. The Golden Hill received a proposed negative
determination and is in an extended response period (i.e. beyond the initial 180
day response period) after which the Department of the Interior will issue its
final determination. The Nipmuck Bands both received proposed negative findings
and have submitted responses. They are awaiting final determinations from the
Department of the Interior expected in May 2004; the Mashpee is awaiting a
proposed finding.
A number of states in the region are projecting budget shortfalls and are
considering permitting forms of gaming to provide state revenues. In an effort
to address its state budget shortfalls, the Governor of Massachusetts and other
leaders in that state have indicated interest in both Indian gaming and
non-Indian commercial gaming.
The Mohegan Sun also competes with other forms of gaming, including on-track and
off-track wagering, state lotteries and Internet gaming, as well as with
non-gaming leisure activities.
9 - EFFECT OF GENERAL ECONOMIC CONDITIONS - The U.S. economy is experiencing a
downturn, which could have an adverse impact on the financial performance of the
Mohegan Sun.
The Mohegan Sun is affected by general economic conditions. The events of
September 11th and the war in Iraq further exacerbated difficult conditions in
the U.S. economy and the gaming industry generally. The effects of these events
have included a decline in vacation travel and tourism due to, among other
factors, fears regarding additional acts of terrorism. The magnitude and
duration of these effects or any future acts of terrorism is unknown and cannot
be predicted. Worsening economic conditions or a prolonged recession could
hamper the Mohegan Sun's ability to meet expected operating results.
10 - DEPENDENCE ON KEY PERSONNEL; SIGNIFICANT CHANGE IN TRIBAL MANAGEMENT - The
loss of any key management member or any significant change in the makeup of the
Tribal Council could have a material adverse effect on the Mohegan Sun.
The Mohegan Sun's success depends in large part on the continued service of
certain key management personnel, particularly William Velardo, the Authority's
President and Chief Executive Officer, Mitchell Etess, the Authority's Executive
Vice President of Marketing, and Jeffrey Hartmann, the Authority's Executive
Vice President, Finance and Chief Financial Officer. The loss of the services of
one or more of these individuals or other key personnel could have a material
adverse effect on the Authority's business, operating results and financial
condition which, in turn, would have a material adverse effect on the Company's
ability to meet its obligations under the 8.625% Senior Notes.
20
Additionally, Mark F. Brown serves as Chairman of the Tribal Council of the
Mohegan Tribe and Chairman of the Management Board of the Authority. The Members
of the Tribal Council, including the Chairman, are elected by the Mohegan Tribe
every five years. The next election is in October 2005. The loss of Mr. Brown's
services, as well as a significant change in the composition of the Tribal
Council, could have a material adverse effect on the Authority which, in turn,
would have a material adverse effect on the Company's ability to meet its
obligations under the 8.625% Senior Notes.
11 - HIGHLY REGULATED INDUSTRY - Changes in the law could have a material
adverse effect on the Authority's ability to conduct gaming.
Gaming on the Mohegan Tribe's reservation is extensively regulated by federal,
state and tribal regulatory bodies, including the National Indian Gaming
Commission and agencies of the State of Connecticut (for example, the Division
of Special Revenue, the State Police and the Department of Liquor Control). As
is the case with any casino, changes in applicable laws and regulations could
limit or materially affect the types of gaming that the Authority can conduct
and the revenues they realize. Congress has regulatory authority over Indian
affairs and can establish and change the terms upon which Indian tribes may
conduct gaming. Currently, the operation of all gaming on Indian lands is
subject to the Indian Gaming Regulatory Act of 1988. For the past several years,
legislation has been introduced in Congress with the intent of modifying a
variety of perceived problems with the Indian Gaming Regulatory Act. Certain
bills have also been proposed which would have the effect of repealing many of
the key provisions of the Indian Gaming Regulatory Act and prohibiting the
continued operation of certain classes of gaming on certain Indian reservations
in states where such gaming is not otherwise allowed on a commercial basis.
However, none of the substantive proposed amendments to the Indian Gaming
Regulatory Act have proceeded out of committee hearings to a vote by either the
House or the Senate.
In the event that Congress passes prohibitory legislation that does not include
any grandfathering exemption for existing tribal gaming operations, and if such
legislation is sustained in the courts against tribal challenge, the Authority's
ability to meet its obligations to creditors, such as Trading Cove under the
Relinquishment Agreement, would be doubtful. If the Authority were unable to
meet its obligations, it would have a material adverse effect on the Company's
ability to make payments of principal, interest and premiums on the 8.625%
Senior Notes.
Under federal law, gaming on Indian land is dependent on the permissibility
under state law of certain forms of gaming or similar activities. If the State
of Connecticut were to make various forms of gaming illegal or against public
policy, such action may have an adverse effect on the ability of the Authority
to conduct gaming. In fact, the State of Connecticut repealed the Las Vegas
Casino Nights statute in 2003, but the state attorney general has opined that
this will not affect the two existing Indian gaming compacts.
12 - POSSIBLE ENVIRONMENTAL LIABILITIES - Risks of material environmental
liability may exist as a result of possibly incomplete remediation of known
environmental hazards and the existence of unknown environmental hazards.
The site on which the Mohegan Sun is located was formerly occupied by United
Nuclear Corporation, a naval products manufacturer of, among other things,
nuclear reactor fuel components. Prior to the decommissioning of United Nuclear
Corporation facilities on the site, extensive remediation of contaminated soils
and additional investigations were completed. The site currently meets federal
and state remediation requirements. Notwithstanding the foregoing, the Company
cannot assure you that:
a) the various environmental reports or any other existing environmental studies
revealed all environmental liabilities;
b) any prior owners or tenants did not create any material environmental
condition not known to the Company;
c) future laws, ordinances or regulations will not impose any material
environmental liability; or
d) a material environmental condition does not otherwise exist on the site.
13 - TAXATION OF INDIAN GAMING - A change in the Authority's current tax-exempt
status could have a material adverse effect on the Authority's ability to make
capital improvements and repay its indebtedness.
Based on current interpretations of the Internal Revenue Code of 1986, as
amended (the "Code"), neither the Mohegan Tribe nor the Authority is a taxable
entity for purposes of federal income taxation. There can be no assurance that
Congress will not reverse or modify the exemption for Indian tribes from federal
income taxation.
Efforts were made in Congress in the mid-1990s to amend the Code to provide for
taxation of the net income of tribal business entities. These have included a
House bill which would have taxed gaming income earned by Indian tribes as
unrelated business income subject to corporate tax rates. Although this
legislation was not enacted, future legislation in this area could materially
and adversely affect the Authority's ability to make capital improvements and
repay its indebtedness which, in turn, would have a material adverse effect on
the Company's ability to meet its obligations under the 8.625% Senior Notes.
21
C - SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts of assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
In the opinion of management, the Company does not have any individual
accounting policy that is critical in the preparation of its financial
statements. This is due to the definitive nature of the business in which the
Company is engaged. Also, in many cases, the Company must use an accounting
policy or method because it is the only policy or method permitted under
accounting principles generally accepted in the United States of America.
The following is a review of the more significant accounting policies and
methods used by the Company:
1 - CONCENTRATION OF CREDIT RISK - The Company's interest in TCA is its
principal asset and source of income and cash flow. The Company anticipates
regular distributions from TCA based upon the operating results of the Authority
and the related Relinquishment Fees, and Development Fee, paid and to be paid by
the Authority.
2 - EQUITY INVESTMENTS - The Company's equity investment in TCA is accounted for
utilizing the equity method. Included in the investment is the purchase price
paid to a corporation for its 12.5 percent interest in TCA. This amount is
amortized over the term of the related agreement. The Company receives
distributions from TCA in accordance with an Amended and Restated Omnibus
Termination Agreement. The amount of distributions relies upon the fees earned
by TCA pursuant to the Relinquishment Agreement with the Authority.
Distributions are recorded when received.
D - TABLE OF CONTRACTUAL OBLIGATIONS
The following table provides an overview of the Company's aggregate contractual
obligations as of the latest fiscal year end balance sheet date.
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
- ----------------------- ----------------------
LESS THAN 1 MORE THAN
TOTAL YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
------- ------------- ----------- ----------- -------------
Long-Term Debt
Obligations(1)................. (1) (1) (1) (1) (1)
Capital Lease
Obligations.................... 0 0 0 0 0
Operating Lease
Obligations .................. 0 0 0 0 0
Purchase Obligations .............. 0 0 0 0 0
Other Long-Term
Liabilities on the
Registrant's Balance
Sheet under GAAP .......... 0 0 0 0 0
Total.............................. (1) (1) (1) (1) (1)
(1) As of December 31, 2003, the Company's long-term debt consists of
obligations under its 8.625% Senior Notes. $145,786,000 in aggregate principal
amount of 8.625% Senior Notes is currently outstanding. At December 31, 2003,
the Company had an aggregate long-term senior indebtedness of $153,088,000. On
March 15, 2004, $7,302,000 of principal amount of 8.625% Senior Notes was
redeemed at the redemption price of 108.625%. Interest on the outstanding
principal amount of 8.625% Senior Notes is payable by the Company semi-annually
in arrears on March 15 and September 15 at a rate of 8.625% per annum. The
outstanding principal amount of 8.625% Senior Notes is due and payable in full
on September 15, 2012. In addition to making payments of principal and interest
as described in the preceding sentences, on March 15 and September 15 of each
year, the Company and Finance must redeem their 8.625% Senior Notes with any
"Company Excess Cash" (as defined in the 8.625% Senior Notes Indenture) at a
redemption price expressed as a percentage of the principal amount of notes
being redeemed. Such redemption price declines annually from 108.625% for
redemptions made between September 15, 2003 and September 14, 2004, to 100% for
redemptions made after September 14, 2012. Any reduction in principal amount of
the 8.625% Senior Notes with Company Excess Cash will lower the interest
payments payable by the Company in subsequent periods.
The Company does not have any material off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
22
E - OVERVIEW OF CURRENT AND FUTURE CASH FLOWS
The Company expects to fund its operating, debt service and capital needs from
cash flows from the Company's distributions from TCA, and from the Company's
available cash. Based upon the Company's anticipated future operations,
management believes that available cash flow will be sufficient to meet the
Company's anticipated requirements for future operating expenses, future
scheduled payments of principal and interest on the 8.625% Million Senior Notes
and additional investments in TCA that may be required in connection with the
Project Sunburst expansion. No assurance, however, can be given that the
operating cash flow will be sufficient for that purpose.
1 - SOURCES OF INCOME AND CASH FLOWS
The Company has one primary source of income and cash flow: equity income and
distributions from TCA. The Company anticipates regular payments from TCA based
on the results of the Mohegan Sun and Relinquishment Fees payments by the
Authority to TCA.
2 - PAYMENTS OF DISTRIBUTIONS ON THE COMPANY'S PARTNERSHIP INTEREST IN TCA
On April 28, 2003, July 28, 2003, October 28, 2003 and January 27, 2004, the
Company received $2,876,707, $6,365,797, $3,512,706 and $11,798,117,
respectively, from TCA as distributions, which represents the Company's share
under the Amended and Restated Omnibus Termination Agreement of approximately
(a) $65,100,000 in Relinquishment Fees earned by TCA pursuant to the
Relinquishment Agreement for the year January 1 through December 31, 2003, and
(b) $168,000 in Development Fee earned by TCA pursuant to the Development
Agreement for the same period.
On April 26, 2002, July 26, 2002, October 28, 2002 and January 28, 2003, the
Company received $1,821,000, $9,790,000, $3,550,000 and $11,221,500,
respectively, from TCA as distributions, which represents the Company's share
under the Amended and Restated Omnibus Termination Agreement of approximately
(a) $58,509,000 in Relinquishment Fees earned by TCA pursuant to the
Relinquishment Agreement for the year January 1 through December 31, 2002, and
(b) $1,316,000 in Development Fee earned by TCA pursuant to the Development
Agreement for the same period.
F - RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002
Total expenses for the twelve months ended December 31, 2003 were $24,751,861
compared with $13,102,082 for the twelve months ended December 31, 2002. (a)
Interest expense increased by $8,401,644 due primarily to the redemption of the
9.50% Senior Notes in the principal amount of $102,349,000 at the tender premium
of approximately $7,164,000 and the issuance of the 8.625% Senior Notes in the
principal amount of $155 million, (b) salaries-related parties increased by
$65,912 due to the increase in Revenues of the Mohegan Sun, (c) general and
administrative costs increased by $121,363 (primarily attributable to (1) an
increase in legal and other expenses related to the defense of the Leisure
litigation, as described in Item 3, of approximately $106,900, (2) an increase
in insurance expense of approximately $8,800, (3) an increase in Commission
filing expense of approximately $8,900, (4) an increase in accounting fees of
approximately $15,400 and (5) by an increase in rating agency fees of
approximately $9,600 and offset by (1) a decrease in bank sweep fees of
approximately $15,900 and (2) by a decrease in other legal expenses of
approximately $11,400), (d) 9.50% Senior Notes tender expense increased by
$509,414 due to the redemption of the 9.50% Senior Notes and (e) amortization on
deferred financing costs increased by $2,551,446 due primarily to the redemption
of the 9.50% Senior Notes, the issuance of the 8.625% Senior Notes and the
additional amortization due to the mandatory redemption of the 8.625% Senior
Notes on September 15, 2003.
Equity in income of Trading Cove Associates for the year ended December 31, 2003
was $28,519,860, compared with $24,601,380 for the year ended December 31, 2002.
The Company has included amortization of purchased interests of $440,028 in each
year's equity income. The Company's share of TCA's results fluctuates based upon
revenues earned by TCA under the Relinquishment Agreement and the Development
Agreement. In addition, interest and dividend income decreased by $410,378.
As a result of the foregoing factors the Company experienced net income of
$3,891,633 for the year ended December 31, 2003, compared with net income of
$12,033,310 for the year ended December 31, 2002.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001
Total expenses for the twelve months ended December 31, 2002 was $13,102,082
compared with $13,579,600 for the twelve months ended December 31, 2001. (a)
Interest expense decreased by $480,855 due primarily to the redemption of