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.
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:
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.
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:
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.
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."
A summary of relinquishment payments received by TCA for 2003, 2002 and 2001 is as follows:
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.
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.
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.
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.
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.
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):
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.
(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.
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.
Item 2. PROPERTIES
The Company does not own or lease any real property.
Item 3.
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.
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.
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.
PART II
Item 5.
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.
Item 6. SELECTED FINANCIAL DATA
Item 7.
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.
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;
(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.
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.
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.
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.
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.
(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.
E - OVERVIEW OF CURRENT AND FUTURE CASH FLOWS
The Company expects to fund its operating, debt service and capital needs from cash flows from the Company's distributions from TCA, and from the Company's available cash. Based upon the Company's anticipated future operations, management believes that available cash flow will be sufficient to meet the Company's anticipated requirements for future operating expenses, future scheduled payments of principal and interest on the 8.625% Million Senior Notes and additional investments in TCA that may be required in connection with the Project Sunburst expansion. No assurance, however, can be given that the operating cash flow will be sufficient for that purpose.
1 - SOURCES OF INCOME AND CASH FLOWS
The Company has one primary source of income and cash flow: equity income and distributions from TCA. The Company anticipates regular payments from TCA based on the results of the Mohegan Sun and Relinquishment Fees payments by the Authority to TCA.
2 - PAYMENTS OF DISTRIBUTIONS ON THE COMPANY'S PARTNERSHIP INTEREST IN TCA
On April 28, 2003, July 28, 2003, October 28, 2003 and January 27, 2004, the Company received $2,876,707, $6,365,797, $3,512,706 and $11,798,117, respectively, from TCA as distributions, which represents the Company's share under the Amended and Restated Omnibus Termination Agreement of approximately (a) $65,100,000 in Relinquishment Fees earned by TCA pursuant to the Relinquishment Agreement for the year January 1 through December 31, 2003, and (b) $168,000 in Development Fee earned by TCA pursuant to the Development Agreement for the same period.
On April 26, 2002, July 26, 2002, October 28, 2002 and January 28, 2003, the Company received $1,821,000, $9,790,000, $3,550,000 and $11,221,500, respectively, from TCA as distributions, which represents the Company's share under the Amended and Restated Omnibus Termination Agreement of approximately (a) $58,509,000 in Relinquishment Fees earned by TCA pursuant to the Relinquishment Agreement for the year January 1 through December 31, 2002, and (b) $1,316,000 in Development Fee earned by TCA pursuant to the Development Agreement for the same period.
F - RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Total expenses for the twelve months ended December 31, 2003 were $24,751,861 compared with $13,102,082 for the twelve months ended December 31, 2002. (a) Interest expense increased by $8,401,644 due primarily to the redemption of the 9.50% Senior Notes in the principal amount of $102,349,000 at the tender premium of approximately $7,164,000 and the issuance of the 8.625% Senior Notes in the principal amount of $155 million, (b) salaries-related parties increased by $65,912 due to the increase in Revenues of the Mohegan Sun, (c) general and administrative costs increased by $121,363 (primarily attributable to (1) an increase in legal and other expenses related to the defense of the Leisure litigation, as described in Item 3, of approximately $106,900, (2) an increase in insurance expense of approximately $8,800, (3) an increase in Commission filing expense of approximately $8,900, (4) an increase in accounting fees of approximately $15,400 and (5) by an increase in rating agency fees of approximately $9,600 and offset by (1) a decrease in bank sweep fees of approximately $15,900 and (2) by a decrease in other legal expenses of approximately $11,400), (d) 9.50% Senior Notes tender expense increased by $509,414 due to the redemption of the 9.50% Senior Notes and (e) amortization on deferred financing costs increased by $2,551,446 due primarily to the redemption of the 9.50% Senior Notes, the issuance of the 8.625% Senior Notes and the additional amortization due to the mandatory redemption of the 8.625% Senior Notes on September 15, 2003.
Equity in income of Trading Cove Associates for the year ended December 31, 2003 was $28,519,860, compared with $24,601,380 for the year ended December 31, 2002. The Company has included amortization of purchased interests of $440,028 in each year's equity income. The Company's share of TCA's results fluctuates based upon revenues earned by TCA under the Relinquishment Agreement and the Development Agreement. In addition, interest and dividend income decreased by $410,378.
As a result of the foregoing factors the Company experienced net income of $3,891,633 for the year ended December 31, 2003, compared with net income of $12,033,310 for the year ended December 31, 2002.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Total expenses for the twelve months ended December 31, 2002 was $13,102,082 compared with $13,579,600 for the twelve months ended December 31, 2001. (a) Interest expense decreased by $480,855 due primarily to the redemption of the 9.50% Senior Notes in the principal amounts of $4,031,000 and $3,396,000 on March 15, 2002 and September 15, 2002, respectively, (b) salaries - related parties increased by $127,933 due to the increase in Revenues of the Mohegan Sun and (c) general and administrative costs decreased by $124,596 (primarily attributable to a decrease in legal and other expenses related to the defense of the Leisure litigation, as described in Item 3, totaling approximately $156,000, and offset by (1) an increase in insurance expense of approximately $17,600, (2) an increase in miscellaneous expense of approximately $6,400 and (3) an increase in accounting fees of approximately $8,300).
Equity in income of Trading Cove Associates for the year ended December 31, 2002 was $24,601,380 compared with $18,823,461 for the year ended December 31, 2001. The Company has included amortization of purchased interests of $440,028 in each year's annual equity income. The Company's share of TCA's results fluctuates based upon revenues earned by TCA under the Relinquishment Agreement and the Development Agreement. In addition, interest and dividend income decreased by $796,699.
As a result of the foregoing factors the Company experienced net income of $12,033,310 for the twelve months ended December 31, 2002, compared with net income of $6,574,572 for the twelve months ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The initial capital of the Company consists of the partnership interests in TCA contributed by Slavik and LMW Investments, Inc. in forming the Company. In connection with the offering of the 12.75% Senior Notes, the Company used approximately $25.1 million to purchase from Kerzner International $19.2 million in principal amount of Authority subordinated notes plus accrued and unpaid interest and subordinated notes fee amounts. In addition, TCA distributed approximately $850,000 in principal amount of Authority subordinated notes to the Company. In addition, the Company used approximately $10.6 million of the proceeds from the 12.75% Senior Notes to purchase RJH Development Corp.'s interests in TCA.
During September 1997 and on October 12, 1998 and 1999, the Company purchased from Kerzner International $2.5 million Authority subordinated notes plus accrued and unpaid interest and completion guarantee fee amounts (total cost approximately $2.8 million for each transaction).
On January 6, 1998 the Company paid $5,000,000 to Leisure whereby Leisure gave up its beneficial interest of 5 percent of the organizational and administrative fee and excess cash of TCA and any other claims it may have had against the Company, TCA and TCA's partners and former partner.
In connection with the offering of the 9.50% Senior Notes, the Company used approximately $72 million to repurchase the 12.75% Senior Notes, distributed approximately $37 million to its new parent, Waterford Group, and paid the final $2 million to Leisure.
On December 30, 1999, the Authority paid to the holders of the Authority subordinated notes, an amount to satisfy all obligations of such Authority subordinated notes. The Company received $44,403,517 from the Authority. On December 30, 1999, TCA distributed $10,536,543 to its partners. The Company received $5,268,272.
On January 4, 2000 in accordance with the terms of the 9.50% Senior Notes indenture, dated as of March 17, 1999 between the Company and Finance, as issuers, and State Street Bank and Trust Company, as trustee, and the Security and Control Agreement, dated as of March 17, 1999 between the Company and Finance and State Street Bank and Trust Company, $15,000,000 was transferred to restricted investments ("Interest Reserve Account").
On January 4, 2000 also in accordance with the terms of the 9.50% Senior Notes indenture, the Company distributed $34,671,789 to its member Waterford Group.
On November 1, 2002, the Company distributed $15,000,000 to Waterford Group, as a Permitted Dividend, in accordance with the terms of the 9.50% Senior Notes indenture.
In connection with the offering of the 8.625% Senior Notes, the Company used approximately $111.8 million to repurchase the 9.50% Senior Notes and distributed $44.5 million to Waterford Group.
During 1999, 2000, 2001, 2002, on January 13, 2003 and April 10, 2003 the Company distributed $886,285, $3,059,393, $1,739,660, $3,520,562, $1,290,900 and $1,947,341, respectively, to Waterford Group as tax distributions, in accordance with the terms of the applicable indentures.
On September 15, 2003 $98,080 was distributed to Waterford Group in accordance with the terms of the 8.625% Senior Notes Indenture.
Accordingly, after taking into consideration net income (loss) since inception the Company has a member's deficit of approximately $120,907,000 and $76,962,000 at December 31, 2003 and 2002, respectively.
For the years ended December 31, 2003 and 2002, net cash provided by operating activities (as shown in the Statements of Cash Flows) was $3,111,417 and $10,639,911, respectively.
Current assets decreased from $15,010,697 at December 31, 2002 to $11,523,049 at December 31, 2003. The decrease was primarily attributable to the scheduled semi-annual payment of interest on March 15, 2003 on the 9.50% Senior Notes in the amount of approximately $5,130,000, by the redemption on March 15, 2003 of 9.50% Senior Notes in the principal amount of $5,658,000, by the redemption on June 11, 2003 of 9.50% Senior Notes, by the redemption on September 15, 2003 of 8.625% Senior Notes in the principal amount of $1,912,000, by the distributions to Waterford Group during the period of approximately $47,836,000 and offset by approximately $3,111,400 of cash provided by operations, by distributions by TCA in terms of the Amended and Restated Omnibus Termination Agreement and by proceeds from the 8.625% Senior Notes issuance.
Current liabilities increased from $3,133,192 at December 31, 2002 to $4,038,332 at December 31, 2003. The increase was primarily attributable to an increase in accrued interest on senior notes payable of approximately $866,600 and by an increase in accrued expenses and accounts payable of approximately $38,500 (primarily attributable to an increase in amounts due for salaries-related parties of approximately $3,600, by an increase in amounts due for accounting services of approximately $14,300 and by an increase in legal and other expenses related to the defense of the Leisure litigation, as detailed under Part I: Item 3 Legal Proceedings, of approximately $29,300 and offset by a decrease in other legal fees of approximately $10,000).
For the years ended December 31, 2003 and 2002 net cash provided by investing activities (as shown in the Statement of Cash Flows) was $3,720,405 and $16,395,304, respectively. The net cash provided by investing activities in 2003 was primarily the result of maturities and (purchases) of restricted investment-net of approximately $3,720,400 and distributions from TCA of $450,000 and offset by contributions to TCA of $450,000 (to fund certain of TCA's development expenses in connection with the Project Sunburst expansion at the Mohegan Sun). The net cash provided by investing activities in 2002 was primarily the result of maturities and (purchases) of restricted investments-net of approximately $15,845,000, distributions from TCA of $1,550,000 and offset by contributions to TCA of $1,000,000 (to fund certain of TCA's development expenses in connection with the Project Sunburst expansion at the Mohegan Sun).
The Company anticipates that no additional contributions will have to be made by the Company to TCA (to fund certain of TCA's development expenses in connection with the Project Sunburst expansion at the Mohegan Sun). As of December 31, 2003 $5,000,000 had been contributed by the Company to TCA to fund certain of TCA's development expenses in connection with the Project Sunburst expansion at the Mohegan Sun.
For the twelve months ended December 31, 2003 and 2002, net cash used in financing activities (as shown in the Statements of Cash Flows) was $6,598,352 and $25,947,562, respectively. The net cash used in financing activities in 2003 was primarily the result of the redemption of the 9.50% Senior Notes in the principal amount of $5,658,000 on March 15, 2003, by the redemption of the 9.50% Senior Notes on June 11, 2003 in the principal amount of $102,349,000, by the redemption of the 8.625% Senior Notes on September 15, 2003 in the principal amount of $1,912,000, by deferred financing costs of approximately $3,843,000 and by distributions to Waterford Group of $47,836,321 and offset by the proceeds from the 8.625% Senior Notes issuance in the principal amount of $155,000,000. The net cash used in financing activities in 2002 was primarily the result of the redemption of the 9.50% Senior Notes in the principal amounts of $4,031,000 and $3,396,000 on March 15, 2002 and September 15, 2002, respectively, and by distributions to the Company's member Waterford Group of approximately $18,521,000.
Pursuant to the terms of the 8.625% Senior Notes Indenture, if the Company and Finance have any Company Excess Cash, as defined in the 8.625% Senior Notes Indenture, on February 1 or August 1 of any year, they must use such Company Excess Cash less all Required IRA True-Up Payments, as defined in the 8.625% Senior Notes Indenture, and less any amount set aside for the payment of accrued and unpaid interest on the interest payment date that corresponds to the redemption date for which the determination is being made, to redeem the 8.625% Senior Notes on the March 15 or September 15 following such dates. Any such redemption will be made at a price equal to a percentage of the principal amount being redeemed. On August 1, 2003 the Company and Finance had Company Excess Cash of $5,568,186, as defined in the 8.625% Senior Notes Indenture, and after deducting i) all required IRA True-Up Payments, as defined in the 8.625% Senior Notes Indenture, (which totaled $0) and ii) the amount set aside for the payment of accrued and unpaid interest on the interest payment date that corresponds to the redemption date for which the determination is being made which totaled $3,490,729, the amount available for a mandatory redemption of the 8.625% Senior Notes totaled $2,077,457, and accordingly on September 15, 2003 the Company and Finance made a mandatory redemption of the 8.625% Senior Notes in the principal amount of $1,912,000 at the redemption price of 108.625%. Such redemption price is expressed as a percentage of the principal amount being redeemed.
On February 1, 2004 the Company and Finance had Company Excess Cash (which totaled $14,533,996), as defined in the 8.625% Senior Notes Indenture, and after deducting (i) all Required IRA True-Up Payments, as defined in the 8.625% Senior Notes Indenture, (which totaled $0) and (ii) the amount set aside for the payment of accrued and unpaid interest on the interest payment date that corresponds to the redemption date for which the determination is being made (which totaled $6,601,920), the amount available for a mandatory redemption of the 8.625% Senior Notes totaled $7,932,076, and accordingly on March 15, 2004 the Company and Finance made a mandatory redemption of the 8.625% Senior Notes in the principal amount of $7,302,000 at the redemption price of 108.625%. Such redemption price is expressed as a percentage of the principal amount being redeemed.
On March 15, 2004 approximately $349,200 was distributed to Waterford Group in accordance with the terms of the 8.625% Senior Notes Indenture.
The Company expects to fund its operating, debt service and capital needs from cash flows from the Company's share of payments from TCA, and from the Company's available cash. Based upon the Company's anticipated future operations, management believes that available cash flow will be sufficient to meet the Company's anticipated requirements for future operating expenses, future scheduled payments of principal and interest on the 8.625% Senior Notes and additional investments in TCA that may be required in connection with the Project Sunburst expansion at the Mohegan Sun. No assurance, however, can be given that the operating cash flow will be sufficient for that purpose.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in earnings and cash flows.
For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not earnings or cash flows. Therefore, interest rate risk and changes in the fair market value of fixed rate debt should not have a significant impact on earnings or cash flows until such debt is refinanced, if necessary. For variable rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect future earnings and cash flows. The Company did not have any variable rate debt outstanding at December 31, 2003 and 2002. The fair market value of the Company's long-term debt at December 31, 2003 and 2002 is estimated to be approximately $163,804,000 and $111,787,000, respectively, based on the quoted market price for the same issue.
The Company is exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on market values of the Company's cash equivalents and restricted investments. Cash equivalents generally consist of overnight investments while the restricted investments at December 31, 2003 are principally comprised of an investment in a Federal Home Loan Bank Discount Note which was purchased at a discount of 1.01% and matured March 10, 2004 and an investment in the First American Treasury Obligations Fund. These investments are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned and cash flow from these investments.
The Company does not currently have any derivative financial instruments in place to manage interest costs, but that does not mean that the Company will not use them as a means to manage interest rate risk in the future.
The Company does not use foreign currency exchange forward contracts or commodity contracts and does not have foreign currency exposure in its operations.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and notes thereof are filed as part of this report and appear in this annual report on Form 10-K beginning on page 34.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports, is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing, and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives, and management is required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.
As required by the Commission Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in Internal Controls
There has been no change in the Company's internal controls over financial reporting during the Company's most recent quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls or financial reporting.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following tables set forth certain information with respect to persons who are members of the Board of Directors of the Company or who are Executive Officers of the Company.
NAME AGE POSITION - ---- --- -------- Len Wolman 49 Chairman of the Board and Chief Executive Officer Alan Angel 47 Chief Financial Officer Del J. Lauria 55 Director and Secretary Mark Wolman 46 Director Stephan F. Slavik 57 Director Richard Slavik 53 Vice President
LEN WOLMAN. Mr. Len Wolman has been the Chairman of the Board of Directors and the Chief Executive of the Company since its formation. Since 1986, Mr. Len Wolman has been the Chairman of the Board of Directors and the Chief Executive Officer of the Waterford Hotel Group, Inc. Mr. Len Wolman is the Company's designated representative to TCA under the TCA Partnership Agreement. Mr. Len Wolman was instrumental in the formation of the relationship between Trading Cove and the Mohegan Tribe and had been actively working with the Mohegan Tribe in connection with obtaining federal recognition, acquiring the site for the Mohegan Sun and obtaining the financing to construct the Mohegan Sun. Mr. Len Wolman was actively involved in the development, construction and operation of the Mohegan Sun. Mr. Len Wolman has served as President and Chief Executive Officer of Finance since its inception. Mr. Len Wolman is a Director and Officer of Slavik, one of the Waterford Group's members. Mr. Len Wolman is the brother of Mr. Mark Wolman. Mr. Len Wolman's wife and Mr. Angel's wife are sisters.
ALAN ANGEL. Mr. Angel became Chief Financial Officer of the Company in January 1999. Since 1997, Mr. Angel has been the Chief Financial Officer of Mystic Suites, L.L.C. Mystic Suites, L.L.C. is a commercial development firm based in Eastern Connecticut which currently holds an ownership interest in a number of hotels managed by the Waterford Hotel Group, Inc. Prior to joining Mystic Suites, L.L.C., Mr. Angel resided in South Africa and served as Chief Financial Officer of Rowan & Angel cc. Mr. Angel is a certified public accountant and a chartered accountant. Mr. Angel has over 20 years of accounting experience. Mr. Angel's wife and Mr. Len Wolman's wife are sisters.
DEL J. LAURIA. Mr. Lauria became a Director, Chief Financial Officer and Secretary of the Company upon its formation. Mr. Lauria was succeeded as Chief Financial Officer in January 1999 by Mr. Alan Angel. Mr. Lauria is also an Officer and Director of the Waterford Hotel Group, Inc. and is Executive Vice President and Director of Slavik. Mr. Lauria first joined the Slavik Organization in 1980 as the Chief Financial Officer of its real estate property management division. The Slavik Organization is an affiliated group of full service real estate companies first established in Michigan in the early 1950s. Mr. Lauria rapidly advanced at the Slavik Organization and currently holds various key managerial positions within the enterprise. Prior to joining the Slavik Organization, Mr. Lauria was associated with the accounting firm now known as Deloitte & Touche and is a certified public accountant. Mr. Lauria has served as Treasurer and Secretary of Finance since its inception.
MARK WOLMAN. Mr. Mark Wolman became a Director of the Company upon its formation. Mr. Mark Wolman is the president of Wolman Homes, Inc. Wolman Homes, Inc. is a commercial development and construction firm based in Eastern Connecticut. Mr. Mark Wolman has been working with the Mohegan Tribe since 1992 and had been instrumental in assisting the Mohegan Tribe in obtaining a number of governmental approvals in connection with the development and construction of the Mohegan Sun. Mr. Mark Wolman is a Director of Slavik. Mr. Mark Wolman is the brother of Mr. Len Wolman.
STEPHAN F. SLAVIK. Mr. Slavik was appointed a Director of the Company on April 9, 2001. Mr. Slavik is the President of Michigan based Slavik Builders. Mr. Slavik has over 30 years of experience with all phases of land planning, product design, estimating and site construction in single family, multiple and commercial design/build developments. Mr. Slavik is a Director and Vice President of Slavik. Mr. Slavik is the brother of Mr. Richard Slavik.
MR. RICHARD SLAVIK. Mr. Richard Slavik was appointed a Vice President of the Company on April 9, 2001. Mr. Richard Slavik is Chief Operating Officer of the Fourmidable Group, Inc., a Michigan based real estate management firm. Mr. Richard Slavik has over 20 years of constructing and operating commercial residential real estate experience. Mr. Richard Slavik is President of Slavik. Mr. Richard Slavik is the brother of Mr. Stephan F. Slavik.
In light of the Company's limited operations and the fact that the Company's interest in TCA is its principal asset and source of income and cash flow, the Company has not adopted a code of ethics that applies to the Company's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to the Directors and the named Executive Officers of the Company.
NAME YEAR ENDED SALARY - ---- ---------- ------ Len Wolman(1) 2003 $ 900,998 2002 $ 835,086 2001 $ 707,153
Del Lauria 2003 $ - 2002 $ - 2001 $ -
Stephan F. Slavik 2003 $ - 2002 $ - 2001 $ -
Mark Wolman 2003 $ - 2001 $ - 2001 $ -
(1) As detailed in Item 13, Mr. Len Wolman has an employment contract with the Company. For the years ended December 31, 2003, 2002, and 2001, $900,998, $835,086 and $707,153, respectively, was paid to Mr. Len Wolman pursuant to the employment contract.
From January 1, 2000, the Company's Directors have also received compensation as part of the operating expenses of TCA as detailed under point a) of the table set forth above under "Amended and Restated Omnibus Termination Agreement". The Company does not have a compensation committee, and all compensation decisions are made by the Board of Directors.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The Company's sole member is Waterford Group, L.L.C.
The following table sets forth the beneficial ownership interest in Waterford Group, L.L.C.
NAME OF % OWNERSHIP BENEFICIAL OWNER IN THE COMPANY - ---------------- -------------- LMW Investments, Inc.(1).................................. 32.2033% Slavik Suites, Inc.(2).................................... 67.7967% -------------- 100.0000% ==============
(1) LMW Investments, Inc. is owned 50% by Mr. Len Wolman and 50% by Mr. Mark Wolman. The address for LMW Investments, Inc. is 914 Hartford Turnpike, P.O. Box 715, Waterford, Connecticut 06385.
(2) Messrs. Len and Mark Wolman each own approximately 11.875% of the outstanding shares of Slavik Suites, Inc. Messrs. Stephan F. Slavik and Richard Slavik each own approximately 14.35% of the outstanding shares of Slavik
Suites, Inc. The address for Slavik Suites, Inc. is 32605 West 12 Mile Road, Suite 350, Farmington Hills, Michigan 48334.
The Company does not currently have in place any equity compensation plans.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DEVELOPMENT SERVICES AGREEMENT PHASE II AND RELATED AGREEMENTS AND PAYMENTS
As noted in the section above entitled "Business - Trading Cove Associates Material Agreements - Development Agreement and Related Agreements", on February 9, 1998, TCA and KIML, an affiliate of Kerzner Investments, the Company's partner in TCA, entered into the Development Services Agreement Phase II. Pursuant to the Development Services Agreement Phase II, TCA subcontracted with KIML, who agreed to perform those services assigned to KIML by TCA in order to facilitate TCA's fulfillment of its duties and obligations to the Authority under the Development Agreement. KIML assigned the Development Services Agreement Phase II to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner Investments the Development Services Fee Phase II, which equals 3 percent of the development costs of the Project Sunburst expansion, excluding capitalized interest, less all costs incurred by TCA in connection with the Project Sunburst expansion. The Development Services Fee Phase II is paid in three installments - on December 31, 1999, December 31, 2000 and on the Completion Date, as defined in the Development Agreement - with the final payment being made when the actual development costs of the Project Sunburst expansion are known. TCA pays the Development Services Fee Phase II from available cash flow, if any, in accordance with the Amended and Restated Omnibus Termination Agreement. The total of the Development Services Fee Phase II and TCA's costs related to the development of the Project Sunburst expansion will exceed the related revenue received by TCA under the Development Agreement by approximately $15,964,000.
Before KIML assigned the Development Services Agreement Phase II to Kerzner Investments, it entered into the Local Construction Services Agreement with Construction, an affiliate of the Company, pursuant to which Construction agreed to provide certain of those services assigned to KIML by TCA pursuant to the Development Services Agreement Phase II. KIML assigned the Local Construction Services Agreement to Kerzner Investments.
Pursuant to the Local Construction Services Agreement, Kerzner Investments agreed to pay to Construction a fee equal to 20.83 percent of the Development Services Fee Phase II as and when Kerzner Investments receives payment from TCA in accordance with the Development Services Agreement Phase II.
Pursuant to a letter agreement, Construction has subcontracted with The Slavik Company, an affiliate of the Company, to provide certain services under the Local Construction Services Agreement. In exchange for providing such services, Construction agreed that The Slavik Company would be paid a fee equal to 14.30 percent of its fee under the Local Construction Services Agreement.
On April 26, 2000, July 26, 2000, January 26, 2001 and July 28, 2003 TCA paid $3,095,000, $1,238,000, $6,474,000 and $9,157,000, respectively, as partial payment of the Development Services Fee Phase II. Construction received $644,688, $257,875, $1,348,534, and $1,907,403, respectively, and Construction paid The Slavik Company $92,190, $36,876, $192,840 and $259,121 on April 26, 2000, July 26, 2000, January 26, 2001 and July 28, 2003, respectively.
At December 31, 2003 the accrued liability to Kerzner Investments pursuant to the Development Services Agreement Phase II was approximately $507,000.
The Development Services Agreement Phase II and the Local Construction Services Agreement are each filed as an exhibit to the Company's, Quarterly Report on Form 10-Q for the period ended March 31, 1999 (Commission File No. 333-17795) as accepted by the Commission on May 17, 1999, and each is incorporated herein by reference.
EMPLOYMENT AGREEMENT WITH MR. LEN WOLMAN
Len Wolman, the Company's Chairman of the Board of Directors and Chief Executive Officer, is the Company's designated representative to TCA under the TCA Partnership Agreement.
On September 28, 1998, the Company entered into an employment agreement with Len Wolman. The employment agreement provides for a base annual salary of $250,000 reduced by any amounts Mr. Wolman receives as a salary from TCA for such period. In addition, pursuant to the employment agreement, the Company agreed pay to Mr. Wolman an amount equal to 0.05 percent of the revenues of the Mohegan Sun including the Project Sunburst expansion to the extent Mr. Wolman has not received such amounts from TCA. On and after January 1, 2004, the Company agreed to pay to Mr. Wolman incentive compensation based on the revenues of the Mohegan Sun, including the Project Sunburst expansion, as a percentage (ranging from .00 percent to .10 percent) to be determined using a formula attached to the employment agreement, which compares actual revenues to predetermined revenue targets. For the years ended December 31, 2003, 2002 and 2001, the Company paid and incurred $900,998, $835,086 and $707,153, respectively, as an expense pursuant to Len Wolman's employment agreement.
OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 2003, 2002, and 2001 approximately $42,000, $46,000 and $46,000, respectively, was paid and incurred by TCA to the principals and affiliates of the Company as part of TCA's operating expenses. In addition, in 2003, 2002 and 2001, TCA paid and incurred approximately $962,000, $0 and approximately $856,000, respectively, to the principals of the Company in connection with the first priority payments set forth under the section "Business - Trading Cove Associates Material Agreements - Amended and Restated Omnibus Termination Agreement".
In 1999, the Company renovated Len Wolman's office space at a cost of $32,413, of which $30,000 was paid to Wolman Homes Inc., an affiliate of the Company. Cost of the improvement is being depreciated over five years. Expense for each of the years ended December 31, 2003, 2002 and 2001 was $6,480.
Waterford Group, Slavik Suites, Inc. and the other principals of the Company and Waterford Group have interests in and may acquire interests in hotels in Southeastern Connecticut which have or may have arrangements with the Mohegan Sun to reserve and provide hotel rooms to patrons of the Mohegan Sun.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES
For the year ended December 31, 2003
Audit fees $ 264,000 Tax fees 2,250 All other fees Analyses of propsed buyout of a contract 17,250 --------- Total $ 283,500 =========
For the year ended December 31, 2002
Audit fees $ 34,750 Tax fees 750 All other fees Excess cash certification 1,500 Internal revenue services audit 4,950 Permitted dividend certification 1,125 7,575 ----- --------- Total $ 43,075 =========
PART IV
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) EXHIBITS
Exhibit No. Description 3.1 Certificate of Formation, as amended, of Waterford Gaming, LLC (i) 3.2 Certificate of Incorporation of Waterford Gaming Finance Corp. (i) 3.3 Bylaws of Waterford Gaming Finance Corp. (i) 4.1 Indenture, dated as of November 8, 1996, between Waterford Gaming, L.L.C. and Waterford Gaming Finance Corp., the issuers, and Fleet National Bank, as trustee, relating to $65,000,000 12-3/4% Senior Notes due 2003. (i) 4.1.1 First Supplemental Indenture, dated as of March 4, 1999, among Waterford Gaming, L.L.C. and Waterford Gaming Finance, Corp., as issuers, and State Street Bank and Trust Company, as trustee, relating to $65,000,000 12-3/4% Senior Notes due 2003. (vi) 4.2 Indenture, dated as of March 17, 1999, among Waterford Gaming, L.L.C. and Waterford Gaming Finance Corp., as issuers, and State Street Bank and Trust Company, as trustee, relating to $125,000,000 9-1/2% Senior Notes due 2010. (vi) 4.2.1 First Supplemental Indenture, dated as of June 6, 2003, among Waterford Gaming, L.L.C. and Waterford Gaming Finance Corp., as issuers, and U.S. Bank National Association, as trustee, relating to $125,000,000 9-1/2% Senior Notes due 2010. (viii) 4.3 Security and Control Agreement, dated as of March 17, 1999, among Waterford Gaming, L.L.C. and Waterford Gaming Finance Corp., as pledgors and State Street Bank and Trust Company, as securities intermediary. (vi) 4.3.1 Termination Agreement, dated as of June 11, 2003, among Waterford Gaming, L.L.C. and Waterford Gaming Finance Corp., and U.S. Bank National Association, as securities intermediary. (viii) 4.4 Specimen Form of 9-1/2% Senior Notes due 2010 (included in Exhibit 4.2). (vi) 4.5 Indenture, dated as of June 11, 2003, among Waterford Gaming, L.L.C. and Waterford Gaming Finance Corp., as issuers, and U.S. Bank National Association, as trustee, relating to $155,000,000 8-5/8% Senior Notes due 2012. (viii) 4.6 Security and Control Agreement, dated as of June 11, 2003, among Waterford Gaming, L.L.C. and Waterford Gaming Finance Corp., as pledgors and U.S. Bank National Association, as securities intermediary. (viii) 4.7 Specimen Form of 8-5/8% Senior Notes due 2012 (included in Exhibit 4.5). (viii) 10.1 Omnibus Financing Agreement, dated as of September 21, 1995, between Trading Cove Associates and Sun International Hotels Limited. (i) 10.2 First Amendment to the Omnibus Financing Agreement, dated as of October 19, 1996, among Trading Cove Associates, Sun International Hotels Limited and Waterford Gaming, L.L.C. (i) 10.2.1 Amended and Restated Omnibus Financing Agreement dated September 10, 1997 (ii) 10.2.2 Omnibus Termination Agreement, dated as of March 18, 1999, among Sun International Hotels Limited, Trading Cove Associates, Waterford Gaming, L.L.C., Sun International Management Limited, LMW Investments, Inc., Sun Cove Limited, Slavik Suites, Inc., and Wolman Construction, L.L.C.(vi) 10.2.3 Amended and Restated Omnibus Termination Agreement, dated as of January 1, 2000 and effective as of March 18, 1999, among Sun International Hotels Limited, Trading Cove Associates, Waterford Gaming, L.L.C., Sun International Management Limited, LMW Investments, Inc., Sun Cove Limited, Slavik Suites, Inc., and Wolman Construction, L.L.C.(vii) 10.3 Amended and Restated Partnership Agreement of Trading Cove Associates, dated as of September 21, 1994, among Sun Cove Limited, RJH Development Corp., Leisure Resort Technology, Inc., Slavik Suites , Inc., and LMW Investments, Inc. (i)
10.4 First Amendment to Amended and Restated Partnership Agreement of Trading Cove Associates, dated as of October 22, 1996, among Sun Cove Limited, Slavik Suites, Inc., RJH Development Corp., LMW Investments, Inc. and Waterford Gaming, L.L.C. (i) 10.5 Purchase Agreement, dated as of March 10, 1999, among Waterford Gaming, L.L.C., Waterford Gaming Finance Corp., Bear, Stearns & Co., Inc., Merrill Lynch, Pierce, Fenner and Smith Inc. and Salomon Smith Barney. (vi) 10.5.1 Agreement with Respect to Redemption or Repurchase of Subordinated Notes, dated September 10, 1997 (ii) 10.6 Amended and Restated Limited Liability Company Agreement of Waterford Gaming, L.L.C., dated as of March 17, 1999 by Waterford Group, L.L.C. (vi) 10.7 Note Purchase Agreement, dated as of October 19, 1996, among Sun International Hotels Limited, Waterford Gaming, L.L.C. and Trading Cove Associates. (i) 10.8 Note Purchase Agreement, dated as of September 29, 1995, between the Mohegan Tribal Gaming Authority and Sun International Hotels Limited relating to the Subordinated Notes. (i) 10.9 Management Agreement, dated as of July 28, 1994, between the Mohegan Tribe of Indians of Connecticut and Trading Cove Associates. (i) 10.10 Management Services Agreement, dated September 10, 1997. (ii) 10.11 Development Services Agreement, dated September 10, 1997. (ii) 10.12 Subdevelopment Services Agreement, dated September 10, 1997. (ii) 10.13 Completion Guarantee and Investment Banking and Financing Arrangement Fee Agreement, dated September 10, 1997. (ii) 10.14 Settlement and Release Agreement, dated January 6, 1998, by and among Leisure Resort Technology, Inc., Lee R. Tyrol, Trading Cove Associates, Slavik Suites, Inc., LMW Investments, Inc., RJH Development Corp., Waterford Gaming, L.L.C. and Sun Cove Limited. (iii) 10.15 Waiver and Acknowledgment of Noteholder. (iv) 10.16 Relinquishment Agreement, dated February 7, 1998, between the Mohegan Tribal Gaming Authority and Trading Cove Associates. (v) 10.17 Development Services Agreement, dated February 7, 1998, between the Mohegan Tribal Gaming Authority and Trading Cove Associates. (v) 10.18 Agreement, dated September 28, 1998, by and among, Waterford Gaming, L.L.C., Slavik Suites, Inc., LMW Investments, Inc., Len Wolman, Mark Wolman, Stephan F. Slavik, Sr. and Del J. Lauria (Len Wolman's Employment Agreement). (v) 10.19 Agreement Relating to Development Services, dated as of February 9, 1998, between Trading Cove Associates and Sun International Management Limited. (vi) 10.20 Local Construction Services Agreement, dated as of February 9, 1998 between Sun International Management Limited and Wolman Construction, L.L.C. (vi) 10.21 Escrow Deposit Agreement, dated as of the 3rd day of March 1999, by and among the Mohegan Tribal Gaming Authority and First Union National Bank, as Defeasance Agent. (vi) 21.1 Subsidiaries of Waterford Gaming, L.L.C. (i) 21.2 Subsidiaries of Waterford Gaming Finance Corp. (i) 31 Certifications. (ix)
(i) Incorporated by reference to the Registrant's Registration Statement on Form S-4, Commission File No. 333-17795, declared effective on May 15, 1997.
(ii) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997, Commission File No. 333-17795, as accepted by the Commission on November 14, 1997.
(iii) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, Commission File No. 333-17795, as accepted by the Commission on March 30, 1998.
(iv) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1998, Commission File No. 333-17795, as accepted by the Commission on May 14, 1998.
(v) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1998, Commission File No. 333-17795, as accepted by the Commission on November 13, 1998.
(vi) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1999, Commission File No. 333-17795 as accepted by the Commission on May 17, 1999.
(vii) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2001, Commission File No. 333-17795 as accepted by the Commission on May 14, 2001.
(viii)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2003, Commission File No. 333-17795 as accepted by the Commission on August 12, 2003.
(ix) Filed herewith.
b) FINANCIAL STATEMENTS SCHEDULES
WATERFORD GAMING, L.L.C. Report of Independent Auditors Financial Statements: Balance Sheets as of December 31, 2003 and 2002 Statements of Income for the years ended December 31, 2003, 2002 and 2001 Statements of Changes in Member's Deficiency for the years ended December 31, 2003, 2002 and 2001 Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 Notes to Financial Statements
TRADING COVE ASSOCIATES Report of Independent Auditors Financial Statements: Balance Sheets as of December 31, 2003 and 2002 Statements of Operations for the years ended December 31, 2003, 2002 and 2001 Statements of Changes in Partner's Capital (Deficiency)for the years ended December 31, 2003, 2002 and 2001 Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 Notes to Financial Statements
REPORT OF INDEPENDENT AUDITORS
To the Member of Waterford Gaming, L.L.C.
In our opinion, the accompanying balance sheets and the related statements of income, changes in member's deficiency and of cash flows present fairly, in all material respects, the financial position of Waterford Gaming, L.L.C. (the "Company") at December 31, 2003 and 2002 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers, LLP March 24, 2004
Waterford Gaming, L.L.C.
Balance Sheets
December 31, 2003 and 2002
---------------------------------
Waterford Gaming, L.L.C.
Statements of Income
For the years ended December 31, 2003, 2002 and 2001
-----------------------------
Waterford Gaming, L.L.C.
Statements of Changes in Member's Deficiency
For the years ended December 31, 2003, 2002 and 2001
-----------------------------
Waterford Gaming, L.L.C.
Statements of Cash Flows
For the years ended December 31, 2003, 2002 and 2001
-----------------------------
WATERFORD GAMING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION, MEMBERSHIP AGREEMENT, CHANGE OF OWNERSHIP AND MEMBER ALLOCATIONS:
Waterford Gaming, L.L.C. (the "Company"), a Delaware limited liability company, was formed on September 30, 1996. The Company initially acquired and owns a partnership interest in Trading Cove Associates ("TCA"), a Connecticut general partnership, and invested in certain notes issued by the Mohegan Tribal Gaming Authority (the "Authority"). The Company is governed by a Board of Directors pursuant to the limited liability company agreement (the "Agreement"). In June 2003, the Company with its wholly-owned subsidiary Waterford Gaming Finance Corp. ("Finance") issued $155 Million 8.625% Senior Notes due 2012 (the "8.625% Senior Notes") in connection with the redemption of the Company's and Finance's $125 Million 9.5% Senior Notes due 2010 (the "$125 Million Senior Notes"). In March 1999, the Company together with Finance had issued the $125 Million Senior Notes in connection with the redemption of the Company's and Finance's $65 Million 12.75% Senior Notes due 2003 (the "$65 Million Senior Notes"). In connection with the issuance by the Company's and Finance's $125 Million Senior Notes, each of Slavik Suites, Inc. ("Slavik") and LMW Investments, Inc. ("LMW") contributed their respective interests in the Company as of March 17, 1999 to a Delaware limited liability company, Waterford Group, L.L.C. ("Waterford Group"). Waterford Group is now the sole member of the Company. Slavik and LMW own Waterford Group in the same respective interest as they had in the Company which are as follows:
Slavik Suites, Inc. 67.7967% LMW Investments, Inc. 32.2033% --------- 100.0000% =========
The Agreement is effective until September 30, 2020 and may be terminated by the member or any other event as stated in the Agreement.
In connection with the $125 Million Senior Notes offering, the Company distributed $37,050,000 to Waterford Group, L.L.C. during March 1999. During December 1999, the Company received a payment on notes it held due from the Authority and a distribution from TCA. As contemplated in the $125 Million Senior Notes offering, the Company distributed approximately $34,672,000 to Waterford Group during January 2000. On November 1, 2002 the Company distributed $15,000,000 to Waterford Group in accordance with the terms of the indenture relating to the $125 Million Senior Notes. In connection with the 8.625% Senior Notes offering, the Company distributed approximately $44,500,000 to Waterford Group during June 2003. Tax distributions totaling approximately $12,444,000 were made by the Company during 1999, 2000, 2001, 2002 and 2003. In addition the Company distributed approximately $98,100 to Waterford Group during September 2003 in accordance with the terms of the indenture relating to the 8.625% Senior Notes (the "8.625% Senior Notes Indenture"). On March 15, 2004 the Company distributed approximately $349,200 to Waterford Group in accordance with the 8.625% Senior Notes Indenture.
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Method
The accrual method of accounting is used in the preparation of the financial statements.
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less.
Restricted Investments
Restricted investments at December 31, 2003 are principally comprised of an investment in a Federal Home Loan Bank Discount Note, which was purchased at a discount of 1.01% and matured March 10, 2004 and an investment in the First American Treasury Obligations Fund and at December 31, 2002 are principally comprised of an investment in a Federal Home Loan Bank Discount Note, which was purchased at a discount of 1.64% and matured March 7, 2003, and an investment in the Federated Treasury Obligations Fund. The investments represent a restricted investment fund that has been established with a trustee in terms of the applicable indenture and is reported at cost plus accrued interest, which approximates market.
Trading Cove Associates - Equity Investment
The Company's equity investment in TCA is accounted for utilizing the equity method. Included in the investment is the purchase price of $10,600,000 paid to a corporation for their 12.5 percent interest in TCA. This amount was initially amortized on a straight-line basis over a 7-year term, which represents the term of the management agreement between TCA and the Authority. Then beginning in March 1999, as a result of the Relinquishment Agreement, as defined, becoming effective the remaining balance is being amortized over 189 months beginning April 1999.
The Company receives distributions from TCA in accordance with an Amended and Restated Omnibus Termination Agreement. The amount of distributions received relies on the fees earned by TCA pursuant to its Relinquishment Agreement with the Authority. Distributions are recorded when received.
Deferred Financing Costs
All costs incurred with the issuance of the Company's and Finance's 8.625% Senior Notes, were capitalized and are amortized on a straight-line basis over the term of the 8.625% Senior Notes. Additional amortization is recorded when the 8.625% Senior Notes are redeemed. The additional amortization is the amount that the redeemed 8.625% Senior Notes represents of the total deferred financing costs net of accumulated amortization.
Fixed Assets
Fixed Assets are stated at cost. Depreciation is charged against income over the estimated life of the fixed assets. The estimated life is five years for furniture and fixtures and leasehold improvements.
Income Taxes
The Company, as a wholly owned subsidiary of Waterford Group, does not file federal or state income tax returns. As a result, no provision for federal and state income taxes has been made in the accompanying financial statements.
Concentration of Credit Risk
The Company's interest in TCA is its principal asset and source of income and cash flow. The Company anticipates regular distributions from TCA based upon the operating results of the Authority and payments of the related Relinquishment Fees, as defined, by the Authority. Financial instruments, which potentially subject the Company to a concentration of credit risk, principally consist of cash in excess of the financial institutions' insurance limits. The Company invests available cash with high credit quality institutions.
Fair Value of Financial Instruments
Fair value of the Company's debt is based on quoted market prices. The carrying value of all other assets and liabilities approximate market.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. TRADING COVE ASSOCIATES:
TCA was organized on July 27, 1993. The primary purpose of TCA has been,
a) to assist the Mohegan Tribe of Indians of Connecticut (the "Tribe") and the Authority, in obtaining federal recognition,
b) to negotiate the tribal-state compact with the State of Connecticut on behalf of the Tribe,
c) to obtain financing for the development of the Mohegan Sun Casino (the "Mohegan Sun"),
d) to negotiate the Amended and Restated Gaming Facility Management Agreement (the "Management Agreement"),
e) to oversee all operations of the Mohegan Sun pursuant to the terms of the Management Agreement until midnight December 31, 1999, and
f) to participate in the design and development of the Mohegan Sun.
The Mohegan Sun commenced operations on October 12, 1996. From the opening of Mohegan Sun until January 1, 2000, TCA oversaw the Mohegan Sun's day-to-day operations.
TCA's Partnership Agreement (the "TCA Partnership Agreement") will terminate on December 31, 2040, or earlier, in accordance with its terms. The Company has a 50 percent partnership interest in TCA. The remaining 50 percent interest is owned by Kerzner Investments Connecticut, Inc. ("Kerzner Investments"), formerly Sun Cove Limited, an affiliate of Kerzner International Limited ("Kerzner International").
As of December 31, 2003, 2002 and 2001 the following summary information relates to TCA. Total revenues and net income are for the years ended December 31, 2003, 2002 and 2001.
TRADING COVE ASSOCIATES - MATERIAL AGREEMENTS
RELINQUISHMENT AGREEMENT
On February 7, 1998, TCA and the Authority entered into the Relinquishment Agreement (the "Relinquishment Agreement"). Under the terms of the Relinquishment Agreement, TCA continued to manage the Mohegan Sun under the Management Agreement until midnight December 31, 1999, and on January 1, 2000, the Management Agreement terminated and the Tribe assumed day-to-day management of the Mohegan Sun.
Under the Relinquishment Agreement, to compensate TCA for terminating its rights under the Management Agreement and the Hotel/Resort Management Agreement, the Authority agreed to pay to TCA a fee (the "Relinquishment Fees") equal to 5 percent of Revenues, as defined in the Relinquishment Agreement, generated by the Mohegan Sun during the 15-year period commencing on January 1, 2000, including revenue generated by the Project Sunburst expansion project (the "Project Sunburst expansion").
The Relinquishment Fees are divided into senior relinquishment payments and junior relinquishment payments, each of which equals 2.5 percent of "Revenues". Revenues are defined in the Relinquishment Agreement as gross gaming revenues (other than Class II gaming revenue) and all other facility revenues. Such revenue includes hotel revenues, food and beverage sales, parking revenues, ticket revenues and other fees or receipts from the convention/events center in the Project Sunburst expansion and all rental or other receipts from lessees, licensees and concessionaires operating in the facility, but not the gross receipts of such lessees, licensees and concessionaires. Such revenues exclude revenues generated by any other expansion of the Mohegan Sun.
Senior relinquishment payments are payable quarterly in arrears commencing on April 25, 2000 for the quarter ended March 31, 2000, and the junior relinquishment payments are payable semi-annually in arrears commencing on July 25, 2000 for the six months ended June 30, 2000, assuming sufficient funds are available after satisfaction of the Authority's senior obligations, as defined in the Relinquishment Agreement.
For the years ended December 31, 2003, 2002 and 2001 the Relinquishment Fees earned were $65,099,533, $58,508,703 and $45,715,318, respectively. The amount of Relinquishment Fees reported are based upon Revenues reported to TCA by the Authority.
DEVELOPMENT AGREEMENT AND OTHER RELATED AGREEMENTS
On February 7, 1998, TCA and the Authority entered into the Development Services Agreement (the "Development Agreement"). Pursuant to the Development Agreement, TCA agreed to oversee the design, construction, furnishing, equipping and staffing of the Project Sunburst expansion for a $14.0 million development fee (the "Development Fee").
On May 24, 2000, TCA and the Authority agreed that TCA had performed and completed all its obligations relating to the staffing of the Project Sunburst expansion and that TCA has no further obligations relating to the staffing of the Project Sunburst expansion.
The first phase of the Project Sunburst expansion, including the Casino of the Sky, The Shops at Mohegan Sun, and the 10,000-seat Mohegan Sun Arena opened in September 2001. In April 2002, 734 of the approximately 1,200-hotel rooms in the 34-story luxury hotel as well as the meeting and convention space and spa opened. The balance of the approximately 1,200-hotel rooms opened during June 2002. At December 31, 2003 the Project Sunburst expansion was substantially completed.
Pursuant to the Development Agreement, the Authority agreed to pay the Development Fee to TCA quarterly beginning on January 15, 2000, based on incremental completion of the Project Sunburst expansion as of each payment date. The last payment of the Development Fee is to be paid on the Completion Date, as defined in the Development Agreement, of the Project Sunburst expansion. A summary of the quarterly Development Fee payments received by TCA in accordance with the terms of the Development Agreement is as follows:
Date Received by TCA Development Fee Received - -------------------- ------------------------ January 15, 2000 $ 1,372,000 April 20, 2000 896,000 July 17, 2000 1,260,000 October 13, 2000 1,372,000 January 23, 2001 588,000 April 16, 2001 1,582,000 July 20, 2001 2,212,000 October 17, 2001 1,974,000 January 25, 2002 1,260,000 April 22, 2002 413,000 July 19, 2002 581,000 October 18, 2002 238,000 January 24, 2003 84,000 April 15, 2003 112,000 October 30, 2003 56,000 ------------ $ 14,000,000 ============
The Development Agreement terminates after the earlier of the completion of the Project Sunburst expansion or 10 years. In addition, each party has the right to terminate the Development Agreement if there is a default or failure to perform by the other party. The parties must submit disputes arising under the Development Agreement to arbitration and each has agreed that punitive damages may not be awarded to either party by an arbitrator. The Authority has waived sovereign immunity for the purpose of permitting, compelling or enforcing arbitration and has agreed to be sued by TCA in any court of competent jurisdiction for the purposes of compelling arbitration or enforcing any arbitration or judicial award arising out of the Development Agreement.
On February 9, 1998, TCA and Kerzner International Management Limited ("KIML), an affiliate of Kerzner Investments, entered into the Agreement Relating to Development Services (the "Development Services Agreement Phase II"). Pursuant to the Development Services Agreement Phase II, TCA subcontracted with KIML, who agreed to perform, those services assigned to KIML by TCA, in order to facilitate TCA's fulfillment of its duties and obligations to the Authority under the Development Agreement. KIML assigned the Development Services Agreement Phase II to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner Investments a fee, as subcontractor (the "Development Services Fee Phase II"), equal to 3 percent of the development costs of the Project Sunburst expansion, excluding capitalized interest, less all costs incurred by TCA in connection with the Project Sunburst expansion. The Development Services Fee Phase II is paid on December 31, 1999, December 31, 2000 and on the Completion Date, as defined in the Development Agreement with the final payment being made when the actual development costs of the Project Sunburst expansion are known. TCA pays the Development Services Fee Phase II from available cash flow, if any, in accordance with an Amended and Restated Omnibus Termination Agreement. The total of the Development Services Fee Phase II and TCA's costs related to the development of Project Sunburst expansion will exceed the related revenue received by TCA under the Development Agreement by approximately $15,964,000. At December 31, 2003, the accrued liability to Kerzner Investments pursuant to the Development Agreement Phase II was approximately $507,000.
Before KIML assigned the Development Services Agreement Phase II to Kerzner Investments, it entered into the Local Construction Services Agreement (the "Local Construction Services Agreement") with Wolman Construction, L.L.C. ("Construction"), pursuant to which Construction agreed to provide certain of those services assigned to KIML by TCA pursuant to the Development Services Agreement Phase II. KIML assigned the Local Construction Services Agreement to Kerzner Investments. Pursuant to the Local Construction Services Agreement, Kerzner Investments agreed to pay to Construction a fee equal to 20.83 percent of the Development Services Fee Phase II as and when Kerzner Investments receives payment from TCA in accordance with the Development Services Agreement Phase II. Pursuant to a Letter Agreement, Construction has subcontracted with The Slavik Company to provide certain services under the Local Construction Services Agreement. In exchange for providing such services, Construction agreed that The Slavik Company would be paid a fee equal to 14.30 percent of its fee under the Local Construction Services Agreement.
MANAGEMENT AGREEMENT
On August 30, 1995 TCA and the Tribe entered into the Management Agreement. After entering into the Management Agreement, the Tribe assigned it to the Authority.
Until midnight December 31, 1999, TCA was the exclusive manager of the Mohegan Sun and earned a management fee from the Authority pursuant to the Management Agreement (the "Management Fees"). The Management Fees were paid monthly (the final payment was received by TCA from the Authority on January 25, 2000) and were calculated in three tiers based upon net revenues of the Mohegan Sun.
AMENDED AND RESTATED OMNIBUS TERMINATION AGREEMENT
Effective March 18, 1999, the Amended and Restated Omnibus Termination Agreement (the " Amended and Restated Omnibus Termination Agreement") was entered into by TCA, Kerzner International, the Company, KIML, LMW, Kerzner Investments, Slavik and Construction. The Amended and Restated Omnibus Termination Agreement (i) terminated the memorandum of understanding dated February 7, 1998; and (ii) effective January 1, 2000 terminated a) the Amended and Restated Omnibus Financing Agreement, b) completion guarantee and investment banking and financing arrangement fee agreement (the "Financing Arrangement Agreement"); c) the Management Services Agreement; d) the Organizational and Administrative Services Agreement; e) the Marketing Services Agreement; and f) a Letter Agreement relating to expenses dated October 19, 1996.
In consideration for the termination of such agreements, TCA agreed to use its cash to pay the following obligations in the priority set forth below:
(a) First, to pay all unpaid amounts which may be due under the terminated Letter Agreement and to pay certain affiliates of the Company and to Kerzner Investments a percentage of an annual fee of $2.0 million less the actual expenses incurred by TCA during such year. Such annual fee is payable in equal quarterly installments beginning March 31, 2000 and ending December 31, 2014. For the years ended December 31, 2003, and 2002, $1,840,346 ($920,173 to each of Kerzner Investments and affiliates of the Company), and $0, respectively, have been incurred by TCA in terms of the first priority.
(b) Second, to return all capital contributions made by the partners of TCA after September 29, 1995. The Company does not anticipate TCA making further capital calls to fund expenses related to the development of the Project Sunburst expansion. From January 1, 2000 to December 31, 2003 these capital contributions aggregated $8,000,000. From January 1, 2000 to December 31, 2003 $8,000,000 has been repaid to the partners of TCA, 50 percent to the Company and 50 percent to Kerzner Investments.
As of December 31, 2003, $0 in capital contributions remained outstanding.
(c) Third, to pay any accrued amounts for obligations performed prior to January 1, 2000 under the Financing Arrangement Agreement. All such required payments were made during 2000.
(d) Fourth, to make the payments set forth in the agreements relating to the Development Services Agreement Phase II and the Local Construction Services Agreement. No such payments are required or due at December 31, 2003. The accrued liability to Kerzner Investments with respect to such fee at December 31, 2003 was approximately $507,000.
(e) Fifth, to pay Kerzner Investments an annual fee (in the form of a priority distribution) of $5.0 million payable in equal quarterly installments of $1.25 million beginning March 31, 2000 and ending December 31, 2006. On January 27, 2004 and on January 28, 2003, $1,250,000 was distributed in terms of the fifth priority.
(f) Sixth, to pay any accrued amounts for obligations performed with respect to periods prior to January 1, 2000 under the Management Services Agreement, the Organizational and Administrative Services Agreement and the Marketing Services Agreement. The final required payments under this priority were made during 2001.
(g) Seventh, for the period beginning March 31, 2000 and ending December 31, 2014, to pay each of Kerzner Investments and the Company twenty-five percent (25%) of the relinquishment payments as distributions. On January 27, 2004 and January 28, 2003, $12,669,636 ($6,334,818 to each of Kerzner Investments and the Company) and $22,043,000 ($11,025,500 to each of Kerzner Investments and the Company), respectively, was distributed by TCA in terms of the seventh priority.
(h) Eighth, to distribute all excess cash. On January 27, 2004, $10,926,597 ($5,463,298 to Kerzner Investments and $5,463,299 to the Company) was distributed as excess cash.
In addition, TCA shall not make any distributions pursuant to the Amended and Restated Omnibus Termination Agreement until it has annually distributed to its partners pro rata, the amounts related to its partners tax obligations as described in Section 3.03a(1) of the TCA Partnership Agreement less twice the amount of all other funds paid or distributed to the Company during such year pursuant to the Amended and Restated Omnibus Termination Agreement.
To the extent TCA does not have adequate cash to make the payments pursuant to the Amended and Restated Omnibus Termination Agreement, such amount due shall be deferred without the accrual of interest until TCA has sufficient cash to pay them.
AMENDED AND RESTATED OMNIBUS FINANCING AGREEMENT
Until January 1, 2000 TCA's primary source of revenue was Management Fees. Those fees were utilized by TCA to make subcontract payments to partners and affiliates pursuant to the Amended and Restated Omnibus Financing Agreement which was terminated effective January 1, 2000.
3. BENEFICIAL INTEREST - LEISURE RESORT TECHNOLOGY, INC.:
On January 6, 1998, pursuant to the settlement and release agreement described in Note 7 below, the Company paid $5,000,000 to Leisure Resort Technology, Inc. ("Leisure") and, among other things, Leisure gave up (a) its beneficial interest of 5 percent in certain fees and excess cash flows, as defined, of TCA and (b) any other claims it may have had against the Company, TCA and TCA's partners and former partner.
On August 6, 1997, Leisure, a former partner of TCA, filed a lawsuit against TCA, Kerzner Investments, RJH Development Corp. (a former partner of TCA), the Company and its owners, claiming breach of contract, breach of fiduciary duties and other matters in connection with the development of the Mohegan Sun by TCA. In connection with the settlement of all matters related to such suit, pursuant to a settlement and release agreement, the Company agreed to acquire Leisure's interests in TCA. As a result of this acquisition, Leisure no longer has the right to 5 percent of the Organizational and Administrative fee, as defined in the Organizational and Administrative Services Agreement, and 5 percent of TCA's Excess Cash as defined in the TCA Partnership Agreement, and the Company is now entitled to such fees and such cash.
On March 17, 1999, the $65 Million Senior Notes were retired, and on March 18, 1999, the Company paid an additional $2,000,000 to Leisure pursuant to the settlement and release agreement. On January 7, 2000, Leisure filed a complaint against the Company and certain other defendants relating to the settlement and release agreement. For a description of the complaint, see Note 7 to these financial statements.
Until March 17, 1999, the payments made to Leisure pursuant to the settlement and release agreement and associated costs were amortized on a straight-line basis over the remaining term of the Management Agreement. As a result of the Relinquishment Agreement becoming effective, the remaining balance will be amortized over 189 months beginning March 18, 1999. Accumulated amortization at December 31, 2003 and 2002, amounts to $2,895,162 and $2,517,172, respectively.
4. $155 MILLION 8.625% SENIOR NOTES PAYABLE:
On June 11, 2003, the Company and Finance issued the 8.625% Senior Notes. Payment of the principal of, and interest on, the 8.625% Senior Notes is pari passu in right of payment with all of the Company's and Finance's senior debt, and effectively subordinate in right of payment to all of the Company's and Finance's existing and future collateralized and subordinated debts.
The 8.625% Senior Notes bear interest at a rate of 8.625% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, commencing September 15, 2003. The principal amount due on the 8.625% Senior Notes is payable on September 15, 2012.
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:
The 8.625% Senior Notes provide that upon the occurrence of a Change of Control (as defined in the 8.625% Senior Notes Indenture), the holders thereof will have the option to require the redemption of the 8.625% Senior Notes at a redemption price equal to 101% of the principal amount thereof plus accrued interest.
Pursuant to the terms of the 8.625% Senior Notes Indenture, if the Company and Finance have any Company Excess Cash, as defined in the 8.625% Senior Notes Indenture, on February 1 or August 1 of any year, they must use such Company Excess Cash less all Required IRA True-Up Payments, as defined in the 8.625% Senior Notes Indenture, and less any amount set aside for the payment of accrued and unpaid interest on the interest payment date that corresponds to the redemption date for which the determination is being made, to redeem the 8.625% Senior Notes on the March 15 or September 15 following such dates. Any such redemption will be made at a price equal to a percentage of the principal amount being redeemed. Such percentage is set forth in the following table:
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.
The fair market value of the Company's long term debt at December 31, 2003 and 2002 is estimated to be approximately $163,804,000 and $111,787,000, respectively, based on the quoted market price for the 8.625% Senior Notes and the $125 Million Senior Notes, respectively.
5. $125 MILLION 9.50% SENIOR NOTES PAYABLE:
The $125 Million Senior Notes payable at December 31, 2003 and 2002, was $0 and $108,007,000, respectively, and consisted of the aggregate principal amount of the $125 Million Senior Notes issued on March 17, 1999 by the Company and Finance.
All of the $125 Million Senior Notes were redeemed as part of the Company's and Finance's 8.625% Senior Notes offering on June 11, 2003.
6. RECONCILIATION OF FINANCIAL STATEMENT AND TAX INFORMATION:
The following is a reconciliation of net income for financial statement purposes to net income for federal income tax purposes for the years ended December 31, 2003, 2002 and 2001.
The following is a reconciliation of member's deficiency for financial statement purposes to member's deficiency for federal income tax purposes as of December 31, 2003, 2002 and 2001.
7. CONTINGENCIES:
LEGAL PROCEEDINGS
On January 6, 1998, Leisure Resort Technology, Inc. and defendants Waterford Gaming, L.L.C., Trading Cove Associates, LMW Investments, Inc., and Slavik Suites, Inc. settled a prior lawsuit brought by Leisure. In connection with this settlement, Leisure, TCA, the Company, LMW Investments, Inc., and Slavik Suites, Inc. entered into a settlement and release agreement. Pursuant to this settlement and release agreement, the Company bought Leisure's beneficial interest in TCA.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a four count complaint naming as defendants Waterford Gaming, L.L.C., Trading Cove Associates, LMW Investments, Inc., Slavik Suites, Inc., Waterford Group, L.L.C., Len Wolman and Mark Wolman (collectively, the "Defendants"). The matter has been transferred to the complex litigation docket and is pending in State Court in Waterbury, Connecticut. The complaint alleged breach of fiduciary duties, fraudulent non-disclosure, violation of Connecticut Statutes Section 42-110a, et seq. and unjust enrichment in connection with the negotiation by certain of the Defendants of the settlement and release agreement. The complaint also brought a claim for an accounting. The complaint seeks unspecified legal and equitable damages.
On February 29, 2000, Defendants filed a Motion to Strike and a Motion for Summary Judgment, each with respect to all claims. The Court granted Defendants' Motion to Strike in part and denied Defendants' Motion for Summary Judgment, on October 13, 2000. The Court's order dismissed the claim for an accounting and the claim under Connecticut Statutes Section 42-110a, et seq. The Court also struck the alter ego allegations in the complaint against LMW Investments, Inc., Slavik Suites, Inc., Len Wolman and Mark Wolman. In a decision dated August 6, 2001, the Court dismissed all claims against LMW Investments, Inc., Slavik Suites, Inc., Len Wolman and Mark Wolman.
On November 15, 2000, the Company and its co-defendants answered the complaint. In addition, the Company and Trading Cove Associates asserted counterclaims for breach of the settlement and release agreement and breach of the implied covenant of good faith against Leisure and its president, Lee Tyrol. In a decision dated June 6, 2001, the Court dismissed the counterclaims against Lee Tyrol. Leisure moved for summary judgment seeking dismissal of the counter claims in full, which motion was denied on April 14, 2003.
Discovery has commenced and is ongoing. Jury selection is scheduled to commence on October 19, 2004, with presentation of evidence to begin on October 26, 2004.
The Company believes that it has meritorious defenses and intends vigorously to contest the claims in this action and to assert all available defenses. At the present time, the Company is unable to express an opinion on the likelihood of an unfavorable outcome or to give an estimate of the amount or range of possible loss to the Company as a result of this litigation due to the disputed issues of law and/or facts on which the outcome of this litigation depends.
8. CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS:
DEVELOPMENT SERVICES AGREEMENT PHASE II AND RELATED AGREEMENTS AND PAYMENTS
On February 9, 1998, TCA and KIML, an affiliate of Kerzner Investments, the Company's partner in TCA, entered into the Development Services Agreement Phase II. Pursuant to the Development Services Agreement Phase II, TCA subcontracted with KIML who agreed to perform those services assigned to KIML by TCA in order to facilitate TCA's fulfillment of its duties and obligations to the Authority under the Development Agreement. KIML assigned the Development Services Agreement Phase II to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, TCA pays to Kerzner Investments a fee, as subcontractor, equal to 3 percent of the development costs of the Project Sunburst expansion, excluding capitalized interest, less all costs incurred by TCA in connection with the Project Sunburst expansion. The Development Services Fee Phase II is paid in installments on December 31, 1999, December 31, 2000 and on the Completion Date, as defined in the Development Agreement, with the final payment being made when the actual development costs of the Project Sunburst expansion are known. TCA pays the Development Services Fee Phase II from available cash flow, if any, in accordance with the Amended and Restated Omnibus Termination Agreement.
Before KIML assigned the Development Services Agreement Phase II to Kerzner Investments, it entered into the Local Construction Services Agreement with Construction, an affiliate of the Company, pursuant to which Construction agreed to provide certain of those services assigned to KIML by TCA pursuant to the Development Services Agreement Phase II. KIML assigned the Local Construction Services Agreement to Kerzner Investments. Pursuant to the Local Construction Service Agreement, Kerzner Investments agreed to pay to Construction a fee equal to 20.83 percent of the Development Services Fee Phase II as and when Kerzner Investments receives payment from TCA in accordance with the Development Services Agreement Phase II.
Pursuant to a Letter Agreement, Construction has subcontracted with The Slavik Company, an affiliate of the Company, to provide certain services under the Local Construction Services Agreement. In exchange for providing such services, Construction agreed that The Slavik Company would be paid a fee equal to 14.30 percent of its fee under the Local Construction Services Agreement.
On April 26, 2000, July 26, 2000, January 26, 2001 and July 28, 2003 TCA paid $3,095,000, $1,238,000, $6,474,000 and $9,157,000, respectively, as partial payment of the Development Services Fee Phase II. Construction received $644,688, $257,875, $1,348,534 and $ 1,907,403, respectively, and Construction paid The Slavik Company $92,190, $36,876, $192,840 and $259,121 on April 26, 2000, July 26, 2000, January 26, 2001 and July 28, 2003 respectively.
At December 31, 2003 TCA has accrued a liability to Kerzner Investments of approximately $507,000 pursuant to the Development Services Agreement Phase II.
EMPLOYMENT AGREEMENT WITH MR. LEN WOLMAN
Len Wolman, the Company's Chairman of the Board of Directors and Chief Executive Officer, is the Company's designated representative to TCA under the TCA Partnership Agreement.
On September 28, 1998, the Company entered into an employment agreement with Len Wolman. The employment agreement provides for a base annual salary of $250,000 reduced by any amounts Mr. Wolman receives as a salary from TCA for such period. In addition, pursuant to the employment agreement, the Company agreed to pay to Mr. Wolman an amount equal to 0.05 percent of the revenues of the Mohegan Sun including the Project Sunburst expansion to the extent Mr. Wolman has not received such amounts from TCA. On and after January 1, 2004, the Company agreed to pay to Mr. Wolman incentive compensation based on the revenues of the Mohegan Sun, including the Project Sunburst expansion, as a percentage (ranging from .00 percent to .10 percent) to be determined using a formula attached to the employment agreement which compares actual revenues to predetermined revenue targets. For the years ended December 31, 2003, 2002 and 2001 the Company paid and incurred $900,998, $835,086 and $707,153, respectively, as an expense pursuant to Len Wolman's employment agreement.
OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 2003, 2002 and 2001, approximately $42,000, $46,000 and $46,000, respectively, was paid and incurred to the principals and affiliates of the Company as part of TCA's operating expenses. In addition in 2003, 2002 and 2001 TCA paid and incurred approximately $962,000, $0, and approximately $856,000, respectively, to the principals of the Company in connection with the first priority payments set forth under the section "Trading Cove Associates Material Agreements - Amended and Restated Omnibus Termination Agreement".
In 1999, the Company renovated Len Wolman's office space at a cost of $32,413, of which $30,000 was paid to Wolman Homes Inc., an affiliate of the Company. Cost of the improvement is being depreciated over five years. Expense for each of the years ended December 31, 2003, 2002 and 2001 was $6,480.
Waterford Group, Slavik and the other principals of the Company and Waterford Group have interests in and may acquire interests in hotels in southeastern Connecticut which have or may have arrangements with the Mohegan Sun to reserve and provide hotel rooms to patrons of the Mohegan Sun.
REPORT OF INDEPENDENT AUDITORS
To the Partners of Trading Cove Associates
In our opinion, the accompanying balance sheets and the related statements of operations, changes in partners' capital (deficiency) and of cash flows present fairly, in all material respects, the financial position of Trading Cove Associates (the "Partnership") at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers, LLP March 24, 2004
Trading Cove Associates
NOTES TO FINANCIAL STATEMENTS
1. Organization, Partnership Agreement and Other Material Agreements
i) Organization and Partnership Agreement
Trading Cove Associates (the "Partnership"), a Connecticut general partnership, was organized on July 27, 1993. The primary purpose of the Partnership has been:
a) to assist the Mohegan Tribe of Indians of Connecticut (the "Tribe") and the Mohegan Tribal Gaming Authority (the "Authority") in obtaining federal recognition,
b) to negotiate the tribal-state compact with the State of Connecticut on behalf of the Tribe,
c) to obtain financing for the development of the Mohegan Sun Casino (the "Mohegan Sun"),
d) to negotiate the Amended and Restated Gaming Facility Management Agreement (the "Management Agreement"),
e) to oversee all operations of the Mohegan Sun pursuant to the terms of the Management agreement until December 31, 1999, and
f) to participate in the design and development of the Mohegan Sun.
The Mohegan Sun commenced operations on October 12, 1996. From the opening of the Mohegan Sun, and until January 1, 2000, the Partnership oversaw the Mohegan Sun's day-to-day operations.
The Partnership will terminate on December 31, 2040, or earlier, in accordance with the terms of the partnership agreement (the "Partnership Agreement").
The original partners of the Partnership were RJH Development Corp. ("RJH"), a New York corporation, Leisure Resort Technology, Inc. ("Leisure"), a Connecticut corporation, Slavik Suites, Inc. ("Slavik"), a Michigan corporation and LMW Investments, Inc. ("LMW"), a Connecticut corporation. On September 21, 1994, the Partnership Agreement was amended and restated to admit Kerzner Investments Connecticut, Inc. ("Kerzner Investments"), a Connecticut corporation, formerly Sun Cove Limited, as a partner.
On February 3, 1995, Leisure entered into an acknowledgement and release agreement to withdraw as a partner of the Partnership and hold its interest in the Partnership as a beneficial interest. On August 6, 1997, Leisure filed a lawsuit against the Partnership, Kerzner Investments, RJH and Waterford Gaming, L.L.C. ("Waterford Gaming") and its owners, claiming breach of contract, breach of fiduciary duties and other matters in connection with the development of the Mohegan Sun. On January 6, 1998, pursuant to the settlement and release agreement described in Note 7 below, Waterford Gaming paid $5,000,000 to Leisure and, among other things Leisure gave up, (a) its beneficial interest of 5 percent of certain fees and excess cash flows, as defined, of the Partnership and (b) any other claims it may have had against the Partnership, Kerzner Investments, RJH, Waterford Gaming and its owners. In connection with the settlement of all matters related to such suit, pursuant to the settlement and release agreement, Waterford Gaming agreed to acquire Leisure's interests in the Partnership. As a result of this acquisition, Leisure no longer has the right to 5 percent of the Organizational and Administrative fee, as defined in the Organizational and Administrative Services Agreement, and 5 percent of the Partnership's Excess Cash as defined in the Partnership Agreement, and Waterford Gaming is now entitled to such fees and cash.
During March 1999, Waterford Gaming's $65,000,000 senior notes were retired and, on March 18, 1999, Waterford Gaming paid an additional $2,000,000 to Leisure pursuant to the settlement and release agreement. On January 7, 2000, Leisure filed a complaint against the Partnership and certain other defendants. For a description of the complaint, see Note 7 to these financial statements.
On November 8, 1996, Slavik, LMW and RJH withdrew from the Partnership and, concurrently, consented to the admission of Waterford Gaming to the Partnership. Waterford Gaming, simultaneously, purchased RJH's interest in the Partnership. Waterford Gaming is owned by Waterford Group, LLC. Waterford Group, LLC is owned by Slavik and LMW.
The partners' percentage interest in the Partnership as of November 8, 1996 was as follows: Percentage Partner Interest ------- ---------- Kerzner Investments 50.0 percent
Waterford Gaming 50.0 percent
ii) Other Material Agreements
Relinquishment Agreement
On February 7, 1998, the Partnership and the Authority entered into the Relinquishment Agreement (the "Relinquishment Agreement"). Under the terms of the Relinquishment Agreement the Partnership continued to manage the Mohegan Sun under the Management Agreement until midnight December 31, 1999, and on January 1, 2000, the Management Agreement terminated and the Tribe assumed day-to-day management of the Mohegan Sun.
Under the Relinquishment Agreement, to compensate the Partnership for terminating its rights under the Management Agreement and the Hotel/Resort Management Agreement the Authority agreed to pay to the Partnership a fee (the "Relinquishment Fees") equal to 5 percent of Revenues, as defined in the Relinquishment Agreement, generated by the Mohegan Sun during the 15-year period commencing on January 1, 2000, including revenue generated by the Project Sunburst expansion (the "Project Sunburst expansion").
The Relinquishment Fees are divided into senior relinquishment payments and junior relinquishment payments, each of which equals 2.5 percent of "Revenues". Revenues are defined as gross gaming revenues (other than Class II gaming revenue) and all other facility revenues. Such revenue includes hotel revenues, food and beverage sales, parking revenues, ticket revenues and other fees or receipts from the convention/events center in the Project Sunburst expansion and all rental or other receipts from lessees, licensees and concessionaires operating in the facility, but not the gross receipts of such lessees, licensees and concessionaires. Such revenues exclude revenues generated by any other expansion of the Mohegan Sun. Senior relinquishment payments are payable quarterly in arrears commencing on April 25, 2000, for the quarter ended March 31, 2000 and the junior relinquishment payments are payable semi-annually in arrears commencing on July 25, 2000, for the six months ended June 30, 2000, assuming sufficient funds are available after satisfaction of the Authority's senior obligations, as defined in the Relinquishment Agreement.
Development Agreement
On February 7, 1998 the Partnership and the Authority entered into the Development Services Agreement (the "Development Agreement"), which made the Partnership the exclusive developer of the Project Sunburst expansion. Pursuant to the Development Agreement, the Partnership agreed to oversee the planning, design, construction, furnishing, equipping and staffing of the Project Sunburst expansion for a $14.0 million development fee (the "Development Fee").
On May 24, 2000, the Partnership and the Authority agreed that the Partnership had performed and completed all its obligations relating to the staffing of the Project Sunburst expansion and that the Partnership has no further obligations relating to the staffing of the Project Sunburst expansion.
The first phase of the Project Sunburst expansion, including the Casino of the Sky, The Shops at Mohegan Sun, and the 10,000-seat Mohegan Sun Arena opened in September 2001. In April 2002, 734 of the approximately 1,200-hotel rooms in the 34-story luxury hotel as well as the meeting and convention space and spa opened. The balance of the approximately 1,200-hotel rooms opened during June 2002. At December 31, 2003, the Project Sunburst expansion was complete in terms of the Development Agreement.
Pursuant to the Development Agreement, the Authority agreed to pay the Development Fee to the Partnership quarterly beginning on January 15, 2000 based on the incremental completion of the Project Sunburst expansion as of the previous calendar quarter and thereafter within fifteen (15) days following the end of each calendar quarter. The last payment of the Development Fee is to be paid on the Completion Date, as defined in the Development Agreement, of the Project Sunburst expansion.
The Development Agreement terminates after the earlier of the completion of the Project Sunburst expansion or ten (10) years. In addition, each party has the right to terminate the Development Agreement if there is a default or failure to perform by the other party.
Management Agreement
The Partnership entered into the Management Agreement with the Tribe pursuant to which the Tribe granted to the Partnership the exclusive right and obligation to develop, manage, operate and maintain the Mohegan Sun. The Management Agreement was amended and restated effective September 29, 1995 (the "Effective Management Agreement Date"). The Partnership's obligations under this agreement began five days after the Effective Management Agreement Date and were originally intended to end on October 11, 2003, seven years from the opening of the Mohegan Sun. Pursuant to the Management Agreement the Partnership received a management fee (the "Management Fees") that was calculated in three tiers based upon the Net Revenues, as defined in the Management Agreement, of the Mohegan Sun. The Management Agreement terminated at midnight on December 31, 1999. The final management fee was received by the Partnership from the Authority on January 25, 2000.
Agreements with Partners and/or their Affiliates
Agreement Relating to Development Services
On February 9, 1998, the Partnership and Kerzner International Management Limited ("KIML"), entered into the Agreement Relating to Development Services (the "Development Services Agreement Phase II"). Pursuant to the Development Services Agreement Phase II, the Partnership subcontracted with KIML who agreed to perform those services assigned to KIML by the Partnership in order to facilitate the Partnership's fulfillment of its duties and obligations to the Authority under the Development Agreement. KIML subsequently assigned the Development Services Agreement Phase II to Kerzner Investments.
Pursuant to the Development Services Agreement Phase II, the Partnership pays to Kerzner Investments a fee, as subcontractor (the "Development Services Fee Phase II"), equal to 3 percent of the development costs of the Project Sunburst expansion, excluding capitalized interest, less all costs incurred by the Partnership in connection with the Project Sunburst expansion. The Development Services Fee Phase II shall be paid in installments due on December 31, 1999 and 2000 and on the Completion Date, as defined in the Development Agreement, with a final payment being made when the actual development costs of the Project Sunburst expansion are known. The Partnership pays the Development Services Fee Phase II, from available cash flow, if any, in accordance with the Amended and Restated Omnibus Termination Agreement. At December 31, 2003, the total of the Development Services Fee Phase II and the Partnership's costs related to the development of the Project Sunburst expansion exceeded the development services revenue from the Authority by approximately $15,964,000 as discussed in Note 3 to these financial statements.
Before KIML assigned the Development Services Agreement Phase II to Kerzner Investments, it entered into the Local Construction Services Agreement (the "Local Construction Services Agreement") with Wolman Construction, LLC ("Construction") pursuant to which Construction agreed to provide certain of those services assigned to KIML by the Partnership pursuant to the Development Services Agreement Phase II. KIML assigned the Local Construction Services Agreement to Kerzner Investments. Pursuant to the Local Construction Services Agreement, Kerzner Investments agreed to pay to Construction a fee equal to 20.83 percent of the Development Services Fee Phase II as and when Kerzner Investments receives payment from the Partnership in accordance with the Development Services Agreement Phase II.
Construction has subcontracted with The Slavik Company to provide certain services under the Local Construction Services Agreement. In connection with this, Construction agreed that The Slavik Company would be paid a fee equal to 14.30 percent of its fee under the Local Construction Services Agreement.
Amended and Restated Omnibus Termination Agreement
Effective March 18, 1999, the Amended and Restated Omnibus Termination Agreement (the "Amended and Restated Omnibus Termination Agreement") was entered into by the Partnership, Kerzner International Limited ("Kerzner International"), Waterford Gaming, KIML, LMW, Kerzner Investments, Slavik and Construction. The Amended and Restated Omnibus Termination Agreement (i) terminated the memorandum of understanding dated February 7, 1998; and (ii) effective January 1, 2000, terminated a) the Amended and Restated Omnibus Financing Agreement; b) the Completion Guarantee and Investment Banking and Financing Arrangement Fee Agreement (the "Financing Arrangement Agreement"); c) the Management Services Agreement; d) the Organizational and Administrative Services Agreement; e) the Marketing Services Agreement; and f) a Letter Agreement relating to expenses dated October 19, 1996.
In consideration for the termination of such agreements, the Partnership will use its cash to pay the following obligations in the priority set forth below:
(i) First, to pay all unpaid amounts which may be due under the terminated Letter Agreement and to pay to certain affiliates of Waterford Gaming and to Kerzner Investments a percentage of an annual fee of $2.0 million less the actual expenses incurred by the Partnership during such year. Such annual fee shall be payable in equal quarterly installments beginning March 31, 2000 and ending December 31, 2014. For the years ended December 31, 2003, 2002 and 2001, $1,840,346, $0 and $1,712,791, respectively, had been incurred by the Partnership in terms of the first priority;
(ii) Second, to return all capital contributions made by the partners of the Partnership after September 29, 1995. The Partnership does not anticipate making further capital calls to fund expenses related to the development of the Project Sunburst expansion. From January 1, 2000 to December 31, 2003, these contributions aggregated $8,000,000. From January 1, 2000 to December 31, 2003, $8,000,000 has been repaid to the partners of the Partnership.
As of December 31, 2003, $0 in capital contributions remained outstanding;
(iii) Third, to pay any accrued amounts for obligations performed prior to January 1, 2000 under the Financing Arrangement Agreement. All such required payments were made during 2000;
(iv) Fourth, to make the payments set forth in the agreements relating to the Development Services Agreement Phase II and the Local Construction Services Agreement as detailed under the Agreement Relating to Development Services above. No such payments are required or due at December 31, 2003. The accrued liability to Kerzner Investments with respect to such fee at December 31, 2003 was approximately $507,000;
(v) Fifth, to pay Kerzner Investments an annual fee (in the form of a priority distribution) of $5.0 million payable in equal quarterly installments of $1.25 million beginning March 31, 2000 and ending December 31, 2006. On January 27, 2004 and on January 28, 2003, $1,250,000 was distributed in terms of the fifth priority;
(vi) Sixth, to pay any accrued amounts for obligations performed with respect to periods prior to January 1, 2000 under the Management Services Agreement, the Organizational and Administrative Services Agreement and the Marketing Services Agreement. The final required payments under this priority were made during 2001;
(vii) Seventh, for the period beginning March 31, 2000 and ending December 31, 2014, to pay each of Kerzner Investments and Waterford Gaming twenty-five percent (25%) of the relinquishment payments as distributions. On January 27, 2004 and January 28, 2003, $12,669,636 ($6,334,818 to each of Kerzner Investments and Waterford Gaming) and $22,043,000 ($11,021,500 to each of Kerzner Investments and Waterford Gaming), respectively, was distributed by the Partnership in terms of the seventh priority; and
(viii) Eighth, to distribute all excess cash. On January 27, 2004, $10,926,597 ($5,463,298 to Kerzner Investments and $5,463,299 to Waterford Gaming) was distributed as excess cash.
In addition, the Partnership shall not make any distributions pursuant to the Amended and Restated Omnibus Termination Agreement until it has annually distributed to its partners, pro rata, the amounts related to the partners tax obligations as described in Section 3.03a(1) of the Partnership Agreement less twice the amount of all other funds paid or distributed to Waterford Gaming during such year pursuant to the Amended and Restated Omnibus Termination Agreement.
To the extent the Partnership does not have adequate cash to make the payments pursuant to the Amended and Restated Omnibus Termination Agreement, such amounts due shall be deferred without the accrual of interest until the Partnership has sufficient cash to pay them.
Amended and Restated Omnibus Financing Agreement
Until January 1, 2000, the Partnership's primary source of revenue and cash flow was Management Fees. Those fees were utilized by the Partnership to make subcontract payments to partners and affiliates pursuant to the Amended and Restated Omnibus Financing Agreement, which was terminated effective January 1, 2000.
2. Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less.
Relinquishment Fee
Revenue is generated in accordance with the terms of the Relinquishment Agreement and recognized quarterly based upon the revenues of the Authority.
Development Services Revenue and Cost Recognition
Revenue generated from services performed in accordance with the terms of the Development Agreement are recognized on the percentage-of-completion basis, determined by the percentage of costs incurred to date to estimated total costs for the contract. This method is used because management considers cost incurred to be the best available measure of progress on the contract.
Costs of development services revenue performed include all direct labor costs and those indirect costs related to services such as subcontractors, consultants, supplies, depreciation and other costs. Changes in performance, requirements and estimated profitability may result in revisions to costs and income and will be recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.
The asset, "development costs and estimated losses in excess of amounts billed", represents revenues recognized in excess of amounts billed. The liability, "amounts billed in excess of costs and estimated losses", represents billings in excess of revenues recognized.
Deferred Costs
Costs associated with acquiring the Management Agreement were amortized on a straight-line basis over the 84-month period of the Management Agreement through March 3, 1999. As a result of the Relinquishment Agreement becoming effective, the remaining balance will be amortized over 189 months beginning March 4, 1999.
Property and Equipment
Office equipment, computer equipment and furniture and fixtures are stated at cost. Depreciation is charged against income over a 3-year estimated life of the office and computer equipment and over a 5-year estimated life of furniture and fixtures. Depreciation expense for the years ended December 31, 2003, 2002 and 2001 amounted to $3,303, $7,641 and $12,708 of which $3,003, $7,341 and $12,508 were included in cost of development services revenue, respectively.
Income Taxes
No income tax provision or benefit is recorded on the books of the Partnership, as the respective share of taxable income or loss is reportable by the partners on their individual tax returns.
Concentration of Credit Risk
Financial instruments, which potentially subject the Partnership to a concentration of credit risk, principally consist of cash in excess of the financial institutions' insurance limits. The Partnership invests available cash with high credit quality institutions.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Payments to Partners and their Affiliates
Payments are made to the partners and/or their affiliates in accordance with the terms of the Amended and Restated Omnibus Termination Agreement for certain subcontracted services rendered and are accounted for as expenses of the Partnership.
3. Development Contract
The Partnership entered into a Development Agreement with the Authority, which entitles the Partnership to receive a development fee totaling $14 million. A summary of the quarterly Development Fee payments received by the Partnership in accordance with the terms of the Development Agreement is as follows:
Date of Payment Amount --------------- ----------
January 15, 2000 $ 1,372,000 April 20, 2000 896,000 July 17, 2000 1,260,000 October 13, 2000 1,372,000 January 23, 2001 588,000 April 16, 2001 1,582,000 July 20, 2001 2,212,000 October 17, 2001 1,974,000 January 25, 2002 1,260,000 April 22, 2002 413,000 July 19, 2002 581,000 October 18, 2002 238,000 January 24, 2003 84,000 April 15, 2003 112,000 October 30, 2003 56,000 ----------- $14,000,000 ===========
Information relative to the development contract in progress is as follows:
2003 2002 ---- ----
Development costs incurred $ 29,727,400 $ 25,065,345 Estimated losses (15,964,000) (16,000,000) ------------ ------------ 13,763,400 9,065,345 Less: billings to date (14,000,000) (13,832,000) ------------ ------------ Amounts billed in excess of development costs and estimated losses $ (236,600) $ (4,766,655) ------------ ------------
The balance sheets include a related loss provision of $270,380 and $5,639,684 representing an accrual for additional contract costs exceeding cumulative revenues earned and cumulative costs incurred at December 31, 2003 and 2002, respectively.
4. Deferred Costs
Certain costs incurred by the Partnership in connection with obtaining the Management Agreement and the opening of the Mohegan Sun totaling $5,498,941 were capitalized. Amortization commenced upon the opening of the Mohegan Sun. Amortization expense for the years ended December 31, 2003, 2002 and 2001 was $221,518, $221,518 and $221,517, respectively.
5. Relinquishment Fee
The Partnership entered into a Relinquishment Agreement with the Authority, which entitles the Partnership to receive a relinquishment fee of 5 percent of the Revenues generated by the Mohegan Sun including revenue generated by the Project Sunburst expansion.
For the years ended December 31, 2003, 2002 and 2001, Relinquishment Fees earned were $65,099,553, $58,508,703 and $45,715,318, respectively. The amount of Relinquishment Fees reported in these financial statements are based upon Revenues reported to the Partnership by the Authority. These amounts were paid by the Authority as follows:
Date received by the Partnership Amount -------------------------------- ------
April 25, 2003 $ 7,433,160 July 25, 2003 23,635,310 October 27, 2003 8,691,811 January 26, 2004 25,339,272 ------------- Relinquishment Fees earned 2003 $ 65,099,553 =============
April 25, 2002 $ 6,228,559 July 25, 2002 20,438,439 October 25, 2002 8,171,882 January 27, 2003 23,669,823 ------------- Relinquishment Fees earned 2002 $ 58,508,703 =============
April 25, 2001 $ 5,090,622 July 25, 2001 16,036,421 September 7, 2001 136,467 October 25, 2001 5,765,232 January 25, 2002 18,686,576 ------------- Relinquishment Fees earned 2001 $ 45,715,318 =============
6. Reconciliation of Financial Statements and Tax Information
2003 2002 2001 ---- ---- ----
Financial statement net income $ 62,919,777 $ 55,082,815 $ 43,526,978
Guaranteed payments to partners (39,941,567) (55,765,000) (36,268,038)
Subcontract payments to affiliates previously recorded for financial statement purposes --- --- (11,810,876)
Financial statement depreciation and amortization (greater than) less than tax basis depreciation and amortization (3,028) 1,560 4,172
Conversion from accrual basis to cash basis method of accounting --- --- 14,660
Percentage of completion accounting difference (9,236,479) 991,712 (923,794)
Other (4,865) 50,093 34,156 ------------ ------------ ------------
Federal income tax basis net income (loss) $ 13,733,838 $ 361,180 $(5,422,742) ============ ============ ===========
For the year ended December 31, 1998, the Partnership was required to change its method of accounting for tax purposes from the cash method to the accrual method, in accordance with Internal Revenue Code Section 448. The cumulative difference of $58,640 is amortized equally over four years at $14,660 per year.
7. Commitments and Contingencies
Litigation
On January 6, 1998, Leisure and defendants Waterford Gaming, the Partnership, LMW and Slavik settled a prior lawsuit brought by Leisure. In connection with this settlement, Leisure, the Partnership, Waterford Gaming, LMW and Slavik entered into a settlement and release agreement. Pursuant to this settlement and release agreement, Waterford Gaming bought out Leisure's beneficial interest in the Partnership.
By complaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a four count complaint naming as defendants Waterford Gaming, the Partnership, LMW, Slavik, Waterford Group, LLC, Len Wolman and Mark Wolman (collectively, the "Defendants"). The matter has been transferred to the complex litigation docket and is pending in Waterbury, Connecticut. The complaint alleged breach of fiduciary duties, fraudulent non-disclosure, violation of Connecticut Statutes Section 42-110a, et seq. and unjust enrichment in connection with the negotiation by certain of the Defendants of the settlement and release agreement. The complaint also brought a claim for an accounting. The complaint seeks unspecified legal and equitable damages. On February 29, 2000 Defendants filed a Motion to Strike and a Motion for Summary Judgement, each with respect to all claims. The Court granted Defendants' Motion to Strike in part and denied Defendants' Motion for Summary Judgement, on October 13, 2000. The Court's order dismissed the claim for an accounting and the claim under Connecticut Statutes Section 42-110a, et seq. The Court also struck the alter ego allegations in the complaint against LMW, Slavik, Len Woman, and Mark Wolman. In a decision dated August 6, 2001, the Court dismissed all claims against LMW, Slavik, Len Wolman and Mark Wolman.
On November 15, 2000, the Partnership and its co-defendants answered the complaint. In addition, the Partnership and Waterford Gaming asserted counterclaims for breach of the settlement and release agreement and breach of the implied covenant of good faith against Leisure and its president, Lee Tyrol. In a decision dated June 6, 2001, the Court dismissed the counterclaims against Lee Tyrol. Leisure moved for summary judgment seeking dismissal of the counterclaims in full, which motion was denied on April 14, 2003.
Discovery has commenced and is ongoing. Jury selection is scheduled to commence on October 19, 2004 with presentation of evidence to begin on October 26, 2004.
The Partnership believes that it has meritorious defenses and intends to vigorously contest the claims in this action and to assert all available defenses. At the present time, the Partnership is unable to express an opinion on the likelihood of an unfavorable outcome or to give an estimate of the amount or range of possible loss to the Partnership as a result of this litigation due to the disputed issues of law and/or facts on which the outcome of this litigation depends.
In addition, the Partnership is a defendant in certain litigation incurred in the normal course of business. In the opinion of the Partnership's management, based on the advice of counsel, the aggregate liability, if any, arising from such litigation will not have a material adverse effect on the Partnership's financial condition or results of operations.
c) REPORTS ON FORM 8-K
(i) Form 8-K filed on November 19, 2003
Item 5.
On November 14, 2003, the Mohegan Tribal Gaming Authority (the "Authority") filed Form 8-K, relating to the completion of its offer to exchange its Senior Subordinated Notes, a copy of which has been filed as an exhibit to this report and is incorporated by reference to the Authority's electronic filing of such report on Form 8-K, Securities and Exchange Commission file reference no. 033-80655.
Date of Report: November 14, 2003
(ii) Form 8-K filed on December 18, 2003
Item 5.
On December 16, 2003, the Mohegan Tribal Gaming Authority (the "Authority") filed its annual report on Form 10-K for the year ended September 30, 2003, a copy of which has been filed as an exhibit to this report and is incorporated by reference to the Authority's electronic filing of such report on Form 10-K, Securities and Exchange Commission file reference no. 033-80655.
Date of Report: December 16, 2003
(iii)Form 8-K filed on January 21, 2004
Item 5.
On January 20, 2004, the Mohegan Tribal Gaming Authority (the "Authority") filed Form 8-K, relating to the posting on its website of its slot machine statistical report, a copy of which has been filed as an exhibit to this report and is incorporated by reference to the Authority's electronic filing of such report on Form 8-K, Securities and Exchange Commission file reference no. 033-80655.
Date of Report: January 20, 2004
(iv) Form 8-K filed on February 2, 2004
Item 5.
On January 30, 2004, the Mohegan Tribal Gaming Authority (the "Authority") filed a press release on Form 8-K, announcing its first quarter ended December 31, 2003 operating results, a copy of which has been filed as an exhibit to this report and is incorporated by reference to the Authority's electronic filing of such report on Form 8-K, Securities and Exchange Commission file reference no. 033-80655.
Date of Report: January 30, 2004
(v) Form 8-K filed on February 12, 2004
Item 5.
On February 11, 2004, the Mohegan Tribal Gaming Authority (the "Authority") filed its quarterly report on Form 10-Q for the quarter ended December 31, 2003, a copy of which has been filed as an exhibit to this report and is incorporated by reference to the Authority's electronic filing of such report on Form 10-Q, Securities and Exchange Commission file reference no. 033-80655.
Date of Report: February 11, 2004
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WATERFORD GAMING, L.L.C.
Date: March 26, 2004 By: /s/ Len Wolman ------------------------------------ Len Wolman, Chairman of the Board of Directors, Chief Executive Officer
Date: March 26, 2004 By: /s/ Alan Angel ------------------------------------ Alan Angel, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 26, 2004.
SIGNATURE TITLE
/s/ Len Wolman Chairman of the Board of Directors, - --------------------------- Len Wolman Chief Executive Officer
/s/Del J. Lauria Member of the Board of Directors, - --------------------------- Del J. Lauria Secretary
/s/ Mark Wolman Member of the Board of Directors - --------------------------- Mark Wolman
/s/ Stephen F. Slavik Member of the Board of Directors - --------------------------- Stephen F. Slavik