**EXHIBIT 14.3**

 

TRADING COVE ASSOCIATES

 
| Report  of Independent Registered Public Accounting Firm Financial Statements:                         |   |
|--------------------------------------------------------------------------------------------------------|--------|
| Balance  Sheets as of December 31, 2004 and 2003                                                       |   |
| Statements of Operations for  the years ended December 31, 2004, 2003 and 2002                         |   |
| Statements  of Changes in Partners’ Capital for the years ended December 31, 2004, 2003  and 2002 |   |
| Statements of Cash Flows for  the years ended December 31, 2004, 2003 and 2002                         |   |
| Notes to Financial  Statements                                                                         |   |

 

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Report of Independent Registered Public Accounting Firm

 

Tothe Partners of Trading Cove Associates 

 

 

Inour opinion, the accompanying balance sheets and the related statements of operations,changes in partners’ capital and of cash flows present fairly, in all material respects,the financial position of Trading Cove Associates (the “Partnership”) atDecember 31, 2004 and 2003, and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2004, inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Partnership’smanagement. Our responsibility is to express an opinion on these financial statementsbased on our audits. We conducted our audits of these statements in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion. 

 

PricewaterhouseCoopers,LLP 

Hartford,CT 

March15, 2005

 

1

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Trading Cove Associates

BalanceSheets

December 31, 2004 and 2003

 
| ** **                                                                                                                   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                         |       |       |       |       |       |
| Assets                                                                                                                       |       |       |       |       |       |
| Current assets                                                                                                               |       |       |       |       |       |
| Cash and cash equivalents                                                                                                    |       | $          | 732,886    |       | $          | 798,602 |   |
| Relinquishment fee receivable                                                                                                |       | 26,589,614 |       | 25,339,272 |       |
| Other current assets                                                                                                         |       | 151        |       | 5,531      |       |
|                                                                                                                         |       |       |       |       |       |
| Total current assets                                                                                                         |       | 27,322,651 |       | 26,143,405 |       |
|                                                                                                                         |       |       |       |       |       |
|                                                                                                                         |       |       |       |       |       |
| Deferred costs, net of accumulated  amortization of $3,282,551 and $3,060,427 at December 31, 2004 and 2003,  respectively   |       | 2,216,390  |       | 2,438,514  |       |
| Property and equipment, net of accumulated  depreciation of $14,951 and $14,651 at December 31, 2004 and 2003,  respectively |       | 384        |       | 684        |       |
|                                                                                                                         |       |       |       |       |       |
| Total assets                                                                                                                 |       | $          | 29,539,425 |       | $          | 28,582,603 |   |
|                                                                                                                         |       |       |       |       |       |
| Liabilities and Partners’ Capital                                                                                       |       |       |       |       |       |
| Current liabilities                                                                                                          |       |       |       |       |       |
| Accounts payable and accrued expenses                                                                                        |       | $          | 93,538     |       | $          | 88,972 |   |
| Subcontracted services payable                                                                                               |       | 465,930    |       | 474,767    |       |
| Estimated contract costs due related party                                                                                   |       | 413,760    |       | 506,980    |       |
|                                                                                                                         |       |       |       |       |       |
| Total current liabilities                                                                                                    |       | 973,228    |       | 1,070,719  |       |
|                                                                                                                         |       |       |       |       |       |
| Commitments and contingent liabilities                                                                                       |       |       |       |       |       |
| Partners’ capital                                                                                                       |       | 28,566,197 |       | 27,511,884 |       |
|                                                                                                                         |       |       |       |       |       |
| Total liabilities and partners’ capital                                                                                 |       | $          | 29,539,425 |       | $          | 28,582,603 |   |

 

The accompanying notes are an integral partof these financial statements.

 

2

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Trading Cove Associates

Statementsof Operations

For the Years Ended December 31, 2004, 2003 and 2002

 
| ** **                                             | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                   |       |       |       |       |       |       |       |
| Revenue                                                |       |       |       |       |       |       |       |
| Relinquishment fee                                     |       | $          | 69,101,491 |       | $          | 65,099,553 |       | $ | 58,508,703 |   |
| Development services revenue                           |       | 43,400     |       | 4,698,055  |       | 556,788    |       |
|                                                   |       |       |       |       |       |       |       |
| Total revenues                                         |       | 69,144,891 |       | 69,797,608 |       | 59,065,491 |       |
|                                                   |       |       |       |       |       |       |       |
| Expenses                                               |       |       |       |       |       |       |       |
| Subcontract payments to partners and their  affiliates |       | 1,869,157  |       | 1,840,346  |       | —     |       |
| Cost of development services revenue                   |       | 43,400     |       | 4,662,055  |       | 1,756,788  |       |
| Amortization and depreciation                          |       | 222,424    |       | 221,818    |       | 221,818    |       |
|                                                   |       |       |       |       |       |       |       |
| General and administrative                             |       | 130,843    |       | 159,653    |       | 2,017,350  |       |
|                                                   |       |       |       |       |       |       |       |
| Total expenses                                         |       | 2,265,824  |       | 6,883,872  |       | 3,995,956  |       |
|                                                   |       |       |       |       |       |       |       |
| Interest and dividend income                           |       | 8,252      |       | 6,041      |       | 13,280     |       |
|                                                   |       |       |       |       |       |       |       |
| Net income                                             |       | $          | 66,887,319 |       | $          | 62,919,777 |       | $ | 55,082,815 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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Trading Cove Associates

Statements of Changes in Partners’ Capital For the Years

Ended December 31, 2004, 2003 and 2002

 
| ** **                                | ** ** | **Kerzner Investments  Connecticut Inc.** | ** ** | **Waterford  Gaming, L.L.C.** | ** ** | **Total**   | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|-------------------------------|------------|-------------|------------|
|                                      |       |                                      |       |                          |       |        |       |
| Partners’ capital, January 1, 2002   |       | $                                         | 7,174,961  |                          | $          | 5,924,961   |       | $ | 13,099,922 |   |
| Net income                                |       | 30,041,407                                |       | 25,041,408                    |       | 55,082,815  |       |
| Contributions                             |       | 1,000,000                                 |       | 1,000,000                     |       | 2,000,000   |       |
| Distributions                             |       | (29,268,604                               | )          | (24,268,605                   | )          | (53,537,209 | )          |
|                                      |       |                                      |       |                          |       |        |       |
| Partners’ capital, December 31, 2002 |       | 8,947,764                                 |       | 7,697,764                     |       | 16,645,528  |       |
| Net income                                |       | 33,959,889                                |       | 28,959,888                    |       | 62,919,777  |       |
| Contributions                             |       | 450,000                                   |       | 450,000                       |       | 900,000     |       |
| Distributions                             |       | (28,976,711                               | )          | (23,976,710                   | )          | (52,953,421 | )          |
|                                      |       |                                      |       |                          |       |        |       |
| Partners’ capital, December 31, 2003 |       | 14,380,942                                |       | 13,130,942                    |       | 27,511,884  |       |
| Net income                                |       | 35,943,660                                |       | 30,943,659                    |       | 66,887,319  |       |
| Distributions                             |       | (35,416,503                               | )          | (30,416,503                   | )          | (65,833,006 | )          |
|                                      |       |                                      |       |                          |       |        |       |
| Partners’ capital, December 31, 2004 |       | $                                         | 14,908,099 |                          | $          | 13,658,098  |       | $ | 28,566,197 |   |

 

The accompanying notes are an integral partof these financial statements.

 

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Trading Cove Associates

Statementsof Cash Flows

For the Years Ended December 31, 2004, 2003 and 2002

 
| ** **                                                                        | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                              |       |        |       |        |       |        |       |
| Cash flows from operating activities                                              |       |        |       |        |       |        |       |
| Net income                                                                        |       | $           | 66,887,319 |        | $          | 62,919,777  |       | $ | 55,082,815 |   |
|                                                                              |       |        |       |        |       |        |       |
| Adjustments to reconcile net income to net  cash provided by operating activities |       |        |       |        |       |        |       |
| Amortization                                                                      |       | 222,124     |       | 221,518     |       | 221,518     |       |
| Depreciation                                                                      |       | 300         |       | 3,303       |       | 7,641       |       |
| Loss on disposal of property and equipment                                        |       | —      |       | 743         |       | —      |       |
| Gain on sale of property and equipment                                            |       | —      |       | (1,750      | )          | —      |       |
| Change in operating assets and liabilities                                        |       |        |       |        |       |        |       |
| Relinquishment fee receivable                                                     |       | (1,250,342  | )          | (1,669,449  | )          | (4,983,247  | )          |
| Development fee receivable                                                        |       | —      |       | 84,000      |       | 1,176,000   |       |
| Other current assets                                                              |       | 5,380       |       | (1,531      | )          | (4,000      | )          |
| Accounts payable and accrued expenses                                             |       | 4,566       |       | (25,884     | )          | (64,237     | )          |
| Subcontracted services payable                                                    |       | (8,837      | )          | 474,767     |       | (430,791    | )          |
| Estimated contract costs due related party                                        |       | (93,220     | )          | (9,899,359  | )          | 593,578     |       |
| Total adjustments                                                                 |       | (1,120,029  | )          | (10,813,642 | )          | (3,483,538  | )          |
|                                                                              |       |        |       |        |       |        |       |
| Net cash provided by operating activities                                         |       | 65,767,290  |       | 52,106,135  |       | 51,599,277  |       |
|                                                                              |       |        |       |        |       |        |       |
| Cash flows from investing activities                                              |       |        |       |        |       |        |       |
| Proceeds from sale of property and  equipment                                     |       | —      |       | 1,750       |       | —      |       |
| Net cash provided by investing activities                                         |       | —      |       | 1,750       |       | —      |       |
|                                                                              |       |        |       |        |       |        |       |
| Cash flows from financing activities                                              |       |        |       |        |       |        |       |
| Distributions                                                                     |       | (65,833,006 | )          | (52,953,421 | )          | (53,537,209 | )          |
| Partners’ contributions                                                      |       | —      |       | 900,000     |       | 2,000,000   |       |
| Net cash used in financing activities                                             |       | (65,833,006 | )          | (52,053,421 | )          | (51,537,209 | )          |
|                                                                              |       |        |       |        |       |        |       |
| Net change in cash and cash equivalents                                           |       | (65,716     | )          | 54,464      |       | 62,068      |       |
|                                                                              |       |        |       |        |       |        |       |
| Cash and cash equivalents                                                         |       |        |       |        |       |        |       |
|                                                                              |       |        |       |        |       |        |       |
| Beginning of year                                                                 |       | 798,602     |       | 744,138     |       | 682,070     |       |
| End of year                                                                       |       | $           | 732,886    |        | $          | 798,602     |       | $ | 744,138 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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TRADING COVE ASSOCIATES

 

NOTESTO FINANCIAL STATEMENTS

 

1.Organization, Partnership Agreement and Other Material Agreements

 

(a)           Organization and Partnership Agreement

 

TradingCove Associates (the “Partnership”), a Connecticut general partnership, wasorganized on July 23, 1993. The primary purpose of the Partnership has been:

 

(i)            to assist the Mohegan Tribe of Indians of Connecticut(the “Tribe”) and the Mohegan Tribal Gaming Authority (the “Authority”) inobtaining federal recognition;

 

(ii)           to negotiate the tribal-state compact with theState of Connecticut on behalf of the Tribe;

 

(iii)          to obtain financing for the initial developmentof the Mohegan Sun Casino (the “Mohegan Sun”);

 

(iv)          to negotiate the Amended and Restated GamingFacility Management Agreement, (the “Management Agreement”);

 

(v)           to oversee all operations of the Mohegan Sun pursuantto the terms of the Management Agreement until midnight December 31, 1999, and

 

(vi)          to participate in the design and developmentof the Mohegan Sun.

 

TheMohegan Sun commenced operations on October 12, 1996. From the opening of theMohegan Sun, and until January 1, 2000, the Partnership oversaw the MoheganSun’s day-to-day operations.

 

ThePartnership will terminate on December 31, 2040, or earlier, in accordance withthe terms of the partnership agreement (the “Partnership Agreement”).

 

Theoriginal partners of the Partnership were RJH Development Corp. (“RJH”), a NewYork corporation, Leisure Resort Technology, Inc. (“Leisure”), a Connecticutcorporation, Slavik Suites, Inc. (“Slavik”), a Michigan corporation, and LMWInvestments, Inc. (“LMW”), a Connecticut corporation. On September 21, 1994,the Partnership Agreement was amended and restated to admit Kerzner InvestmentsConnecticut, Inc. (“Kerzner Investments”), a Connecticut corporation, formerlySun Cove Limited, as a partner.

 

OnFebruary 3, 1995, Leisure entered into an acknowledgement and release agreementto withdraw as a partner of the Partnership and hold its interest in thePartnership as a beneficial interest. On August 6, 1997, Leisure filed alawsuit against the Partnership, Kerzner Investments, RJH and Waterford GamingL.L.C. (“Waterford Gaming”) and its owners, claiming breach of contract, breachof fiduciary duties and other matters in connection with the development of theMohegan Sun. On January 6, 1998, pursuant to the settlement and release agreementdescribed in Note 6 below, Waterford Gaming paid $5,000,000 to Leisure and, amongother things, Leisure gave up, (a) its beneficial interest of 5% of certain feesand excess cash flows, as defined, of the Partnership and (b) any other claimsit may have had against the Partnership, Kerzner Investments, RJH, Waterford Gamingand its owners. In connection with the settlement of all matters related tosuch suit, pursuant to the settlement and release agreement, Waterford Gaming agreedto acquire Leisure’s interests in the Partnership. As a result of thisacquisition, Leisure no longer has the right to 5% of the Organizational andAdministrative fee, as defined in the Organizational and Administrative ServicesAgreement, and 5% of the Partnership’s Excess Cash as defined in thePartnership Agreement, and Waterford Gaming is now entitled to such fees andcash. During March 1999, Waterford Gaming’s $65,000,000 senior notes were retiredand, on March 18, 1999, Waterford Gaming paid an additional $2,000,000 to Leisurepursuant to the settlement and release agreement. On January 7, 2000, Leisure fileda complaint against the Partnership and certain other defendants.

 

6

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Fora description of the complaint, see Note 6 to these financial statements.

 

OnNovember 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 Gamingis owned by Waterford Group, LLC. Waterford Group, LLC is owned by Slavik andLMW.

 

Thepartners’ percentage interest in the Partnership as of November 8, 1996 was asfollows:

 
| ** **                            | ** ** | **Percentage** | ** ** |
|---------------------------------------|------------|----------------|------------|
| **Partner**                           | ** ** | **Interest**   | ** ** |
| Kerzner Investments Connecticut, Inc. |       | 50.0%          |       |
| Waterford Gaming, L.L.C.              |       | 50.0%          |       |

 

 

(b)           Other Material Agreements 

 

RelinquishmentAgreement

 

OnFebruary 7, 1998, the Partnership and the Authority entered into the RelinquishmentAgreement (the “Relinquishment Agreement”). Under the terms of theRelinquishment Agreement the Partnership continued to manage the Mohegan Sun underthe Management Agreement until midnight December 31, 1999, and on January 1,2000, the Management Agreement terminated and the Tribe assumed day-to-daymanagement of the Mohegan Sun.

 

Underthe Relinquishment Agreement, to compensate the Partnership for terminating itsrights under the Management Agreement and the Hotel/Resort ManagementAgreement, the Authority agreed to pay to the Partnership a fee (the“Relinquishment Fees”) equal to 5% of Revenues, as defined in theRelinquishment Agreement, generated by the Mohegan Sun during the 15-year periodcommencing on January 1, 2000, including revenue generated by the Project Sunburstexpansion (the “Project Sunburst expansion”).

 

TheRelinquishment Fees are divided into senior relinquishment payments and juniorrelinquishment payments, each of which equals 2.5% of “Revenues”. Revenues aredefined as gross gaming revenues (other than Class II gaming revenue) and all otherfacility revenues. Such revenue includes hotel revenues, food and beverage sales,parking revenues, ticket revenues and other fees or receipts from the convention/eventscenter in the Project Sunburst expansion and all rental or other receipts fromlessees, licensees and concessionaires operating in the facility, but not the grossreceipts of such lessees, licensees and concessionaires. Such revenues excluderevenues generated by any other expansion of the Mohegan Sun. Senior relinquishmentpayments are payable quarterly in arrears commencing on April 25, 2000, for thequarter ended March 31, 2000 and the junior relinquishment payments are payablesemi-annually in arrears commencing on July 25, 2000, for the six months endedJune 30, 2000, assuming sufficient funds are available after satisfaction of theAuthority’s senior obligations, as defined in the Relinquishment Agreement.

 

DevelopmentAgreement

 

OnFebruary 7, 1998 the Partnership and the Authority entered into the DevelopmentServices Agreement (the “Development Agreement”), which made the Partnership theexclusive developer of the Project Sunburst expansion. Pursuant to theDevelopment Agreement, the Partnership agreed to oversee the planning, design,construction, furnishing, equipping and staffing of the Project Sunburst expansionfor a $14.0 million development fee (the “Development Fee”).

 

Thefirst 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 September2001. In April 2002, 734 of the approximately 1,200-hotel rooms in the 34-storyluxury hotel as well as the meeting and convention space and spapened. Thebalance of the approximately 1,200-hotel rooms opened during June 2002. As ofDecember 31, 2004, the Project Sunburst expansion was complete in terms of theDevelopment Agreement.

 

7

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ManagementAgreement

 

ThePartnership entered into the Management Agreement with the Tribe pursuant to whichthe Tribe granted to the Partnership the exclusive right and obligation to develop,manage, operate and maintain the Mohegan Sun. The Management Agreement wasamended and restated effective September 29, 1995 (the “Effective Management AgreementDate”). The Partnership’s obligations under this agreement began five daysafter the Effective Management Agreement Date and were originally intended toend on October 11, 2003, seven years from the opening of the Mohegan Sun. Pursuantto the Management Agreement the Partnership received a management fee that was calculatedin three tiers based upon the Net Revenues, as defined in the Management Agreement,of the Mohegan Sun. The Management Agreement terminated at midnight on December31, 1999. The final management fee was received by the Partnership from theAuthority on January 25, 2000.

 

Agreementswith Partners and/or their Affiliates

 

AgreementRelating to Development Services

 

OnFebruary 9, 1998, the Partnership and Kerzner International Management Limited(“KIML”), entered into the Agreement Relating to Development Services (the “DevelopmentServices Agreement Phase II”). Pursuant to the Development Services AgreementPhase II, the Partnership subcontracted with KIML who agreed to perform those servicesassigned to KIML by the Partnership in order to facilitate the Partnership’s fulfillmentof its duties and obligations to the Authority under the Development Agreement.KIML subsequently assigned the Development Services Agreement Phase II toKerzner Investments.

 

Pursuantto the Development Services Agreement Phase II, the Partnership pays to KerznerInvestments a fee, as subcontractor (the “Development Services Fee Phase II”),equal to 3% of the development costs of the Project Sunburst expansion, excludingcapitalized interest, less all costs incurred by the Partnership in connectionwith the Project Sunburst expansion. At December 31, 2004, all of the Partnership’scosts associated with the Project Sunburst expansion had not been paid, howeverreasonable estimates of those costs have been provided for in these financialstatements. The Development Services Fee Phase II shall be paid in installmentsdue on December 31, 1999 and 2000 and on the Completion Date, as defined in theDevelopment Agreement, with a final payment being made when the actual developmentcosts of the Project Sunburst expansion are known. The Partnership pays the DevelopmentServices Fee Phase II, from available cash flow, if any, in accordance with theAmended and Restated Omnibus Termination Agreement. At December 31, 2004, thetotal of the Development Services Fee Phase II and the Partnership’s costs relatedto the development of the Project Sunburst expansion exceeded the development servicesrevenue from the Authority by approximately $15,964,000.

 

BeforeKIML assigned the Development Services Agreement Phase II to Kerzner Investments,it entered into the Local Construction Services Agreement (the “Local ConstructionServices Agreement”) with Wolman Construction, LLC(“Construction”) pursuant towhich Construction agreed to provide certain of those services assigned to KIMLby 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 agreedto pay to Construction a fee equal to 20.83% of the Development Services FeePhase II as and when Kerzner Investments receives payment from the Partnership inaccordance with the Development Services Agreement Phase II.

 

Constructionhas subcontracted with The Slavik Company to provide certain services under theLocal Construction Services Agreement. In connection with this, Construction agreedthat The Slavik Company would be paid a fee equal to14.30% of its fee under theLocal Construction Services Agreement.

 

Amendedand Restated Omnibus Termination Agreement

 

EffectiveMarch 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 RestatedOmnibus Termination Agreement (i) terminated the memorandum of understanding datedFebruary 7, 1998; and (ii) effective January 1, 2000, terminated a) the Amendedand Restated Omnibus Financing Agreement; b) the Completion Guarantee and InvestmentBanking and Financing Arrangement Fee Agreement (the “Financing Arrangement Agreement”);c) the Management Services Agreement; d) the Organizational and Administrative ServicesAgreement; e) the Marketing Services Agreement; and f) a Letter Agreement relatingto expenses dated October 19, 1996.

 

8

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Inconsideration for the termination of such agreements, the Partnership will useits cash to pay the following obligations in the priority set forth below:

 

(i)            First, to pay all unpaid amounts which may bedue under the terminated Letter Agreement and to pay to certain affiliates of WaterfordGaming and to Kerzner Investments a percentage of an annual fee of $2.0 millionless the actual expenses incurred by the Partnership during such year. Such annualfee shall be payable in equal quarterly installments beginning March 31, 2000 andending December 31, 2014. For the years ended December 31, 2004, 2003 and 2002,$1,869,157, $1,840,346 and $0, respectively, had been incurred by the Partnershipin terms of the first priority;

 

(ii)           Second, to return all capital contributionsmade by the partners of the Partnership after September 29, 1995. ThePartnership does not anticipate making further capital calls to fund expenses relatedto the development of the Project Sunburst expansion. From January 1, 2000 toDecember 31, 2004 these contributions aggregated $8,000,000.

 

From January 1, 2000 to December 31, 2004 $8,000,000had been repaid to the partners of the Partnership;

 

As of December 31, 2004, no capital contributions remainedoutstanding;

 

(iii)          Third, to pay any accrued amounts forobligations performed prior to January 1, 2000 under the Financing ArrangementAgreement. All such required payments were made during 2000;

 

(iv)          Fourth, to make the payments set forth in theagreements relating to the Development Services Agreement Phase II and the LocalConstruction Services Agreement as detailed under the Agreement Relating to DevelopmentServices above. No such payments are required or due at December 31, 2004. Theaccrued liability to Kerzner Investments with respect to such fee at December31, 2004 was approximately $414,000;

 

(v)           Fifth, to pay Kerzner Investments an annualfee (in the form of a priority distribution) of $5 million payable in equalquarterly installments of $1.25 million beginning March 31, 2000 and ending December31, 2006. On January 26, 2005 and on January 27, 2004, $1.25 million wasdistributed in terms of the fifth priority;

 

(vi)          Sixth, to pay any accrued amounts forobligations performed with respect to periods prior to January 1, 2000 underthe Management Services Agreement, the Organizational and Administrative ServicesAgreement and the Marketing Services Agreement. The final required paymentsunder this priority were made during 2001;

 

(vii)         Seventh, for the period beginning March 31, 2000and ending December 31, 2014, to pay each of Kerzner Investments and WaterfordGaming twenty-five percent (25%) of the relinquishment payments as distributions.On January 26, 2005 and January 27, 2004, $13,294,808 ($6,647,404 to each ofKerzner Investments and Waterford Gaming) and $12,669,636 ($6,334,818 to eachof Kerzner Investments and Waterford Gaming), respectively, was distributed bythe Partnership in terms of the seventh priority; and

 

(viii)        Eighth, to distribute all excess cash. OnJanuary 26, 2005 and January 27, 2004, $11,600,000 ($5,800,000 to each ofKerzner Investments and Waterford Gaming) and $10,926,597 ($5,463,298 to KerznerInvestments and $5,463,299 to Waterford Gaming), respectively, was distributedas excess cash.

 

Inaddition, the Partnership shall not make any distributions pursuant to the Amendedand Restated Omnibus Termination Agreement until it has annually distributed toits partners, pro rata, the amounts related to the partners tax obligations asdescribed in Section 3.03a(1) of the Partnership Agreement less twice theamount of all other funds paid or distributed to Waterford Gaming during suchyear pursuant to the Amended and Restated Omnibus Termination Agreement.

 

Tothe extent the Partnership does not have adequate cash to make the payments pursuantto the Amended and Restated Omnibus Termination Agreement, such amounts dueshall be deferred without the accrual of interest until the Partnership has sufficientcash to pay them.

 

9

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Amendedand Restated Omnibus Financing Agreement

 

UntilJanuary 1, 2000, the Partnership’s primary source of revenue and cash flow was managementfees. Those fees were utilized by the Partnership to make subcontract paymentsto partners and affiliates pursuant to the Amended and Restated OmnibusFinancing Agreement, which was terminated effective January 1, 2000.

 

2.Significant Accounting Policies

 

Cashand Cash Equivalents

 

Cashand cash equivalents represent cash and short-term, highly liquid investmentswith original maturities of three months or less.

 

RelinquishmentFees

 

Revenueis generated in accordance with the terms of the Relinquishment Agreement andrecognized quarterly based upon the Revenues of the Authority.

 

DevelopmentServices Revenue and Cost Recognition

 

Revenuegenerated from services performed in accordance with the terms of the DevelopmentAgreement are recognized on the percentage-of-completion basis, determined bythe percentage of costs incurred to date to estimated total costs for thecontract. This method is used because management considers cost incurred to bethe best available measure of progress on the contract.

 

Costsof development services revenue performed include all direct labor costs and thoseindirect costs related to services such as subcontractors, consultants, supplies,depreciation and other costs. Changes in performance, requirements andestimated profitability may result in revisions to costs and income and will berecognized in the period in which the revisions are determined. Provisions forestimated losses on uncompleted contracts are made in the period in which suchlosses are determined.

 

DeferredCosts

 

Costsassociated with acquiring the Management Agreement were amortized on a straight-linebasis over the 84-month period of the Management Agreement through March 3,1999. As a result of the Relinquishment Agreement becoming effective, theremaining balance will be amortized over 189 months beginning March 4, 1999.

 

Propertyand Equipment

 

Officeequipment, computer equipment and furniture and fixtures are stated at cost.Depreciation is charged against income over a 3-year estimated life of the officeand computer equipment and over a 5-year estimated life of furniture and fixtures.Depreciation expense for the years ended December 31, 2004, 2003 and 2002amounted to $300, $3,303 and $7,641, respectively, of which $0, $3,003 and $7,341were included in the cost of development services revenue, respectively.

 

IncomeTaxes

 

Noincome tax provision or benefit is recorded on the books of the Partnership, asthe respective share of taxable income or loss is reportable by the partners ontheir individual tax returns.

 

Concentrationof Credit Risk

 

ThePartnership’s principal source of revenues and cash flows are the payments receivedand to be received pursuant to the Relinquishment Agreement. The Partnership anticipatesregular payments of the Relinquishment Fees from the Authority based upon theoperating results of the Authority.

 

Financialinstruments, which potentially subject the Partnership to a concentration of creditrisk, principally consist of cash in excess of the financial institutions’insurance limits. The Partnership invests available cash with high creditquality institutions.

 

Useof Estimates

 

Thepreparation of financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure 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.

 

Paymentsto Partners and their Affiliates

 

Paymentsare made to the partners and/or their affiliates in accordance with the termsof the Amended and Restated Omnibus Termination Agreement for certain subcontractedservices rendered and are accounted for as expenses of the Partnership.

 

Reclassification

 

Certain2002 and 2003 balances have been reclassified to conform with the 2004 presentation.

 

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3.Deferred Costs

 

Certaincosts borne by the Partnership in connection with obtaining the ManagementAgreement and the opening of the Mohegan Sun totaling $5,498,941 were capitalized.Amortization commenced upon the opening of the Mohegan Sun. Amortization expensefor the years ended December 31, 2004, 2003 and 2002 was $222,124, $221,518 and$221,518, respectively.

 

ThePartnership’s estimate of amortization expense for each of the succeeding fiveyears and thereafter is as follows:

 
| **Year Ending December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
|                         |       |       |       |
| 2005                         |       | $          | 221,518    |   |
| 2006                         |       | 221,518    |       |
| 2007                         |       | 221,518    |       |
| 2008                         |       | 222,124    |       |
| 2009                         |       | 221,518    |       |
| Thereafter                   |       | 1,108,194  |       |
|                         |       | $          | 2,216,390  |   |

 

4.Relinquishment Fees

 

ThePartnership entered into a Relinquishment Agreement with the Authority, which entitlesthe Partnership to receive a relinquishment fee of 5% of the Revenues generatedby the Mohegan Sun including revenue generated by the Project

SunburstExpansion.

 

Forthe years ended December 31, 2004, 2003 and 2002, Relinquishment Fees earned were$69,101,491, $65,099,553 and $58,508,703, respectively. The amounts of RelinquishmentFees reported in these financial statements are based upon Revenues reported tothe Partnership by the Authority. These amounts were paid by the Authority asfollows:

 
| **Date received by the Partnership** | ** ** | **Amount** | ** ** |
|--------------------------------------|------------|------------|------------|
|                                 |       |       |       |
| April 26, 2004                       |       | $          | 8,196,363  |   |
|                                 |       |       |       |
| July 26, 2004                        |       | 25,150,422 |       |
|                                 |       |       |       |
| October 25, 2004                     |       | 9,165,092  |       |
|                                 |       |       |       |
| January 25, 2005                     |       | 26,589,614 |       |
|                                 |       |       |       |
| Relinquishment Fees earned 2004      |       | $          | 69,101,491 |   |
|                                 |       |       |       |
| 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 |   |

 

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5.Reconciliation of Financial Statements and Tax Information

 
| ** **                                                                                                          | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                                                                |       |        |       |        |       |        |       |
| Financial statement net income                                                                                      |       | $           | 66,887,319 |        | $          | 62,919,777  |       | $ | 55,082,815 |   |
|                                                                                                                |       |        |       |        |       |        |       |
| Guaranteed payments to partners                                                                                     |       | (39,550,748 | )          | (39,941,567 | )          | (55,765,000 | )          |
|                                                                                                                |       |        |       |        |       |        |       |
| Financial statement depreciation and  amortization (greater than) less than tax basis depreciation and amortization |       | 305         |       | (3,028      | )          | 1,560       |       |
|                                                                                                                |       |        |       |        |       |        |       |
| Percentage of completion accounting  difference                                                                     |       | (49,505     | )          | (9,236,479  | )          | 991,712     |       |
|                                                                                                                |       |        |       |        |       |        |       |
| Other                                                                                                               |       | 572         |       | (4,865      | )          | 50,093      |       |
|                                                                                                                |       |        |       |        |       |        |       |
| Federal income tax basis net income                                                                                 |       | $           | 27,287,943 |        | $          | 13,733,838  |       | $ | 361,180 |   |

 

6.Commitments and Contingent Liabilities

 

Litigation

 

OnJanuary 6, 1998, Leisure Resort Technology, Inc. and defendants Waterford Gaming,the Partnership, LMW Investments, Inc. and Slavik Suites, Inc. settled a priorlawsuit brought by Leisure. In connection with this settlement, Leisure, thePartnership, Waterford Gaming, LMW Investments, Inc. and Slavik Suites, Inc. enteredinto a settlement and release agreement. Pursuant to this settlement and releaseagreement, Waterford Gaming bought out Leisure’s beneficial interest in thePartnership.

 

Bycomplaint dated January 7, 2000, as amended February 4, 2000, Leisure filed a fourcount complaint naming as defendants Waterford Gaming, the Partnership, LMW Investments,Inc., Slavik Suites, Inc., Waterford Group, LLC, Len Wolman and Mark Wolman(collectively, the “Defendants”). The matter has been transferred to thecomplex litigation docket and is pending in Waterbury, Connecticut. The complaintalleged breach of fiduciary duties, fraudulent non-disclosure, violation ofConnecticut Statutes Section 42-110a, et seq. and unjust enrichment in connectionwith the negotiation by certain of the Defendants of the settlement and releaseagreement. The complaint also brought a claim for an accounting. The complaintseeks unspecified legal and equitable damages. On February 29, 2000, Defendantsfiled a Motion to Strike and a Motion for Summary Judgement, each with respectto all claims. The Court granted Defendants’ Motion to Strike in part and deniedDefendants’ Motion for Summary Judgement, on October 13, 2000. The Court’sorder dismissed the claim for an accounting and the claim under Connecticut StatutesSection 42-110a, et seq. The Court also struck the alter ego allegations in thecomplaint against LMW Investments, Inc., Slavik Suites, Inc., Len Wolman andMark Wolman. In a decision dated August 6, 2001, the Court dismissed all claimsagainst LMW, Slavik, Len Wolman and Mark Wolman.

 

OnNovember 15, 2000, the Partnership and its co-defendants answered the complaint.In addition, the Partnership and Waterford Gaming asserted counterclaims forbreach of the settlement and release agreement and breach of the impliedcovenant of good faith against Leisure and its president, Lee Tyrol. In adecision dated June 6, 2001, the Court dismissed the counterclaims against Lee Tyrol.Leisure moved for summary judgment seeking dismissal of the counterclaims infull. This motion for the summary judgment was denied on April 14, 2003.

 

Factdiscovery is completed. On April 15, 2004, the Partnership and its co-defendantsfiled a motion for summary judgment as to all of Leisure’s claims. The Courtheard argument on this Motion on June 23, 2004. In an August 4, 2004, Memorandumof Decision, the Court granted summary judgment for the Defendants as to eachof the remaining three counts of the plaintiffs compliant. The plaintiff hasappealed this decision. Defendant’s counterclaims are stayed pending this appeal.

 

ThePartnership believes that it has meritorious defenses and, if necessary, intendsto vigorously contest the claims in this action and to assert all availabledefenses. At the present time, the Partnership is unable to express an opinionon the likelihood of an unfavorable outcome or to give an estimate of the amountor range of possible loss to the Partnership as a result of this litigation dueto the pendency of the appeal and the disputed issues of law and/or facts onwhich the outcome of this litigation depends.

 

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