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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q


ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2003

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                              

Commission file number 1-8570

MANDALAY RESORT GROUP
(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction of
incorporation or organization)		   88-0121916
(I.R.S. employer
identification no.)

3950 Las Vegas Boulevard South, Las Vegas, Nevada 89119
(Address of principal executive offices)

(702) 632-6700
(Registrant's telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
   Outstanding at November 30, 2003
Common Stock, $.012/3 par value   64,892,378 shares


MANDALAY RESORT GROUP AND SUBSIDIARIES

Form 10-Q

INDEX

 
    
   Page No.
Part I. FINANCIAL INFORMATION    
 
Item 1.
 
Financial Statements:
 
 

 
 
Condensed Consolidated Balance Sheets (Unaudited) at October 31, 2003 and January 31, 2003
 
3

 
 
Condensed Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended October 31, 2003 and 2002
 
4

 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended October 31, 2003 and 2002
 
5

 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
6-17
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
18-34
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risks
 
34-36
 
Item 4.
 
Controls and Procedures
 
36

Part II. OTHER INFORMATION
 
 
 
Item 1.
 
Legal Proceedings
 
37
 
Item 6.
 
Exhibits and Reports on Form 8-K
 
37-38

2


Part I.    FINANCIAL INFORMATION

Item 1.    Financial Statements


MANDALAY RESORT GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 
   October 31,
2003
   January 31,
2003
  
ASSETS              
Current assets              
  Cash and cash equivalents   $ 169,978   $ 148,442  
  Receivables, net of allowance     80,561     68,410  
  Inventories     33,836     30,625  
  Prepaid expenses and other     56,643     63,927  
   
 
 
    Total current assets     341,018     311,404  
   
 
 
Property, equipment and leasehold interests, at cost, net     3,551,510     3,201,635  
   
 
 
Other assets              
  Excess of purchase price over fair market value of net assets acquired     37,965     38,330  
  Investments in unconsolidated affiliates     568,580     573,345  
  Other investments     57,488     43,625  
  Intangible development costs     93,360     93,360  
  Deferred charges and other assets     78,691     92,965  
   
 
 
    Total other assets     836,084     841,625  
   
 
 
    Total assets   $ 4,728,612   $ 4,354,664  
   
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Current liabilities              
  Current portion of long-term debt   $ 12,591   $ 20,284  
  Accounts and contracts payable              
    Trade     38,559     36,952  
    Construction     17,410     10,031  
  Accrued liabilities     229,298     250,110  
   
 
 
    Total current liabilities     297,858     317,377  
   
 
 
Long-term debt, net of current portion     3,011,910     2,763,593  
   
 
 
Deferred income tax     226,551     227,652  
Accrued intangible development costs     49,360     55,027  
Other long-term liabilities     80,581     89,499  
   
 
 
    Total liabilities     3,666,260     3,453,148  
   
 
 
Minority interest     48,088     18,587  
   
 
 
Stockholders' equity              
  Common stock $.012/3 par value
Authorized—450,000,000 shares
Issued—113,658,313 shares		     1,894     1,894  
  Preferred stock $.01 par value
Authorized—75,000,000 shares		     —     —  
  Additional paid-in capital     552,553     581,166  
  Retained earnings     1,587,041     1,489,979  
  Deferred compensation     (715 )   —  
  Accumulated other comprehensive loss     (11,964 )   (16,920 )
  Treasury stock (48,765,935 and 51,061,847 shares), at cost     (1,114,545 )   (1,173,190 )
   
 
 
Total stockholders' equity     1,014,264     882,929  
   
 
 
    Total liabilities and stockholders' equity   $ 4,728,612   $ 4,354,664  
   
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


MANDALAY RESORT GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share data)

(Unaudited)

 
   Three Months
Ended October 31,
   Nine Months
Ended October 31,
  
 
   2003
   2002
   2003
   2002
  
REVENUES:                          
  Casino   $ 304,808   $ 301,010   $ 916,970   $ 914,861  
  Hotel     167,728     143,027     493,365     442,060  
  Food and beverage     113,335     104,447     347,749     318,187  
  Other     83,614     89,528     257,112     262,341  
   
 
 
 
 
      669,485     638,012     2,015,196     1,937,449  
  Less-complimentary allowances     (43,865 )   (42,377 )   (128,231 )   (127,558 )
   
 
 
 
 
      625,620     595,635     1,886,965     1,809,891  
   
 
 
 
 
COSTS AND EXPENSES:                          
  Casino     160,296     160,605     481,530     482,325  
  Hotel     57,998     51,600     173,806     153,521  
  Food and beverage     78,924     72,086     240,435     216,288  
  Other operating expenses     52,394     58,169     155,888     164,550  
  General and administrative     110,120     105,521     330,802     309,210  
  Corporate general and administrative     7,889     6,574     24,100     20,803  
  Depreciation and amortization     49,821     31,939     124,593     114,586  
  Operating lease rent     —     12,975     20,172     38,161  
  Preopening expenses     4,015     1,248     4,372     3,265  
  Write-off of intangible asset     —     —     —     13,000  
   
 
 
 
 
      521,457     500,717     1,555,698     1,515,709  
   
 
 
 
 
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES     19,846     21,465     65,593     77,333  
   
 
 
 
 
INCOME FROM OPERATIONS     124,009     116,383     396,860     371,515  
   
 
 
 
 
OTHER INCOME (EXPENSE):                          
  Interest, dividend and other income     686     (2,103 )   3,390     (2,076 )
  Guarantee fees from unconsolidated affiliate     —     —     —     193  
  Interest expense     (46,545 )   (47,318 )   (148,451 )   (156,114 )
  Loss on early extinguishment of debt, net of related gain on swap terminations     —     —     (6,327 )   —  
  Net interest expense from unconsolidated affiliates     (2,239 )   (986 )   (6,037 )   (5,010 )
   
 
 
 
 
      (48,098 )   (50,407 )   (157,425 )   (163,007 )
   
 
 
 
 
MINORITY INTEREST     (13,552 )   (13,401 )   (42,766 )   (29,274 )
   
 
 
 
 
INCOME BEFORE PROVISION FOR INCOME TAX AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE     62,359     52,575     196,669     179,234  
  Provision for income tax     (21,717 )   (19,355 )   (69,645 )   (65,960 )
   
 
 
 
 
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE.     40,642     33,220     127,024     113,274  
  Cumulative effect of a change in accounting principle for goodwill.     —     —     —     (1,862 )
   
 
 
 
 
NET INCOME   $ 40,642   $ 33,220   $ 127,024   $ 111,412  
   
 
 
 
 
BASIC EARNINGS PER SHARE                          
  Income before cumulative effect of change in accounting principle   $ .65   $ .49   $ 2.07   $ 1.66  
  Cumulative effect of a change in accounting principle     —     —     —     (.03 )
   
 
 
 
 
  Net income per share   $ .65   $ .49   $ 2.07   $ 1.63  
   
 
 
 
 
DILUTED EARNINGS PER SHARE                          
  Income before cumulative effect of change in accounting principle   $ .63   $ .47   $ 1.98   $ 1.59  
  Cumulative effect of a change in accounting principle     —     —     —     (.03 )
   
 
 
 
 
  Net income per share   $ .63   $ .47   $ 1.98   $ 1.56  
   
 
 
 
 
  Average shares outstanding—basic     62,659,704     68,259,382     61,405,530     68,419,837  
   
 
 
 
 
  Average shares outstanding—diluted     64,894,681     71,117,470     64,241,628     71,441,024  
   
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


MANDALAY RESORT GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
   Nine Months
Ended October 31,
  
 
   2003
   2002
  
Cash flows from operating activities              
  Net income   $ 127,024   $ 111,412  
   
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
 
 
    Depreciation and amortization     124,593     114,586  
    Provision for bad debts     1,765     6,499  
    Decrease in deferred income tax     (3,769 )   (3,210 )
    Tax benefit from stock option exercises     40,034     —  
    Decrease in interest payable     (21,770 )   (1,717 )
    Increase in accrued pension cost     8,192     6,345  
    Loss on disposition of fixed assets     1,049     964  
    Cumulative effect of accounting change     —     1,862  
    Write-off of intangible asset     —     13,000  
    (Increase) decrease in other current assets     (9,843 )   22,573  
    Increase in other current liabilities     12,898     20,053  
    Decrease (increase) in other noncurrent assets     9,071     (21,319 )
    Unconsolidated affiliates' distributions in excess of earnings     4,453     20,864  
    Minority interest in earnings, net of distributions     29,501     17,094  
    Other     (3,890 )   3,183  
   
 
 
     
Total adjustments
 
 
192,284
 
 
200,777
 
   
 
 
   
Net cash provided by operating activities
 
 
319,308
 
 
312,189
 
   
 
 

Cash flows from investing activities
 
 
 
 
 
 
 
  Capital expenditures     (454,225 )   (217,381 )
  Increase in construction payable     7,379     4,287  
  Increase in other investments     (9,973 )   (10,913 )
  Increase in investments in unconsolidated affiliates     —     (43,500 )
  Development agreement costs     (16,000 )   (17,000 )
  Other     1,884     2,282  
   
 
 
   
Net cash used in investing activities
 
 
(470,935
)
 
(282,225
)
   
 
 

Cash flows from financing activities
 
 
 
 
 
 
 
  Proceeds from issuance of senior notes and convertible senior debentures     650,000     —  
  Proceeds from equipment financing     145,000     —  
  Net effect on cash of issuances and payments of debt with initial maturities of three months or less     (100,000 )   90,000  
  Principal payments of debt with initial maturities in excess of three months     (445,446 )   (44,246 )
  Debt issuance costs     (17,012 )   (484 )
  Debt premium on reverse interest rate swap termination     —     28,352  
  Exercise of stock options     89,632     28,942  
  Purchases of treasury stock     —     (95,617 )
  Final settlement and interest under equity forward agreements     (100,419 )   —  
  Reversal of deferred gain     (10,339 )   (16,414 )
  Payment of cash dividend     (29,962 )   —  
  Other     (8,291 )   (5,282 )
   
 
 
 
Net cash provided by (used in) financing activities
 
 
173,163
 
 
(14,749
)
   
 
 

Net increase in cash and cash equivalents
 
 
21,536
 
 
15,215
 

Cash and cash equivalents at beginning of period
 
 
148,442
 
 
105,905
 
   
 
 

Cash and cash equivalents at end of period
 
$
169,978
 
$
121,120
 
   
 
 

Supplemental cash flow disclosures
 
 
 
 
 
 
 
 
Cash paid for interest (net of amounts capitalized, of $5,922 and $9,231)
 
$
166,873
 
$
152,159
 
  Cash paid for income taxes   $ 31,033   $ 27,765  
  Noncash items              
    Accrual of development agreement costs   $ —   $ 76,360  
    Application of deposit for purchase of equipment   $ 22,500   $ —  
    (Decrease) increase in market value of interest rate swaps   $ (5,756 ) $ 12,513  
    (Increase) decrease in market value of investment in insurance contracts   $ (3,889 ) $ 3,440  

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


MANDALAY RESORT GROUP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1.    Summary of Significant Accounting Policies

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

        Mandalay Resort Group (the "Company"), which changed its name from Circus Circus Enterprises, Inc. effective June 18, 1999, was incorporated February 27, 1974 in Nevada. The Company owns and operates hotel and casino facilities in Las Vegas, Reno, Laughlin, Jean and Henderson, Nevada and a hotel and dockside casino in Tunica County, Mississippi. In Detroit, Michigan, the Company is the majority investor in a casino. It is also an investor in several unconsolidated affiliates, with operations that include a riverboat casino in Elgin, Illinois, a hotel/casino in Reno, Nevada and a hotel/casino on the Las Vegas Strip. (See Note 3—Investments in Unconsolidated Affiliates.)

        The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and the Detroit joint venture (53.5% owned), which is required to be consolidated. Material intercompany accounts and transactions have been eliminated. Investments in 50% or less owned affiliated companies are accounted for under the equity method.

        Minority interest, as reflected on the condensed consolidated financial statements, represents the 46.5% interest of the minority partner in MotorCity Casino in Detroit, Michigan.

        The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. The results for the three and nine months ended October 31, 2003 are not necessarily indicative of results to be expected for the full fiscal year.

        These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Amendment No.1 on Form 10-K/A to the Company's annual report on Form 10-K for the year ended January 31, 2003.

EARNINGS PER SHARE

        Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period, while diluted earnings per share reflects the impact of additional dilution for all potentially dilutive securities, such as stock options.

6


        The table below reconciles weighted average shares outstanding used to calculate basic earnings per share with the weighted average shares outstanding used to calculate diluted earnings per share. There were no reconciling items for net income.

 
   Three Months
Ended October 31,
   Nine Months
Ended October 31,
 
   2003
   2002
   2003
   2002
 
   (in thousands, except per share data)
Net income   $ 40,642   $ 33,220   $ 127,024   $ 111,412
   
 
 
 
Weighted average shares outstanding (basic)     62,660     68,259     61,406     68,420
Dilutive effect of stock options     2,235     2,559     2,836     2,704
Equity forward contract     —     299     —     317
   
 
 
 
Weighted average shares outstanding (diluted)     64,895     71,117     64,242     71,441
   
 
 
 
Basic earnings per share   $ .65   $ .49   $