MANDALAY RESORT GROUP - 10-Q Quarterly Report

QuickLinks -- Click here to rapidly navigate through this document

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 April 30, 2004
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 May 31, 2004
Common Stock, $.01-2/3 par value		67,462,870 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 April 30, 2004 and January 31, 2004	3
	Condensed Consolidated Statements of Income (Unaudited) for the Three Months Ended April 30, 2004 and 2003	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended April 30, 2004 and 2003	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6-17
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	18-31
	Item 3. Quantitative and Qualitative Disclosures About Market Risks	32
	Item 4. Controls and Procedures	32-33
Part II. OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K	34

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

				April 30, 2004			January 31, 2004
ASSETS
Current assets
	Cash and cash equivalents			$	153,063		$	153,490
	Receivables, net of allowance				92,888			87,112
	Inventories				37,729			35,166
	Prepaid expenses and other				67,125			74,099

			Total current assets		350,805			349,867

Property, equipment and leasehold interests, at cost, net					3,576,630			3,590,699

Other assets
	Excess of purchase price over fair value of net assets acquired				37,965			37,965
	Investments in unconsolidated affiliates				574,725			573,306
	Other investments				72,959			60,886
	Intangible development costs				97,610			95,610
	Deferred charges and other assets				71,927			74,163

			Total other assets		855,186			841,930

			Total assets	$	4,782,621		$	4,782,496

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Current portion of long-term debt			$	16,677		$	16,681
	Accounts and contracts payable
		Trade			44,036			39,016
		Construction			7,276			10,122
	Accrued liabilities				265,760			265,132

			Total current liabilities		333,749			330,951

Long-term debt, net of current portion					2,868,800			3,001,975

Deferred income tax					236,634			230,324
Accrued intangible development costs					49,360			49,360
Other long-term liabilities					113,227			96,393

			Total liabilities		3,601,770			3,709,003

Minority interest					48,350			43,223

Stockholders' equity
	Common stock $.01-2/3 par value
		Authorized—450,000,000 shares
		Issued—114,786,688 and 113,654,263 shares			1,913			1,894
	Preferred stock $.01 par value
		Authorized—75,000,000 shares			—			—
	Additional paid-in capital				615,899			549,022
	Retained earnings				1,661,312			1,592,199
	Deferred compensation				(66,163	)		(540	)
	Accumulated other comprehensive loss				(23,293	)		(23,293	)
	Treasury stock (47,323,118 and 48,242,286 shares), at cost				(1,057,167	)		(1,089,012	)

			Total stockholders' equity		1,132,501			1,030,270

			Total liabilities and stockholders' equity	$	4,782,621		$	4,782,496

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

MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
(Unaudited)

		Three Months Ended April 30,
		2004			2003
REVENUES:
	Casino	$	346,119		$	303,417
	Hotel		211,196			160,839
	Food and beverage		132,096			112,310
	Other		89,546			80,714

			778,957			657,280
	Less—complimentary allowances		(49,589	)		(40,770	)

			729,368			616,510

COSTS AND EXPENSES:
	Casino		167,388			158,724
	Hotel		67,828			55,961
	Food and beverage		88,073			77,287
	Other operating expenses		52,402			48,573
	General and administrative		115,357			106,747
	Corporate general and administrative		10,272			8,469
	Depreciation and amortization		50,024			35,137
	Operating lease rent		—			11,217
	Preopening expenses		—			88

			551,344			502,203

EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES			21,662			22,740

INCOME FROM OPERATIONS			199,686			137,047

OTHER INCOME (EXPENSE):
	Interest, dividend and other income		1,347			(1,206	)
	Interest expense		(46,762	)		(51,103	)
	Net interest expense from unconsolidated affiliates		(2,082	)		(2,059	)

			(47,497	)		(54,368	)

MINORITY INTEREST			(17,651	)		(13,856	)

INCOME BEFORE PROVISION FOR INCOME TAX			134,538			68,823
Provision for income tax			(47,210	)		(24,777	)

NET INCOME		$	87,328		$	44,046

BASIC EARNINGS PER SHARE
Net income per share		$	1.32		$	.72

DILUTED EARNINGS PER SHARE
	Net income per share	$	1.30		$	.69

	Average shares outstanding—basic		66,225,924			61,598,245

	Average shares outstanding—diluted		66,974,204			64,226,453

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

MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

						Three Months Ended April 30,
						2004			2003
Cash flows from operating activities
		Net income				$	87,328		$	44,046
		Adjustments to reconcile net income to net cash provided by operating activities
			Depreciation and amortization				50,024			35,137
			Provision for bad debts				—			932
			Increase (decrease) in deferred income tax				6,310			(25,783	)
			Tax benefit from stock option exercises				11,342			—
			Decrease in interest payable				(17,484	)		(12,171	)
			Increase in accrued pension cost				3,886			2,380
			Loss on disposition of fixed assets				860			255
			Unconsolidated affiliates' (earnings in excess of distributions) distributions in excess of earnings				(1,522	)		6,893
			Minority interest in earnings, net of distributions				5,127			9,792
			Changes in assets and liabilities:
				Other current assets			(1,365	)		5,302
				Other current liabilities			27,382			47,267
				Other noncurrent assets			2,720			27,818
			Other				(1,450	)		1,111

					Total adjustments		85,830			98,933

		Net cash provided by operating activities					173,158			142,979

Cash flows from investing activities
	Capital expenditures						(37,513	)		(86,109	)
	Decrease in construction payable						(2,846	)		(1,413	)
	Increase in other investments						(10,622	)		(10,371	)
	Intangible development costs						(6,250	)		(5,000	)
	Other						549			265

		Net cash used in investing activities					(56,682	)		(102,628	)

Cash flows from financing activities
	Proceeds from issuance of senior notes and convertible senior debentures						—			400,000
	Net effect on cash of issuances and payments of debt with initial maturities of three months or less						(120,000	)		(300,000	)
	Principal payments of debt with initial maturities in excess of three months						(4,356	)		(16,117	)
	Debt premium on reverse interest rate swap termination						5,424			—
	Debt issuance costs						(92	)		(9,271	)
	Exercise of stock options						18,319			596
	Settlements and interest under equity forward agreements, net of tax benefit						—			(100,582	)
	Payment of cash dividend						(18,215	)		—
	Other						2,017			(2,051	)

		Net cash used in financing activities					(116,903	)		(27,425	)

Net (decrease) increase in cash and cash equivalents							(427	)		12,926
Cash and cash equivalents at beginning of year							153,490			148,442

Cash and cash equivalents at end of year						$	153,063		$	161,368

Supplemental cash flow disclosures
	Cash paid for interest (net of amounts capitalized of $203 and $926)					$	61,688		$	61,135
	Cash paid for income taxes					$	550		$	190
	Noncash items
	(Increase) decrease in market value of investment in insurance contracts					$	(1,450	)	$	1,111
	(Increase) decrease in market value of interest rate swaps					$	—		$	5,991
	Application of deposit for purchase of equipment					$	—		$	22,500

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

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 2—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. The Company views each casino property as an operating segment and all such operating segments have been aggregated into one reporting segment.

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 months ended April 30, 2004 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 the Company's annual report on Form 10-K for the year ended January 31, 2004.

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.

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 April 30,
(in thousands, except per share data)	Three Months Ended April 30,
(in thousands, except per share data)	2004		2003
Net income	$	87,328	$	44,046

Weighted-average shares outstanding (basic)		66,226		61,598
Dilutive effect of stock options		748		2,628

Weighted-average shares outstanding (diluted)		66,974		64,226

Basic earnings per share	$	1.32	$	.72

Diluted earnings per share	$	1.30	$	.69

STOCK-BASED COMPENSATION

The Company has various employee stock option plans. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") provides that companies may elect to account for employee stock options using a fair value method or continue to apply the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has elected to continue to apply APB 25 and related interpretations in accounting for its stock option plans using the intrinsic value method. Intrinsic value represents the excess, if any, of the market price of the underlying common stock at the grant date over the exercise price of the stock option. Since all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant, no compensation expense related to stock options was reflected in net income. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. Had compensation expense related to stock options been determined in accordance with the fair value recognition

provisions of SFAS 123, the effect on the Company's net income and basic and diluted earnings per share would have been as follows:

		Three Months Ended April 30,
(in thousands, except per share data)		Three Months Ended April 30,
(in thousands, except per share data)		2004			2003
Net income as reported		$	87,328		$	44,046

Less total stock-based employee compensation expense determined under the fair value method, net of tax			(394	)		(886	)

Pro forma net income		$	86,934		$	43,160

Net income per share (basic)
	As reported	$	1.32		$	.72
	Pro forma		1.31			.70
Net income per share (diluted)
	As reported	$	1.30		$	.69
	Pro forma		1.30			.67

The Company has also issued restricted stock pursuant to one of its stock incentive plans. The total value of each restricted stock grant, based upon the fair market value of the stock on the date of grant, is initially reported as deferred compensation under stockholders' equity. This deferred compensation is then amortized to compensation expense over the related vesting period. A total of 1.2 million shares of restricted stock have been granted resulting in deferred compensation of $66.2 million at April 30, 2004 (net of amortization). The following table shows the amount of compensation expense reflected in the income statement related to grants of restricted stock (in thousands):

	Three Months Ended April 30,
(in thousands)	Three Months Ended April 30,
(in thousands)	2004		2003
Compensation expense	$	1,799	$	—

COMPREHENSIVE INCOME

Comprehensive income is a broad concept of an enterprise's financial performance that includes all changes in equity during a period that arise from transactions and economic events from nonowner sources. Comprehensive income is net income plus "other comprehensive income," which consists of revenues, expenses, gains and losses that do not affect net income under accounting principles generally accepted in the United States. Other comprehensive income for the Company includes adjustments for minimum pension liability and adjustments to interest rate swaps, net of tax.

Comprehensive income consisted of the following (in thousands):

	Three Months Ended April 30,
	2004		2003
Net income	$	87,328	$	44,046
Change in fair value of interest rate swaps		—		1,557

Comprehensive income	$	87,328	$	45,603

The accumulated comprehensive loss reflected on the balance sheet at April 30, 2004 and January 31, 2004 consisted solely of the minimum pension liability adjustment.

RECLASSIFICATIONS

The condensed consolidated financial statements for the prior year reflect certain other reclassifications to conform to classifications adopted in the current year. These reclassifications had no effect on previously reported net income.

Note 2. Investments in Unconsolidated Affiliates

The Company has investments in unconsolidated affiliates that are accounted for under the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of earnings, losses and distributions of these companies. The investment balance also includes interest capitalized during construction. Investments in unconsolidated affiliates consisted of the following (in thousands):

	April 30, 2004		January 31, 2004
Circus and Eldorado Joint Venture (50%) (Silver Legacy, Reno, Nevada)	$	61,635	$	60,032
Elgin Riverboat Resort (50%) (Grand Victoria, Elgin, Illinois)		245,713		246,637
Victoria Partners (50%) (Monte Carlo, Las Vegas, Nevada)		267,377		266,637

	$	574,725	$	573,306

The Company's unconsolidated affiliates operate with fiscal years ending on December 31. Selected results of operations for each of the unconsolidated affiliates are as follows:

Three months ended March 31, 2004 (in thousands)	Silver Legacy		Grand Victoria		Monte Carlo		Total
Revenues	$	35,603	$	96,012	$	73,142	$	204,757
Expenses		30,158		84,835		47,819		162,812
Income from operations		5,445		11,177		25,323		41,945
Net income		1,222		11,210		25,337		37,769

Three months ended March 31, 2004 (in thousands)	Silver Legacy			Grand Victoria		Monte Carlo		Total
Revenues	$	33,499		$	92,643	$	67,222	$	193,364
Expenses		29,501			71,234		47,045		147,780
Income from operations		3,998			21,409		20,177		45,584
Net income (loss)		(384	)		21,511		20,229		41,356

Note 3. Intangible Development Costs

On August 2, 2002, the Detroit City Council approved a revised development agreement pursuant to which MotorCity Casino will expand its current facility by December 31, 2005. Under the revised development agreement, MotorCity Casino had paid the City of Detroit $44.0 million as of April 30, 2004. MotorCity is further obligated, through letters of credit issued by the Company, to fund approximately $49.4 million to repay bonds issued by the Economic Development Corporation of the City of Detroit ("EDC"). The Company recorded an intangible asset of $93.4 million, representing the total of the above payments and obligations. As of April 30, 2004, the remaining unpaid obligation is $49.4 million.

MotorCity is also obligated under an indemnity agreement to indemnify the EDC and the City of Detroit with respect to certain liabilities. As of April 30, 2004, MotorCity had paid $4.2 million under this indemnity agreement. These payments are also considered to be part of the intangible development costs.

The above intangible development costs have an indefinite life. See Note 9—Commitments and Contingent Liabilities for additional details regarding the Company's Detroit joint venture.

Note 4. Long-term Debt

Long-term debt consisted of the following: