MANDALAY RESORT GROUP - 10-Q Quarterly Report

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UNITED STATES
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 July 31, 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 August 31, 2004
Common Stock, $.01-2/3 par value		67,506,070 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 July 31, 2004 and January 31, 2004	3
	Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended July 31, 2004 and 2003	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended July 31, 2004 and 2003	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6-19
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	20-36
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	37
	Item 4. Controls and Procedures	37-38
Part II. OTHER INFORMATION
	Item 1. Legal Proceedings	39
	Item 6. Exhibits	40

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

				July 31, 2004			January 31, 2004
ASSETS
Current assets
	Cash and cash equivalents			$	189,499		$	153,490
	Receivables, net of allowance				80,127			87,112
	Inventories				40,259			35,166
	Prepaid expenses and other				55,634			74,099

			Total current assets		365,519			349,867

Property, equipment and leasehold interests, at cost, net					3,547,377			3,590,699

Other assets
	Excess of purchase price over fair value of net assets acquired				37,965			37,965
	Investments in unconsolidated affiliates				575,224			573,306
	Other investments				73,743			60,886
	Intangible development costs				97,693			95,610
	Deferred charges and other assets				68,077			74,163

			Total other assets		852,702			841,930

			Total assets	$	4,765,598		$	4,782,496

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Current portion of long-term debt			$	16,687		$	16,681
	Accounts and contracts payable
		Trade			47,671			39,016
		Construction			6,298			10,122
	Accrued liabilities				275,779			265,132

			Total current liabilities		346,435			330,951

Long-term debt, net of current portion					2,792,060			3,001,975

Deferred income tax					229,946			230,324
Accrued intangible development costs					49,360			49,360
Other long-term liabilities					117,648			96,393

			Total liabilities		3,535,449			3,709,003

Minority interest					49,340			43,223

Stockholders' equity
	Common stock $.01-2/3 par value
		Authorized—450,000,000 shares
		Issued—114,786,988 and 113,654,263 shares			1,913			1,894
	Preferred stock $.01 par value
		Authorized—75,000,000 shares			—			—
	Additional paid-in capital				617,920			549,022
	Retained earnings				1,701,299			1,592,199
	Deferred compensation				(61,326	)		(540	)
	Accumulated other comprehensive loss				(23,293	)		(23,293	)
	Treasury stock (47,280,918 and 48,242,286 shares), at cost				(1,055,704	)		(1,089,012	)

			Total stockholders' equity		1,180,809			1,030,270

			Total liabilities and stockholders' equity	$	4,765,598		$	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 July 31,						Six Months Ended July 31,
		2004			2003			2004			2003
REVENUES:
	Casino	$	332,452		$	308,745		$	678,571		$	612,162
	Hotel		193,951			164,798			405,147			325,637
	Food and beverage		128,312			122,104			260,408			234,414
	Other		105,145			92,784			194,691			173,498

			759,860			688,431			1,538,817			1,345,711
	Less—complimentary allowances		(46,020	)		(43,596	)		(95,609	)		(84,366	)

			713,840			644,835			1,443,208			1,261,345

COSTS AND EXPENSES:
	Casino		174,703			162,510			342,091			321,234
	Hotel		69,499			59,847			137,327			115,808
	Food and beverage		90,596			84,224			178,669			161,511
	Other operating expenses		61,844			54,921			114,246			103,494
	General and administrative		122,790			113,935			238,147			220,682
	Corporate general and administrative		13,378			7,742			23,650			16,211
	Depreciation and amortization		46,139			39,635			96,163			74,772
	Operating lease rent		—			8,955			—			20,172
	Preopening expenses		—			269			—			357

			578,949			532,038			1,130,293			1,034,241

EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES			20,655			23,007			42,317			45,747

INCOME FROM OPERATIONS			155,546			135,804			355,232			272,851

OTHER INCOME (EXPENSE):
	Interest, dividend and other income		961			3,910			2,308			2,704
	Interest expense		(46,366	)		(50,803	)		(93,128	)		(101,906	)
	Loss on early extinguishment of debt, net of related gain on swap terminations		—			(6,327	)		—			(6,327	)
	Net interest expense from unconsolidated affiliates		(2,117	)		(1,739	)		(4,199	)		(3,798	)

			(47,522	)		(54,959	)		(95,019	)		(109,327	)

MINORITY INTEREST			(15,890	)		(15,358	)		(33,541	)		(29,214	)

INCOME BEFORE PROVISION FOR INCOME TAX			92,134			65,487			226,672			134,310
Provision for income tax			(33,920	)		(23,151	)		(81,130	)		(47,928	)

NET INCOME		$	58,214		$	42,336		$	145,542		$	86,382

BASIC EARNINGS PER SHARE
	Net income per share	$	.86		$	.71		$	2.18		$	1.42

DILUTED EARNINGS PER SHARE
	Net income per share	$	.85		$	.67		$	2.16		$	1.36

	Average shares outstanding—basic		67,483,319			59,964,927			66,861,530			60,768,050

	Average shares outstanding—diluted		68,126,064			63,028,375			67,529,745			63,662,019

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)

						Six Months Ended July 31,
						2004			2003
Cash flows from operating activities
	Net income					$	145,542		$	86,382
		Adjustments to reconcile net income to net cash provided by operating activities
			Depreciation and amortization				96,163			74,772
			Provision for bad debts				2,935			2,056
			Decrease in deferred income tax				(378	)		(15,774	)
			Tax benefit from stock option exercises				12,031			34
			Increase (decrease) in interest payable				7,161			(3,279	)
			Increase in accrued pension cost				7,770			5,275
			Loss on disposition of fixed assets				1,068			601
			Unconsolidated affiliates' (earnings in excess of distributions) distributions in excess of earnings				(2,125	)		8,983
			Minority interest in earnings, net of distributions				6,117			21,735
			Changes in assets and liabilities:
				Other current assets			17,422			1,190
				Other current liabilities			16,391			31,772
				Other noncurrent assets			7,124			8,412
			Other				(2,456	)		(2,903	)

					Total adjustments		169,223			132,874

		Net cash provided by operating activities					314,765			219,256

Cash flows from investing activities
	Capital expenditures						(72,775	)		(346,002	)
	(Decrease) increase in construction payable						(3,824	)		13,112
	Increase in other investments						(10,401	)		(10,179	)
	Intangible development costs						(6,333	)		(10,334	)
	Other						18,449			1,251

		Net cash used in investing activities					(74,884	)		(352,152	)

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						(190,000	)		(90,000	)
	Principal payments of debt with initial maturities in excess of three months						(8,488	)		(445,139	)
	Debt premium on reverse interest rate swap termination						5,424			6,812
	Debt issuance costs						(132	)		(16,536	)
	Exercise of stock options						19,240			30,219
	Settlements and interest under equity forward agreements, net of tax benefit						—			(100,582	)
	Reversal of deferred gain						—			(10,339	)
	Payment of cash dividend						(36,442	)		(13,748	)
	Other						6,526			(13,239	)

		Net cash (used in) provided by financing activities					(203,872	)		142,448

Net increase in cash and cash equivalents							36,009			9,552
Cash and cash equivalents at beginning of year							153,490			148,442

Cash and cash equivalents at end of year						$	189,499		$	157,994

Supplemental cash flow disclosures
	Cash paid for interest (net of amounts capitalized of $361 and $2,818)					$	80,854		$	104,345
	Cash paid for income taxes					$	19,094		$	31,631
	Noncash items
	Increase in market value of investment in insurance contracts					$	(2,456	)	$	(2,903	)
	Decrease in market value of interest rate swaps					$	—		$	3,211
	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 and six months ended July 31, 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 July 31,				Six Months Ended July 31,
(in thousands, except per share data)	Three Months Ended July 31,				Six Months Ended July 31,
(in thousands, except per share data)	2004		2003		2004		2003
Net income	$	58,214	$	42,336	$	145,542	$	86,382

Weighted-average shares outstanding (basic)		67,483		59,965		66,862		60,768
Dilutive effect of stock options		643		3,063		668		2,894

Weighted-average shares outstanding (diluted)		68,126		63,028		67,530		63,662

Basic earnings per share	$	.86	$	.71	$	2.18	$	1.42

Diluted earnings per share	$	.85	$	.67	$	2.16	$	1.36

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 July 31,						Six Months Ended July 31,
(in thousands, except per share data)		Three Months Ended July 31,						Six Months Ended July 31,
(in thousands, except per share data)		2004			2003			2004			2003
Net income as reported		$	58,214		$	42,336		$	145,542		$	86,382

Less total stock-based employee compensation expense determined under the fair value method, net of tax			(247	)		(667	)		(641	)		(1,553	)

Pro forma net income		$	57,967		$	41,669		$	144,901		$	84,829

Net income per share (basic)
	As reported