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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1999
OR
/ / 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 88-0121916
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3950 LAS VEGAS BOULEVARD SOUTH (702) 632-6700
LAS VEGAS, NEVADA 89119 (Registrant's telephone number, including area
code)
(Address of principal executive offices)
(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 /X/ No / /
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, 1999
Common Stock, $.01-2/3 par value 90,679,299 shares
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MANDALAY RESORT GROUP AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE NO.
---------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at October 31, 1999
(Unaudited) and January 31, 1999.......................... 3-4
Condensed Consolidated Statements of Income (Unaudited) for
the Three and Nine Months Ended October 31, 1999 and
1998...................................................... 5-6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended October 31, 1999 and 1998....... 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 8-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15-22
Item 3. Quantitative and Qualitative Disclosures About Market
Risks..................................................... 23
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
OCTOBER 31, JANUARY 31,
1999 1999
------------ ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 103,806 $ 81,389
Receivables............................................... 72,481 26,136
Inventories............................................... 27,907 24,270
Prepaid expenses and other................................ 44,865 29,483
---------- ----------
Total current assets.................................... 249,059 161,278
PROPERTY, EQUIPMENT AND LEASEHOLD INTERESTS,
at cost, less accumulated depreciation and amortization of
$851,790 and $733,967, respectively....................... 3,185,961 3,000,822
EXCESS OF PURCHASE PRICE OVER FAIR MARKET
value of net assets acquired, net......................... 359,381 367,076
NOTES RECEIVABLE............................................ 646 10,895
INVESTMENTS IN UNCONSOLIDATED AFFILIATES.................... 271,395 271,707
OTHER ASSETS................................................ 41,201 57,929
---------- ----------
Total Assets............................................ $4,107,643 $3,869,707
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
OCTOBER 31, JANUARY 31,
1999 1999
------------ ------------
(UNAUDITED)
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 1,226 $ 3,481
Accounts payable - trade.................................. 39,546 23,745
Accounts payable - construction........................... 10,399 75,030
Accrued liabilities....................................... 165,022 129,317
---------- ----------
Total current liabilities............................... 216,193 231,573
LONG-TERM DEBT.............................................. 2,458,784 2,259,149
DEFERRED INCOME TAX......................................... 206,084 200,376
OTHER LONG-TERM LIABILITIES................................. 21,038 20,981
---------- ----------
Total liabilities....................................... 2,902,099 2,712,079
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.01-2/3 par value
Authorized - 450,000,000 shares
Issued - 113,634,013 and 113,622,508 shares............. 1,894 1,894
Preferred stock, $.01 par value
Authorized - 75,000,000 shares.......................... -- --
Additional paid-in capital................................ 564,327 558,935
Retained earnings......................................... 1,207,002 1,159,469
Treasury stock (23,037,180 and 22,959,425 shares), at
cost.................................................... (567,679) (562,670)
---------- ----------
Total stockholders' equity.............................. 1,205,544 1,157,628
---------- ----------
Total Liabilities and Stockholders' Equity.............. $4,107,643 $3,869,707
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
------------------- ----------------------
1999 1998 1999 1998
-------- -------- --------- ----------
REVENUES:
Casino.......................................... $241,739 $183,011 $ 693,187 $ 532,529
Rooms........................................... 143,906 92,168 407,516 268,797
Food and beverage............................... 93,245 63,749 264,266 188,311
Other........................................... 71,567 43,286 189,214 132,632
Earnings of unconsolidated affiliates........... 28,790 22,001 75,935 64,238
-------- -------- --------- ----------
579,247 404,215 1,630,118 1,186,507
Less-complimentary allowances................... (34,045) (21,766) (97,476) (62,435)
-------- -------- --------- ----------
545,202 382,449 1,532,642 1,124,072
-------- -------- --------- ----------
COSTS AND EXPENSES:
Casino.......................................... 127,655 91,937 363,170 268,925
Rooms........................................... 51,293 33,450 142,218 97,915
Food and beverage............................... 71,944 53,035 207,811 158,655
Other operating expenses........................ 52,078 26,603 129,410 78,356
General and administrative...................... 88,532 66,571 247,769 199,641
Depreciation and amortization................... 38,066 34,493 125,617 102,864
Operating lease rent............................ 9,935 -- 15,989 --
Preopening expenses............................. 2,110 -- 39,990 --
Abandonment loss................................ 5,433 -- 5,433 --
-------- -------- --------- ----------
447,046 306,089 1,277,407 906,356
-------- -------- --------- ----------
OPERATING PROFIT BEFORE CORPORATE EXPENSE......... 98,156 76,360 255,235 217,716
CORPORATE EXPENSE................................. 8,300 12,103 23,750 26,295
-------- -------- --------- ----------
INCOME FROM OPERATIONS............................ 89,856 64,257 231,485 191,421
-------- -------- --------- ----------
OTHER INCOME (EXPENSE):
Interest, dividend and other income............. 696 526 1,878 2,055
Guarantee fees from unconsolidated affiliate.... 684 771 2,115 2,366
Interest expense................................ (42,328) (23,250) (117,287) (71,370)
Interest expense from unconsolidated
affiliates.................................... (2,737) (3,015) (8,332) (9,346)
-------- -------- --------- ----------
(43,685) (24,968) (121,626) (76,295)
-------- -------- --------- ----------
INCOME BEFORE PROVISION FOR INCOME TAX............ 46,171 39,289 109,859 115,126
Provision for income tax........................ 17,414 15,573 40,332 44,518
-------- -------- --------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................ 28,757 23,716 69,527 70,608
Cumulative effect of change in accounting
principle for preopening expenses, net of tax
benefit of $11,843............................ -- -- (21,994) --
-------- -------- --------- ----------
NET INCOME........................................ $ 28,757 $ 23,716 $ 47,533 $ 70,608
======== ======== ========= ==========
5
MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED OCTOBER 31, ENDED OCTOBER 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
BASIC EARNINGS PER SHARE:
Income before cumulative effect of
change in accounting principle........ $ .32 $ .25 $ .76 $ .74
Cumulative effect of change in
accounting principle.................. $ -- $ -- $ (.24) $ --
----------- ----------- ----------- -----------
Net income per share.................... $ .32 $ .25 $ .52 $ .74
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of
change in accounting principle........ $ .31 $ .25 $ .76 $ .74
Cumulative effect of change in
accounting principle.................. $ -- $ -- $ (.24) $ --
----------- ----------- ----------- -----------
Net income per share.................... $ .31 $ .25 $ .52 $ .74
=========== =========== =========== ===========
Avg.shares outstanding-basic.............. 90,594,951 95,129,383 90,666,879 95,127,213
=========== =========== =========== ===========
Avg.shares outstanding-diluted............ 91,848,438 95,129,383 91,943,377 95,157,946
=========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED OCTOBER 31,
---------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 47,533 $ 70,608
--------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 132,183 109,060
(Gain) loss on disposition of fixed assets.............. 2,764 (1,590)
Increase in other current assets........................ (65,364) (4,776)
(Increase) decrease in other noncurrent assets.......... 16,818 (18,892)
Increase in interest payable............................ 10,793 13,329
Increase in other current liabilities................... 40,713 30,198
Increase in deferred income tax......................... 5,708 5,226
Decrease in other noncurrent liabilities................ (49) (49)
Unconsolidated affiliates' distributions in excess of
earnings (earnings in excess of distributions)........ 1,890 (10,235)
--------- ---------
Total adjustments..................................... 145,456 122,271
--------- ---------
Net cash provided by operating activities............. 192,989 192,879
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (312,470) (536,907)
Increase (decrease) in construction payable............... (64,631) 25,828
Increase in investments in unconsolidated affiliates...... (1,889) (7,409)
Proceeds from sale of equipment and other assets.......... 390 5,712
Decrease in notes receivable.............................. 10,249 183
--------- ---------
Net cash used in investing activities................. (368,351) (512,593)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net effect on cash of issuances and payments of debt with
original
maturities of three months or less...................... 199,995 312,531
Issuances of debt with original maturities in excess of
three months............................................ -- 337,266
Principal payments of debt with original maturities in
excess of three months.................................. (2,705) (343,404)
Exercise of stock options and warrants.................... 14,500 219
Purchases of treasury stock............................... (14,115) --
Other..................................................... 104 13,647
--------- ---------
Net cash provided by financing activities............. 197,779 320,259
--------- ---------
Net increase in cash and cash equivalents................... 22,417 545
Cash and cash equivalents at beginning of period............ 81,389 58,631
--------- ---------
Cash and cash equivalents at end of period.................. $ 103,806 $ 59,176
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest (net of amount capitalized)...................... $ 103,489 $ 56,128
Income tax................................................ $ 29,925 $ 18,670
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
MANDALAY RESORT GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
IS UNAUDITED.)
(1) 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. 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. 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, a hotel/casino on the Las Vegas Strip and a
temporary casino in Detroit, Michigan, which opened December 14, 1999.
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Material intercompany accounts and
transactions have been eliminated.
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 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 month periods are not
necessarily indicative of results to be expected for the full fiscal year.
Certain reclassifications have been made to the financial statements for the
three and nine months ended October 31, 1998 to conform to the financial
statement presentation for the three and nine months ended October 31, 1999.
These reclassifications have no effect on net income.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended January 31, 1999.
8
MANDALAY RESORT GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
IS UNAUDITED.)
(2) LONG-TERM DEBT--
Long-term debt consists of the following (in thousands):
OCTOBER 31, JANUARY 31,
1999 1999
------------ ------------
(UNAUDITED)
Amounts due under bank credit agreement at floating interest
rates, weighted average of 6.3% and 6.0%.................. $1,330,000 $1,130,000
Amounts due under corporate debt program at floating
interest rates, weighted average of 6.2% and 5.7%......... 50,000 50,000
9-1/4% Senior Subordinated Notes due 2005................... 275,000 275,000
6.45% Senior Notes due 2006 (net of unamortized discount of
$275 and $308)............................................ 199,725 199,692
7-5/8% Senior Subordinated Debentures due 2013.............. 150,000 150,000
6-3/4% Senior Subordinated Notes due 2003 (net of
unamortized discount of $59 and $71)...................... 149,941 149,929
7.0% Debentures due 2036 (net of unamortized discount of
$123 and $133)............................................ 149,877 149,867
6.70% Debentures due 2096 (net of unamortized discount of
$195 and $231)............................................ 149,805 149,769
Other notes................................................. 5,662 8,373
---------- ----------
2,460,010 2,262,630
Less - current portion...................................... (1,226) (3,481)
---------- ----------
$2,458,784 $2,259,149
========== ==========
The Company has a policy aimed at managing interest rate risk associated
with its current and anticipated future borrowings. This policy enables the
Company to use any combination of interest rate swaps, futures, options, caps
and similar instruments. To the extent the Company employs such financial
instruments pursuant to this policy, they are accounted for as hedging
instruments. In order to qualify for hedge accounting, the underlying hedged
item must expose the Company to risks associated with market fluctuations and
the financial instrument used must be designated as a hedge and must reduce the
Company's exposure to market fluctuation throughout the hedge period. If these
criteria are not met, a change in the market value of the financial instrument
is recognized as a gain or loss in the period of change. Otherwise, gains and
losses are not recognized except to the extent that the financial instrument is
disposed of prior to maturity. Net interest paid or received pursuant to the
financial instrument is included as interest expense in the period.
The Company has entered into various interest rate swaps, principally with
its bank group, to manage interest expense, which is subject to fluctuation due
to the variable-rate nature of the debt under the Company's corporate debt
program. The Company has interest rate swap agreements under which it pays a
fixed interest rate (weighted average of approximately 6.1%) and receives a
variable interest rate (weighted average of approximately 5.5% at October 31,
1999) on $550 million notional amount of "initial" swaps. The net effect of all
such swaps resulted in additional interest expense, due to an interest rate
differential which, at October 31, 1999, was approximately .7% on the total
notional amount of the swaps. Two of the initial swaps with a combined notional
amount of $150 million
9
MANDALAY RESORT GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
IS UNAUDITED.)
(2) LONG-TERM DEBT-- (CONTINUED)
provide that the swaps will terminate two business days after any date on which
three-month LIBOR is set at or above 9% on or after October 15, 2000 for $100
million notional amount, and on or after January 15, 2001 for $50 million
notional amount. These swaps, otherwise terminate in fiscal 2008. The remaining
two initial swaps of $200 million notional amount each terminate in fiscal 2003
and 2004.
The Company has also entered into a forward interest rate swap with a
notional amount of $200 million which has an effective date of December 31, 1999
and a termination date of March 31, 2000. Under this agreement, the Company will
pay a fixed rated of 6.14% and receive a variable interest rate based on
three-month LIBOR.
As of October 31, 1999, under its most restrictive loan covenants, the
Company was restricted as to the purchase of its own capital stock in excess of
$411 million and was restricted from issuing additional debt in excess of
approximately $337 million.
(3) LEASE FACILITY--
On October 30, 1998, the Company entered into an operating lease agreement
with a group of financial institutions (the "Lease Facility") to permit the
Company to lease up to $200 million of equipment. As of June 30, 1999, the
Company had utilized the entire $200 million Lease Facility to lease equipment
at Mandalay Bay and the commitment under the Company's bank credit facility was
permanently reduced to $1.8 billion. The base term of the lease expires
June 30, 2001, but the lease provides for up to two successive one-year renewal
terms. The rent expense related to this lease facility is reported separately on
the income statement as "operating lease rent."
(4) STOCK OPTIONS--
The Company has various stock option plans for executive, managerial and
supervisory personnel as well as the Company's outside directors and
consultants. The plans permit grants of options relating to the Company's common
stock and one of the plans also permits grants of the Company's common stock as
performance share and restricted stock awards. The only awards granted pursuant
to such plans through October 31, 1999 are stock options, which are generally
exercisable in one or more installments beginning not less than six months after
the grant date.
10
MANDALAY RESORT GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
IS UNAUDITED.)
(4) STOCK OPTIONS-- (CONTINUED)
Summarized information for stock options granted pursuant to the Company's
plans is as follows:
NINE MONTHS ENDED
OCTOBER 31, 1999
--------------------
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
Outstanding at beginning of period....................... 3,872,674 $14.72
Granted.................................................. 3,300,166 14.12
Exercised................................................ (754,950) 19.21
Cancelled................................................ (326,800) 19.24
--------- ------
Outstanding at end of period............................. 6,091,090 $13.60
========= ======
Options exercisable at end of period..................... 2,009,244 $13.62
Options available for grant at end of period........... 1,974,865
(5) STOCK RELATED MATTERS--
For the nine months ended October 31, 1999, the Company repurchased 821,200
shares of its common stock at a cost of $14.1 million.
(6) EARNINGS PER SHARE--
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 NINE MONTHS
ENDED ENDED
OCTOBER 31, OCTOBER 31,
------------------- -------------------
(IN THOUSANDS, EXCEPT 1999 1998 1999 1998
EARNINGS PER SHARE) -------- -------- -------- --------
Net income.............................................. $28,757 $23,716 $47,533 $70,608
======= ======= ======= =======
Weighted average shares out standing used in computation
of basic earnings per share........................... 90,595 95,129 90,667 95,127
Stock options........................................... 1,253 -- 1,276 31
------- ------- ------- -------
Weighted average shares out standing used in computation
of diluted earnings per share......................... 91,848 95,129 91,943 95,158
======= ======= ======= =======
Basic earnings per share................................ $ .32 $ .25 $ .52 $ .74
======= ======= ======= =======
Diluted earnings per share.............................. $ .31 $ .25 $ .52 $ .74
======= ======= ======= =======
(7) INVESTMENTS IN UNCONSOLIDATED AFFILIATES--
The Company has investments in unconsolidated affiliates that are accounted
for under the equity method. Using the equity method, original investments are
recorded at cost and adjusted by the
11
MANDALAY RESORT GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
IS UNAUDITED.)
(7) INVESTMENTS IN UNCONSOLIDATED AFFILIATES-- (CONTINUED)
Company's share of earnings or losses of these entities. The investment balance
also includes interest capitalized during construction (net of amortization).
Investments in unconsolidated affiliates consist of the following (in
thousands):
OCTOBER 31, JANUARY 31,
1999 1999
------------ ------------
(UNAUDITED)
Circus and Eldorado Joint Venture (50%) (Silver Legacy,
Reno, Nevada)............................................. $ 85,899 $ 74,871
Elgin Riverboat Resort (50%) (Grand Victoria, Elgin,
Illinois)............................................... 42,349 42,461
Victoria Partners (50%)
(Monte Carlo, Las Vegas, Nevada).......................... 140,507 141,658
Detroit Entertainment (45%, see also Note 8) (Proposed
Hotel/ Casino, Detroit, Michigan)......................... 2,640 12,717
-------- --------
$271,395 $271,707
======== ========
The above unconsolidated affiliates operate with fiscal years ending on
December 31. Summarized results of operations of the unconsolidated affiliates
are as follows (unaudited, in thousands):
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1999 1998
--------- ---------
Revenues................................................ $565,032 $506,603
Expenses................................................ 453,139 387,482
Operating income........................................ 111,893 119,121
Net income.............................................. 96,438 100,979
Included in the above are revenues of the Grand Victoria of $233,206 and
$197,509 for the nine months ended September 30, 1999 and 1998. The property's
operating margin during each of those periods was 26%.
(8) COMMITMENTS AND CONTINGENT LIABILITIES--
The Company has formed a joint venture with the Detroit-based Atwater Casino
Group to build, own and operate a hotel/casino in Detroit, Michigan. This joint
venture is one of three groups which negotiated development agreements with the
city. The Company had an initial 45% ownership interest in the joint venture.
Effective December 14, 1999, the Company acquired a portion of the other
interest at a cost of $38.4 million, thus increasing its ownership interest to
approximately 53.5%.
Pending its development of a permanent hotel/casino, the joint venture has
completed construction of a temporary casino in downtown Detroit, which opened
December 14, 1999. The temporary casino contains approximately 75,000 square
feet of gaming space, with approximately 2,600 slot machines and 136 table
games, plus five restaurants and a 3,000-space parking facility. The cost of the
temporary casino, including land and capitalized interest, was approximately
$150 million, which was financed pursuant to the joint venture's $150 million
credit facility secured by the assets associated with the
12
MANDALAY RESORT GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
IS UNAUDITED.)
(8) COMMITMENTS AND CONTINGENT LIABILITIES-- (CONTINUED)
temporary casino. The Company has guaranteed this credit facility subject to the
release of the guaranty if certain performance measures are reached. The joint
venture's operation of the temporary casino is subject to ongoing regulatory
oversight and its ability to proceed with a permanent hotel/ casino facility is
contingent upon the receipt of all necessary gaming approvals and satisfaction
of other customary conditions.
The Detroit joint venture is planning a $600 million permanent hotel/casino
facility. The Company is expected to contribute 20% of this amount in the form
of equity, and the joint venture will seek project-specific financing for the
balance. The development agreement provides that the Company will guarantee
completion of the permanent facility and will enter into a keep-well guarantee
with the city, pursuant to which the Company could be required to contribute
additional funds, if and as needed, to continue operation of the project for a
period of two years. This keep-well guarantee also applies to the temporary
casino. The Company has issued letters of credit in an aggregate amount of $50
million for the benefit of Bank of America to back letters of credit in the same
aggregate amount issued by Bank of America to secure payments of principal and
interest on bonds issued by the Economic Development Corporation of the City of
Detroit, the proceeds of which are to be used to finance costs related to the
acquisition of and other activities relating to the land on which the permanent
facility will be built.
The constitutionality of the Detroit Casino Competitive Selection Process
and the Michigan Gaming Control and Revenue Act, which govern the selection and
licensing of casino developers in the City of Detroit, has been challenged in
separate federal court proceedings initiated by the Lac Vieux Band of Lake
Superior Chippewa Indians and by Barden Detroit Casino, L.L.C. No assurance can
be given regarding the timing and outcome of either proceeding. If the federal
courts determine that either the Detroit Casino Competitive Selection Process or
the Michigan Gaming Control and Revenue Act is defective and this determination
is upheld, this may impact the validity of the Development Agreement entered
into between the joint venture and the City of Detroit which, in turn, could
adversely impact the status of the joint venture's operation of the temporary
facility, as well as the certificate of suitability and casino license for the
permanent facility.
The Company is a defendant in various pending litigation. In management's
opinion, the ultimate outcome of such litigation will not have a material effect
on the results of operations or the financial position of the Company.
(9) RECENTLY ISSUED ACCOUNTING STANDARDS
Effective February 1, 1999, the Company adopted Statement of Position No.
98-5 "Reporting on the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5
requires that the costs of all start-up activities, as defined, be expensed as
incurred. The Company previously capitalized preopening costs prior to the
opening of a specific project and charged them to expense at the commencement of
operations. The Company has written off $73.8 million in preopening costs
associated primarily with Mandalay Bay and the development of its Detroit joint
venture project. This amount includes $40.0 million of costs incurred during the
first nine months of fiscal 2000, and $33.8 million of costs incurred in the
previous fiscal year. These previously capitalized costs are reflected, net of
income tax benefit of $11.8 million, as a cumulative effect of a change in
accounting principle for preopening expenses in the condensed consolidated
statements of income.
13
MANDALAY RESORT GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE AND NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
IS UNAUDITED.)
(9) RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative financial instruments. The provisions of SFAS
No. 133 require that a company recognize derivatives as either assets or
liabilities on its balance sheet and that the instrument be valued at its fair
value. The statement also defines the criteria and conditions which govern the
recognition of subsequent changes in the fair value of the instrument as either
balance sheet or income statement events. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. The Company does not expect the adoption of
this pronouncement to materially impact its results of operations or financial
position.
14
MANDALAY RESORT GROUP AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED)
RESULTS OF OPERATIONS
EARNINGS PER SHARE
For the quarter ended October 31, 1999, the Company reported net income of
$28.8 million, or $.31 per share, versus $23.7 million, or $.25 per share in the
prior year. For the nine months, net income was $47.5 million, or $.52 per
share, compared to $70.6 million, or $.74 per share, in the previous year.
Results in the current year quarter include $2.1 million in preopening
expenses related to the Company's joint venture project in Detroit, where a
temporary casino opened on December 14, 1999. The quarter was also impacted by a
$5.4 million write-off related to a proposed timeshare resort in Las Vegas which
the Company has decided not to pursue. In the prior-year quarter, the Company
recognized $5.4 million in political campaign costs associated with Proposition
5 in California. Excluding these one-time charges in both periods, earnings per
share for the quarter were $.37 compared to $.29 in the prior year.
For the nine months ended October 31, 1999, results include $73.8 million in
preopening expenses related to Mandalay Bay, the Four Seasons at Mandalay Bay,
and the Company's joint venture project in Detroit, as well as the $5.4 million
timeshare write-off discussed above. Results for the nine months in the prior
year include $6.5 million in political campaign costs. Excluding these one-time
charges, earnings per share were $1.08 versus $.79.
The increases in both the quarter and the nine months were due primarily to
Mandalay Bay, which opened March 2, 1999, as well as improved operating results
at virtually all of the Company's other properties, particularly Luxor, Gold
Strike Casino Resort in Mississippi and Grand Victoria.
The preopening expenses mentioned above were reflected in two categories.
Those costs incurred prior to January 31, 1999 were treated as a cumulative
effect of a change in accounting principle and expensed in the first quarter
this year, while those costs incurred subsequent to January 31, 1999 were
expensed as incurred. See Note 9 of Notes to Condensed Consolidated Financial
Statements in Item 1 of this report for a further explanation of the accounting
for preopening expenses.
REVENUES
Revenues for the Company increased $162.8 million, or 43%, for the three
months ended October 31, 1999 and $408.6 million, or 36%, for the nine months,
versus the same periods last year. Each of the Company's wholly owned and joint
venture properties generated higher revenues for both the third quarter and nine
months.
The overall increase is mainly attributable to Mandalay Bay, which produced
revenues of $138.9 million in the quarter and $330.9 million in the nine months.
Gold Strike-Tunica contributed to this growth, with revenues rising $4.5
million in the quarter and $18.5 million year-to-date. The addition of 1,100
hotel rooms at this property in the first quarter of the prior year has provided
a stronger base from which to market the property and driven growth in operating
results.
The growth in revenues at the Company's other properties was driven by a
combination of increased room and occupancy rates and increases in casino
revenues. Furthermore, the Company's
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED) (CONTINUED)
three joint venture properties (Grand Victoria, Silver Legacy and Monte Carlo)
generated strong increases in their contribution to revenues. Recent legislation
in Illinois permitting dockside gaming was a significant factor in the increase
in revenues at Grand Victoria.
On October 31, 1999, the lease pursuant to which the Company operated the
Silver City Casino expired and the Company ceased operation of that facility.
Total revenues for Silver City for the nine months ended October 31, 1999
counted for less than one-half of one percent of consolidated revenues.
INCOME FROM OPERATIONS (EXCLUDING PREOPENING EXPENSES AND OTHER NONRECURRING
ITEMS)
For the quarter and nine months ended October 31, 1999, income from
operations rose $27.7 million, or 40%, and $79.0 million, or 40%, compared to a
year ago. The Company's composite operating margin was 17.9% and 18.1% for the
three and nine months ended October 31, 1999 versus 18.2% and 17.6% for the
comparable periods in the prior year. A discussion of operating results by
market follows.
LAS VEGAS
The Company's Las Vegas properties posted overall increases in income from
operations of $19.1 million, or 41%, during the third quarter, and $56.4
million, or 41%, year-to-date. The increase in both periods was due to the
opening of Mandalay Bay on March 2, plus improved results at the Company's
established properties, led by Luxor whose income from operations rose $3.1
million, or 20%, in the quarter and $14.9 million, or 36%, in the nine months.
The increases at Luxor were due to a combination of higher average room and
occupancy rates, along with lower advertising and marketing expenses. In the
prior year, Luxor had initiated a new national advertising campaign to
reintroduce the property after its substantial expansion and remodeling.
Excalibur was also a strong contributor, posting increased income from
operations of 20% in the quarter and 13% year-to-date, due also to higher room
and occupancy rates.
RENO
The Company recorded income from operations from its Reno properties (Circus
Circus-Reno and the 50%-owned Silver Legacy) of $12.9 million and $32.2 million
for the three and nine months ended October 31, 1999. These results represented
increases of 16% and 18%, respectively, over the prior year periods.
Both properties experienced gains in occupancy, room rates and casino
revenues versus the prior-year periods. Operating results improved despite the
absence of a major bowling tournament this year. Reno is the host to national
bowling tournaments two out of every three years, and this year the city is
without a tournament.
Although the Company owns 50% of Silver Legacy, it currently records
approximately two-thirds of Silver Legacy's operating income as a priority
return on its investment. Based upon current projections, the Company
anticipates that this priority return will continue through the end of fiscal
2001, but the rate will gradually decrease from the current two-thirds
allocation to a 50% allocation.
LAUGHLIN
Income from operations at the Company's two Laughlin properties, the
Colorado Belle and the Edgewater, was relatively flat in the three months (down
$.6 million) and nine months (up $.9 million)
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED) (CONTINUED)
versus the previous year. Results in both the third quarter and nine months were
negatively impacted by additional health insurance costs stemming from
unexpected increases in claims.
RIVERBOAT MARKETS
In Tunica County, Mississippi, income from operations at the Gold Strike
rose 66% in the quarter to $6.0 million, while for the nine months, income from
operations was up 92% to $17.6 million. The increases are the result of the
addition of a 1,100-room hotel tower and extensive remodeling of the property
that was completed during the first quarter of the prior year.
Results at Grand Victoria (a 50%-owned riverboat casino in Elgin, Illinois)
reflected a $5.0 million increase in the Company's share of income from
operations for the third quarter and a $7.4 million increase for the nine
months. The advent of dockside gaming (now permitted under recent legislation in
Illinois) was a key factor in the increase in operating results at Grand
Victoria.
INTEREST EXPENSE
For the three and nine months ended October 31, 1999, interest expense
(excluding joint venture interest expense and before capitalized interest)
increased $7.9 million and $27.1 million versus the prior year periods. The
increases were due principally to higher average borrowings related to the
completion of construction of Mandalay Bay and the core components of Masterplan
Mile. Average borrowings were approximately $2.5 billion for the current quarter
and nine months, compared against $2.0 billion for the same periods last year.
Capitalized interest was $1.5 million and $11.0 million for the three and nine
months ended October 31, 1999 versus $12.7 million and $29.8 million a year ago.
Long-term debt at October 31, 1999 stood at $2.5 billion compared to $2.1
billion at October 31, 1998.
The Company also recorded interest expense related to joint venture projects
of $2.7 million and $8.3 million in the quarter and nine months ended
October 31, 1999 compared to $3.0 million and $9.3 million in the previous year.
This reflects the Company's 50% share of the interest expense of Silver Legacy
and Monte Carlo.
INCOME TAX
For the three and nine months ended October 31, 1999, the Company's
effective tax rate was approximately 37.7% and 36.7% (37.5% including cumulative
effect of change in accounting principle), compared with 39.6% and 38.7% for the
same periods in the prior year. These rates reflect the corporate statutory rate
of 35% plus the effect of various nondeductible expenses, including the
amortization of goodwill associated with the 1995 acquisition of Gold Strike
Resorts.
FINANCIAL POSITION AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $103.8 million at October 31,
1999, reflecting normal daily operating requirements. The Company's pretax cash
flow from operations was $147.6 million and $425.0 million for the three and
nine months ended October 31, 1999 versus $106.1 million and $307.0 million for
the same periods last year. In this context, pretax cash flow from operations is
defined as the Company's income from operations plus noncash operating expenses
(primarily depreciation and amortization). The Company used its cash flow
primarily to fund the construction of Mandalay Bay and related Masterplan Mile
components.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED) (CONTINUED)
CAPITAL SPENDING
Capital expenditures for the quarter ended October 31, 1999 were $32.7
million, of which $8.0 million related to the construction of the Sea of
Predators aquarium exhibit adjacent to Mandalay Bay and $4.4 million related to
the room renovation at Excalibur. For the nine months, capital expenditures were
$312.5 million, of which $136.3 related to the construction of Mandalay Bay,
$46.1 million related to the construction of the convention center and arena at
Mandalay Bay, $26.6 million related to the construction of the monorail
connecting Mandalay Bay, Luxor and Excalibur, $14.9 million related to the
construction of the aquarium exhibit, and $13.9 related to the room renovation
at Excalibur.
CREDIT FACILITY
In order to allow for increased borrowing capacity during the construction
of Mandalay Bay, the Company amended its unsecured credit facility with its bank
group in May 1998 to provide a more liberal test for total indebtedness during
such period and a new leverage test for senior debt. The facility, which
currently permits borrowings in an aggregate amount of $1.8 billion, was amended
in June 1999 to provide for a single leverage test for total indebtedness. The
Company also has a commercial paper program, pursuant to which it may utilize up
to $1 billion of its borrowing capacity under the credit facility to issue
commercial paper. As of October 31, 1999, the Company had utilized $1.38 billion
of its borrowing capacity under the credit facility.
LEASE FACILITY
On October 30, 1998, the Company entered into an operating lease agreement
with a group of financial institutions (the "Lease Facility") to permit the
Company to lease up to $200 million of equipment. As of June 30, 1999, the
Company had utilized the entire $200 million Lease Facility to lease equipment
at Mandalay Bay and the commitment under the Company's bank credit facility was
permanently reduced to $1.8 billion. The base term of the lease expires
June 30, 2001, but the lease provides for up to two successive one-year renewal
terms.
SILVER LEGACY
In July 1995, Silver Legacy, a 50/50 joint venture with the Eldorado
Hotel/Casino, opened in downtown Reno, Nevada. As a condition of the joint
venture's $230 million bank credit agreement, the Company is obligated under a
make-well agreement to make additional contributions to the joint venture as may
be necessary to maintain a minimum coverage ratio (as defined).
MANDALAY BAY
On March 2, 1999, the Company opened Mandalay Bay, a 43-story, hotel/casino
resort in Las Vegas, Nevada. The resort includes approximately 3,700 rooms and
135,000 square feet of gaming space and is situated on approximately 60 acres of
land just south of Luxor. Mandalay Bay's attractions include an 11-acre tropical
lagoon featuring a sand-and-surf beach, a three-quarter-mile lazy river ride, a
30,000-square-foot spa and other entertainment attractions. Inside, Mandalay Bay
offers internationally renowned restaurants and a House of Blues nightclub and
restaurant, including its signature Foundation Room sited on Mandalay Bay's
rooftop.
Four Seasons operates approximately 400 rooms at Mandalay Bay, providing Las
Vegas visitors with a luxury "five-star" hospitality experience. The Four
Seasons Hotel, which is owned by the Company and managed by Four Seasons,
represents the first step in the Company's cooperative effort
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED) (CONTINUED)
with Four Seasons to identify strategic opportunities for development of hotel
and casino properties worldwide. The total cost of Mandalay Bay, including the
Four Seasons Hotel and including leased equipment, but excluding land,
capitalized interest and preopening expenses, was approximately $1 billion.
During construction, Mandalay Bay's hotel tower experienced settling in
excess of the level contemplated in the building's original design. The settling
was greater in some portions of the structure than others. The Company retained
geotechnical, structural engineering and foundation consultants who evaluated
the situation and recommended remedial measures, which were completed prior to
the opening of the property. The evaluation of these remedial measures will
continue over a period of time to determine if any further measures will be
required.
MASTERPLAN MILE
The Company's development plan for Masterplan Mile (the acreage with
approximately one mile of frontage on the Las Vegas Strip including the Mandalay
Bay, Luxor and Excalibur sites) includes various core components which will be
cross-marketed to guests at the Company's existing and future hotel/casinos
within Masterplan Mile. These components include a 125,000-square-foot
convention facility (which opened March 12, 1999) and a 12,000-seat arena (which
opened April 10, 1999). The total cost of the convention facility and arena
(excluding land, capitalized interest and preopening expenses) was approximately
$125 million. Additional core components include a monorail system (which opened
April 10, 1999) linking the Company resorts within Masterplan Mile, as well as a
Sea of Predators aquarium exhibit, which is currently under construction and is
expected to open in early summer 2000. The cost of the monorail (excluding land,
capitalized interest and preopening expenses) was approximately $40 million. The
estimated cost of the aquarium (excluding land, capitalized interest and
preopening expenses) is approximately $45 million, of which $16.9 million had
been incurred as of October 31, 1999. The Company may add other core components
to its development plan for Masterplan Mile in the future.
DETROIT
The Company has formed a joint venture with the Detroit-based Atwater Casino
Group to build, own and operate a hotel/casino in Detroit, Michigan. This joint
venture is one of three groups which negotiated development agreements with the
city. The Company had an initial 45% ownership interest in the joint venture.
Effective December 14, 1999, the Company acquired a portion of the other
interest at a cost of $38.4 million, thus increasing its ownership interest to
approximately 53.5%.
Pending its development of a permanent hotel/casino, the joint venture has
completed construction of a temporary casino in downtown Detroit, which opened
December 14, 1999. The temporary casino contains approximately 75,000 square
feet of gaming space, with approximately 2,600 slot machines and 136 table
games, plus five restaurants and a 3,000-space parking facility. The cost of the
temporary casino, including land and capitalized interest, was approximately
$150 million, which was financed pursuant to the joint venture's $150 million
credit facility secured by the assets associated with the temporary casino. The
Company has guaranteed this credit facility subject to the release of the
guaranty if certain performance measures are reached. The joint venture's
operation of the temporary casino is subject to ongoing regulatory oversight and
its ability to proceed with a permanent hotel/ casino facility is contingent
upon the receipt of all necessary gaming approvals and satisfaction of other
customary conditions.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED) (CONTINUED)
The Detroit joint venture is planning a $600 million permanent hotel/casino
facility. The Company is expected to contribute 20% of this amount in the form
of equity, and the joint venture will seek project-specific financing for the
balance. The development agreement provides that the Company will guarantee
completion of the permanent facility and will enter into a keep-well guarantee
with the city, pursuant to which the Company could be required to contribute
additional funds, if and as needed, to continue operation of the project for a
period of two years. This keep-well agreement also applies to the temporary
casino. The Company has issued letters of credit in an aggregate amount of $50
million for the benefit of Bank of America to back letters of credit in the same
aggregate amount issued by Bank of America to secure payments of principal and
interest on bonds issued by the Economic Development Corporation of the City of
Detroit, the proceeds of which are to be used to finance costs related to the
acquisition of and other activities relating to the land on which the permanent
facility will be built.
The constitutionality of the Detroit Casino Competitive Selection Process
and the Michigan Gaming Control and Revenue Act, which govern the selection and
licensing of casino developers in the City of Detroit, has been challenged in
separate federal court proceedings initiated by the Lac Vieux Band of Lake
Superior Chippewa Indians and by Barden Detroit Casino, L.L.C. No assurance can
be given regarding the timing and outcome of either proceeding. If the federal
courts determine that either the Detroit Casino Competitive Selection Process or
the Michigan Gaming Control and Revenue Act is defective and this determination
is upheld, this may impact the validity of the Development Agreement entered
into between the joint venture and the City of Detroit which, in turn, could
adversely impact the status of the joint venture's operation of the temporary
facility, as well as the certificate of suitability and casino license for the
permanent facility.
MISSISSIPPI GULF COAST
The Company has announced that it plans to develop a hotel/casino resort on
the Mississippi Gulf Coast at the north end of the Bay of St. Louis, near the
DeLisle exit on Interstate 10. It is currently anticipated that the resort will
include approximately 1,500 rooms and will involve an investment of
approximately $225 million. The Company has received all necessary approvals to
commence development. However, these approvals have been challenged in federal
court, and the Company anticipates that the design and construction of this
project will begin only after satisfactory resolution of all legal actions.
Present plans call for the Company to own 90% of the resort, with a partner
contributing land (up to 500 acres) in exchange for the remaining 10% interest.
LIQUIDITY
The Company believes that -- through the combination of its operating cash
flows, credit facility and ability to raise additional funds through capital
markets -- it has sufficient capital resources to meet all of its existing cash
obligations, fund its capital commitments on the projects under way and
strategically repurchase shares of the Company's common stock. As of
October 31, 1999, under its most restrictive loan covenant, the Company could
issue additional debt of approximately $337 million, and was restricted as to
the purchase of its own capital stock in excess of $411 million. The Company's
Board of Directors has authorized a share repurchase program for up to 15% of
the outstanding shares, as market conditions and other factors warrant. This
authorization replaces a former 15% authorization that was utilized over a
four-year span.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED) (CONTINUED)
YEAR 2000 READINESS DISCLOSURE
BACKGROUND
In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, information
technology ("IT"), such as date-sensitive computer software, as well as non-IT
systems (such as equipment containing microcontrollers or other embedded
technology) may recognize a date using "00" as the year 1900 rather than the
year 2000. This is generally referred to as the Year 2000 issue. If the year is
recognized incorrectly, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.
RISK FACTORS
Date-sensitive IT and non-IT systems and equipment are utilized throughout
the Company's wholly owned properties and its joint venture properties.
Consequently, the Company is exposed to the risk that Year 2000 problems could
disrupt operations at the affected properties and have a material adverse impact
upon the Company's operating results.
The Company is also exposed to the risk of possible failure of IT and non-IT
systems external to the Company's operations ("external risk factors"). These
external risk factors arise from the fact that the Company's operations, like
those of most businesses, are dependent upon numerous other private and public
entities. While such risk factors are not the responsibility of the Company and
their remediation is beyond the Company's control, we are monitoring these risks
and have formed contingency plans as warranted. As a result of the external risk
factors, the Company may be materially and adversely impacted even if its own IT
and non-IT systems and equipment are Year 2000-compliant. The most significant
of these factors are as follows:
--One or more of the Company's suppliers or its joint ventures' suppliers
could experience Year 2000 problems that impact their ability to provide
goods and services. The Company believes that such a disruption would have a
limited impact due to the availability of alternative suppliers.
--One or more of the Company's utility providers (of electric, natural gas,
water, sewer, garbage collection and similar services) could experience Year
2000 problems that impact their ability to provide their services.
Furthermore, the Company could be adversely impacted if utility services
were significantly disrupted in any of its key customer markets (e.g.,
southern California), as this could alter the customary flow of visitors
from the affected market.
--Airline service to and from the principal markets in which the Company
operates could be disrupted by Year 2000 problems, which would limit the
ability of potential customers to visit our properties.
--The possible disruption of banking services due to Year 2000 problems
could impair the Company's daily financial transactions, including the
deposit of monies and processing of checks. Furthermore, credit card
processing and customers' access to cash via automated teller machines could
also be disrupted.
The Company has developed contingency plans to address those identified
risks for which the Company believes viable alternatives exist. However, given
the nature of many of the external risk factors, the Company does not believe
viable alternatives are available. For example, the Company cannot develop a
meaningful contingency plan to address a disruption in airline service.
Consequently,
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED) (CONTINUED)
the occurrence of any of the aforementioned disruptions could, depending upon
their severity and duration, have a material adverse impact on operating
results.
APPROACH
The Company established a task force to coordinate its response to the Year
2000. This task force, which reports to the Audit Committee of the Board of
Directors, includes the Company's Chief Accounting Officer, the Chief Internal
Auditor, the Director of Information Services, as well as support staff.
Previously, the Company engaged an outside consultant who helped establish a
program for dealing with the Year 2000 issue. The Company has implemented this
program at its wholly owned properties and at its joint venture properties. The
program consists of the following phases:
Phase 1 Compile an inventory of IT and non-IT systems that may be sensitive
to the Year 2000 problem.
Phase 2 Identify which of these systems are critical, and prioritize them;
identify third parties with whom the Company does significant
business (e.g., vendors) and inquire as to the state of their Year
2000 readiness.
Phase 3 Analyze critical systems to determine which ones are not Year
2000-compliant, and evaluate the costs to repair or replace them.
Phase 4 Repair or replace noncompliant critical systems; test those systems
for which information about Year 2000 compliance has not been
received or for which information has been received but not
confirmed.
STATUS
Phases 1 through 3 are complete. Phase 4 is substantially complete, though
some elements of testing are continuing. Based upon the analysis conducted to
date, the Company believes that all of the critical systems at its wholly owned
and joint venture properties are currently compliant or will be compliant by the
end of the year. To date, the most significant Year 2000 requirement that has
been identified is the need to replace older personal computers whose systems
are not Year 2000 compatible.
COSTS
The Company currently estimates that the total cost to the Company of making
its systems and those of its joint venture properties Year 2000 compliant will
be in the range of $5 to $10 million, of which approximately $6.0 million had
been incurred as of October 31, 1999. Most of this cost relates to the
acquisition of new computer hardware to replace noncompliant personal computers
and the purchase of new software to replace noncompliant software. These costs
are being capitalized and the equipment and software depreciated over their
expected useful lives. To the extent existing hardware or software is replaced,
the Company will recognize a loss currently for the undepreciated balance. This
loss is included in the above cost estimate. Furthermore, all costs related to
software modification, as well as all costs associated with the Company's
administration of its Year 2000 project, are being expensed as incurred and are
likewise included in the cost estimate above.
22
MANDALAY RESORT GROUP AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As of October 31, 1999 there were no material changes to the information
incorporated by reference in Item 7A of the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1999.
23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
4(a). Interest Rate Swap Agreement, dated as of September 27,
1999, by and between the Company and Bank of America, N.A.
4(b). Interest Rate Swap Agreement, dated as of September 27,
1999, by and between the Company and Bank of America, N.A.
4(c). Interest Rate Swap Agreement, dated as of October 13, 1999,
by and between the Company and Bank of America, N.A.
27. Financial Data Schedule for the nine months ended
October 31, 1999 as required under EDGAR.
(b) REPORTS ON FORM 8-K. No report on Form 8-K was filed during the period
covered by this report.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MANDALAY RESORT GROUP
--------------------------------------
(Registrant)
Date: December 14, 1999 By /s/ GLENN SCHAEFFER
--------------------------------------
Glenn Schaeffer
PRESIDENT, CHIEF FINANCIAL
OFFICER AND TREASURER
25
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- --------- -----------
4(a). Interest Rate Swap Agreement, dated as of September 27,
1999, by and between the Company and Bank of America, N.A.
4(b). Interest Rate Swap Agreement, dated as of September 27,
1999, by and between the Company and Bank of America, N.A.
4(c). Interest Rate Swap Agreement, dated as of October 13, 1999,
by and between the Company and Bank of America, N.A.
27. Financial Data Schedule for the nine months ended
October 31, 1999 as required under EDGAR.
26