SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
Amendment No. 1
| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2003 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
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Commission file number 1-8570 |
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MANDALAY RESORT GROUP (Exact name of registrant as specified in its charter) |
| Nevada | 88-0121916 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification no.) |
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3950 Las Vegas Boulevard South, Las Vegas, Nevada 89119 (Address of principal executive offices) |
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(702) 632-6700 (Registrant's telephone number, including area code) |
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| (Former name, former address and former fiscal year, if changed since last report) |
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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, 2003 |
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| Common Stock, $.012/3 par value | 59,343,760 shares |
MANDALAY RESORT GROUP AND SUBSIDIARIES
Form 10-Q/A
(Amendment No. 1)
INDEX
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Page No. |
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| Part I. FINANCIAL INFORMATION | ||||||
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Part II. OTHER INFORMATION |
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Item 6. |
Exhibits and Reports on Form 8-K |
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Explanatory Note: This amendment is being filed for the purpose of correcting certain statistical information relating to average room rates and REVPAR presented in Part I, Item 2 of the report, as originally filed. In calculating the average room rate and REVPAR at Mandalay Bay for the quarter ended April 30, 2003, revenues for the period attributable to the rental of space in Mandalay's new convention center were inadvertently included with the revenues attributable to the rooms. While revenues from the rental of convention center space are reported as part of room revenue in the consolidated income statement, such revenues are not properly included in the determination of average room rate and REVPAR. As a result, the company's previously reported 14% increase in REVPAR at Mandalay Bay for the quarter ended April 30, 2003 was actually 6% and that property's actual average room rate for the period was $187 rather than topping $200, as previously reported. The table in Item 2 containing summary average room rate, occupancy and REVPAR information for the period ended April 30, 2003 has been revised to reflect Mandalay's recalculated average room rate and REVPAR. The above errors did not result in any changes to the financial statements presented in Part I, Item 1 of the report.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
We are one of the largest hotel-casino operators in the United States. Our operations consist of wholly owned resorts in Nevada and Mississippi, as well as investments in joint ventures with operating resorts in Nevada, Illinois and Michigan. Our resorts cater to a wide variety of customers and we strive to provide the best value in each of the market segments where we compete. We generate almost half of our revenues from gaming activities. Rooms also contribute a large portion of our net revenues.
Our core market is Las Vegas, where our properties generate approximately two-thirds of our operating income. Mandalay Bay is typically the best performer among our properties in this market. As our flagship property, Mandalay Bay possesses amenities that appeal to higher-income customers. Strong demand from this segment of our customer base has permitted us greater pricing leverage, thus helping to drive results at this property. With the addition of the convention center, all-suites hotel tower and retail mall (each discussed more fully below), Mandalay Bay should continue to be the leading driver of future growth for our company.
Our operating results are highly dependent on the volume of customers visiting and staying at our resorts. This is particularly evident in our two principal revenue centers-the casino and the hotel. The volume of casino activity is measured by "drop", which refers to amounts wagered by our customers. The amount of drop which we keep and which is recognized as casino revenue is referred to as our "win" or "hold". Meanwhile, revenue per available room ("REVPAR") is a key metric for our hotel business. REVPAR reflects both occupancy levels and room rates, each of which is impacted by customer demand, among other factors.
CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2003. There have been no material changes to those policies during the quarter ended April 30, 2003.
SIGNIFICANT FACTORS AFFECTING RESULTS OF OPERATIONS
The War in Iraq
We believe that the war in Iraq affected our operating results in the first quarter of fiscal 2004. The intense and comprehensive media coverage of the war, along with travel concerns, caused many customers to stay close to home during March and April. As a result, fewer customers visited or stayed at our properties, and this led to a drop in revenues at most of our properties in the first quarter. In Las Vegas, visitor volume dropped over 7% in March, effectively wiping out the gain in visitor volume experienced during the first two calendar months of 2003.
We cannot predict the extent to which the aftermath of the war in Iraq will continue to directly or indirectly impact our operating results, nor can we predict the extent to which future security alerts or terrorist attacks may interfere with our operations.
Economic Conditions
Historically, there has not been a high correlation between economic conditions and our operating results. This has been true with respect to the overall U.S. economy and also the regional economies from which we derive a sizeable portion of our customers (e.g., California). However, we believe the economic downturn in the country did affect our first quarter results.
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Expansion of Native American Gaming
A significant expansion of Native American gaming operations has occurred in California and is continuing. This trend has caused generally lower operating results at our properties in the secondary markets of Reno, Laughlin and Jean, Nevada. While most existing Native American gaming facilities in California are modest compared to our Nevada casinos, numerous Native American tribes have announced that they are in the process of constructing, developing, or are considering establishing, large-scale hotel and gaming facilities in California. A significant new Native American casino development opened in June 2003 in northern California, which will place additional competitive pressure on our operations in the Reno market. Numerous other tribes are at various stages of planning new or expanded facilities. The continued growth of Native American gaming establishments in California (as well as elsewhere in the country) could have a material adverse effect on our operations.
RESULTS OF OPERATIONS
Earnings per Share
For the quarter ended April 30, 2003, we reported net income of $44.0 million, or $.69 per diluted share, versus $48.9 million, or $.68 per diluted share, for the quarter ended April 30, 2002.
Despite lower net income, earnings per share comparisons were positive due to lower average diluted shares outstanding (down 10% from the prior year quarter), a reflection of our substantial share repurchases in fiscal 2003. Operating results were lower at most of our wholly-owned and joint venture properties, with the exception of Mandalay Bay, MotorCity Casino and Gold Strike Resort in Tunica County, Mississippi. As discussed previously, the effect of the war with Iraq and competition from Native American casinos accounted for most of the downturn in results. The decline in operating results was partially offset by lower interest expense (see "Interest Expense" below).
Mandalay Bay benefitted from the January opening of its new convention center, which contributed to an increase in average room rate, to $187 compared with $173 in the prior year. MotorCity increased its operating income due primarily to decreased depreciation expense in the quarter (see "Depreciation and Amortization" below).
For the three months ended April 30, 2003, results include preopening expenses of approximately $0.1 million related primarily to the new retail center connecting Mandalay Bay and Luxor that is scheduled to open in the fall of this year. For the three months ended April 30, 2002, results included preopening expenses of $0.5 million related primarily to the new convention center at Mandalay Bay that opened in January 2003.
Results for the three months ended April 30, 2003, also include a market value adjustment related to investments associated with our Supplemental Executive Retirement Plan (a defined benefit plan for senior executives). The carrying value of these investments must be adjusted to market value at the end of each reporting period. This adjustment resulted in a noncash loss of $1.1 million (reflected in the "interest, dividend and other income" caption). In the prior year period, we recorded a comparable gain in market value of $1.0 million.
Results for the prior year quarter reflect the impact of a new accounting pronouncement, Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142 (which became effective for Mandalay on February 1, 2002), goodwill is no longer amortized, but must be reviewed at least annually for impairment. We completed our implementation analysis of the goodwill arising from our prior acquisitions. Based upon this analysis, we recorded a write-off of $1.9 million (reflected as a cumulative effect of a change in accounting principle in the quarter ended April 30, 2002), representing the goodwill associated with the June 1, 1995 acquisition of the Railroad Pass Hotel and Casino.
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Revenues
Revenues increased $5.9 million, or 1%, for the three months ended April 30, 2003 compared to the same period last year. Mandalay Bay saw a $19.6 million, or 14% increase in revenues, owing to the first full quarter of operations of the new convention center and the successful opening of the Broadway hit, "Mamma Mia!" on February 3. Revenues at our other Strip properties decreased $4.9 million, or 2%, primarily due to concerns over the war in Iraq.
Revenues declined at our other Nevada properties, mainly because of expanded Native American gaming in California and, to a lesser extent, due to concerns over the war in Iraq. In Reno, revenues decreased $2.4 million, or 9%, while our Laughlin properties were down $3.8 million, or 9%. Revenues at our Jean and Henderson properties decreased $2.9 million, or 13%, in the quarter.
In other markets, revenues at Gold Strike in Tunica County, Mississippi were up $2.3 million, or 8%, in the quarter. Gold Strike continues to pursue marketing efforts that have generated additional slot play. In Detroit, Michigan, MotorCity Casino experienced decreased revenues of $1.9 million, or 2%, due to lower gaming volume.
Casino Revenues
Casino revenues declined $7.9 million, or 3%, in the quarter. In Nevada, Mandalay Bay and Excalibur reported increased casino revenues in the quarter. Mandalay Bay benefitted from increased casino traffic due to the opening of its new convention center.
Our other wholly owned Nevada properties reported decreases in casino revenues due to the impact of the significant factors discussed previously. In Tunica, Gold Strike's casino revenues improved due to marketing efforts which increased slot play. Casino revenues at MotorCity Casino decreased in the current quarter due to decreased gaming volume.
Room Revenues
Room revenues rose $5.4 million, or 3%, in the quarter. Room revenues include revenues from the rental of the new convention space, which amounted to $3.7 million in the quarter. REVPAR at our wholly owned Las Vegas properties increased 3% during the quarter, due primarily to Mandalay Bay. REVPAR at Mandalay Bay rose 6%, with an average room rate of $187 compared with $173 in the prior year. This rise in room rates reflected convention-related bookings attributable to the opening of the new convention center in January. The following table compares average room rates, occupancy and REVPAR at our wholly owned properties:
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Quarter 4/30/03 |
Quarter 4/30/02 |
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Avg. Rate |
Occupancy |
REVPAR |
Avg. Rate |
Occupancy |
REVPAR |
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| Weighted average—all wholly owned properties | $ | 87 | 86 | % | $ | 75 | $ | 83 | 89 | % | $ | 74 | ||||
| Weighted average—wholly owned Las Vegas Strip properties | $ | 104 | 90 | % | $ | 94 | $ | 97 | 93 | % | $ | 90 | ||||
Food and Beverage Revenues
Food and beverage revenues increased $5.6 million, or 5%, in the quarter. The increase was mainly due to the expansion of Mandalay Bay's convention business following the opening of the new convention center.
Other Revenues
Other revenues come principally from amusements, retail stores and entertainment. Other revenues were flat in the quarter versus last year. Increased entertainment revenues at Mandalay Bay from the successful February opening of "Mamma Mia!" were mitigated by decreases at other properties.
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For the three months ended April 30, 2003, income from operations fell $9.6 million, or 7%, from the previous year. The composite operating margin was 22.2% and 24.0% for the three months this year, compared to last year. Income from operations in the quarter benefitted from a $7.9 million decrease in depreciation and amortization expense at MotorCity Casino (see discussion under "Depreciation and Amortization" below). However, this benefit was offset by a $7.8 million decline in earnings from unconsolidated affiliates. The table below summarizes our operating results by property and is followed by a discussion of operating results by market.
Operating Results by Property
(in millions)
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Quarter 4/30/2003 |
Quarter 4/30/2002 |
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Income from Operations |
Depreciation |
Income from Operations |
Depreciation |
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| Mandalay Bay | $ | 27.2 | $ | 12.2 | $ | 23.3 | $ | 9.0 | ||||
| Luxor | 25.4 | 5.2 | 27.8 | 4.6 | ||||||||
| Excalibur | 21.0 | 2.5 | 21.3 | 2.9 | ||||||||
| Circus Circus-Las Vegas(1) | 10.6 | 4.4 | 13.6 | 4.5 | ||||||||
| Gold Strike-Tunica | 5.2 | 2.2 | 3.9 | 3.2 | ||||||||
| Colorado Belle / Edgewater | 4.0 | 2.4 | 7.3 | 2.7 | ||||||||
| Circus Circus-Reno | 0.4 | 1.5 | 1.7 | 1.8 | ||||||||
| Gold Strike properties(2) | 0.9 | 0.9 | 1.7 | 1.4 | ||||||||
| MotorCity Casino(3) | 30.5 | 2.3 | 26.1 | 10.2 | ||||||||
| Unconsolidated joint ventures(4) | 22.7 | 0.0 | 30.6 | 0.1 | ||||||||
| Other | (0.9 | ) | 0.0 | (1.7 | ) | 0.0 | ||||||
| Subtotal | 147.0 | 33.6 | 155.6 | 40.4 | ||||||||
| Corporate expense | (10.0 | ) | 1.5 | (9.0 | ) | 0.6 | ||||||
| Total | $ | 137.0 | $ | 35.1 | $ | 146.6 | $ | 41.0 | ||||
Las Vegas
Our Las Vegas properties (including our 50% share of Monte Carlo) posted an overall decrease in operating income of $3.7 million, or 4%, during the three months ended April 30, 2003. At Mandalay Bay, operating income rose $3.9 million, or 17% due primarily to the January opening of the new convention center, which increased the property's foot traffic and levered room rates upward, particularly during the slower mid-week period.
Operating income at our other wholly owned Las Vegas properties declined in the three-month period due primarily to concerns about the war in Iraq, as discussed previously. For the quarter, operating income at Luxor was down $2.4 million, or 9%; Excalibur was down $0.3 million, or 1%; while Circus Circus declined $3.0 million, or 22%. The contribution from Monte Carlo declined $2.0 million, or 18%, for the quarter. See also "Factors Affecting Future Results."
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Reno
Operating income from our Reno properties (including our 50% share of Silver Legacy) was down $2.7 million, or 48%, in the first quarter, due to the adverse impact of the expansion of Native American gaming in California and the northwestern U.S., as well as the other significant factors discussed previously.
Laughlin
Our two Laughlin properties, Colorado Belle and Edgewater, posted a combined decrease in operating income of $3.3 million, or 45%, for the quarter. The Laughlin market continues to face increased competition from Native American casinos in its primary feeder markets in Arizona and southern California.
Other Markets
In Detroit, Michigan, MotorCity Casino generated an increase in operating income of $4.4 million, or 17%, in the first quarter. Lower depreciation expense was the principal factor in this increase (see discussion under "Depreciation and Amortization"). See "New Projects" under "Financial Position and Capital Resources" for additional details regarding our Detroit operation.
In Tunica County, Mississippi, operating income at Gold Strike was up $1.3 million, or 33%, in the three months ended April 30, 2003, compared to the prior year. The increases are due to increased marketing efforts which drove higher slot play, as described previously.
The contribution to income from operations from Grand Victoria (a 50%-owned riverboat casino in Elgin, Illinois) declined 29% in the quarter, due essentially to a higher casino tax rate, which became effective July 1, 2002, including a top-end rate of 50% on gaming revenues exceeding $200 million. This tax increase reduced the contribution from Grand Victoria by approximately $4.8 million in the first quarter. See also "Recent Tax Developments".
Depreciation and Amortization
For the three months ended April 30, 2003, depreciation and amortization expense was $35.1 million versus $41.0 million in the prior year. The decrease was due primarily to the reduction of depreciation at MotorCity Casino. Based upon the revised development agreement entered into with the City of Detroit on August 2, 2002, (discussed more fully under "Financial Position and Capital Resources—New Projects"), depreciation expense related to the MotorCity Casino temporary facility was reduced prospectively. Previously, the cost of the temporary facility was being depreciated over its contractual operating term of four years, with annual depreciation expense approximating $40 million. Under the Revised Development Agreement, the temporary facility will be converted into a permanent resort (as opposed to the permanent resort being developed on a separate site, as was the requirement under the original development agreement). Consequently, the remaining book value of the temporary facility is being depreciated over its remaining expected life, resulting in estimated annual depreciation expense of $8-$10 million, pending completion of the permanent facility or other equipment additions.
Operating Lease Rent
Operating lease rent for the three months ended April 30, 2003, decreased to $11.2 million from $12.9 million in the prior year period. The decrease in rent expense was related to the June 2002 renewal of our $200 million lease facility, as well as lower interest rates (see the discussion under "Off Balance Sheet Arrangements—Operating Leases" for additional details regarding our operating lease agreements).
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Interest Expense
For the three months ended April 30, 2003, interest expense (excluding interest expense of unconsolidated joint ventures and without reduction for capitalized interest) decreased $5.9 million versus the comparable prior year period. The decrease in the quarter was due to a combination of lower interest rates on short-term borrowings and fixed-to-floating interest rate swap agreements entered into in June and August 2002 and February 2003 (see "Financial Position and Capital Resources—Financing Activities" for a discussion of our fixed-to-floating swaps). The reduction of interest expense was aided by the issuance of $400 million principal amount of floating rate (LIBOR plus .75%) convertible senior debentures on March 21, 2003. While the net proceeds from this offering were initially used to pay down borrowings outstanding under our revolving credit facility (with a current rate equal to LIBOR plus 1.75%), they ultimately represent a refinancing of our $150 million 63/4% Senior Subordinated Notes due 2003 repaid at maturity in July and our $150 million 6.70% Debentures due 2096, which we will likely be required to redeem at the holders' one-time option in November this year. Consequently, the convertible debentures should contribute to even lower interest expense in the future. (See "Financial Position and Capital Resources—Financing Activities" for additional details regarding the convertible debentures.)
At April 30, 2003, long-term debt (including current portion) stood at $2.87 billion compared to $2.42 billion at April 30, 2002. The current year total includes $4.0 million of debt related to MotorCity Casino, while the prior year total includes $46.0 million of debt related to MotorCity. Capitalized interest was $.9 million in the three months ended April 30, 2003, compared to $1.8 million in the previous year. Capitalized interest in the current year related primarily to the construction of the suites tower at Mandalay Bay, and in the previous year related primarily to the new convention center at Mandalay Bay.
Income Taxes
The effective tax rate for the three months ended April 30, 2003 was 36.0% compared to 37.0% for the same period a year ago. These rates reflect the corporate statutory rate of 35% plus the effect of various nondeductible expenses, primarily the write-off of goodwill in the previous year.
Recent Tax Developments
On May 31, 2003, the Illinois legislature approved a new tax bill which provides for an increase in tax rates on Illinois gaming revenues. Under the bill, which must still be signed by the governor, the upper tax rate on casino revenues was increased from 50% on casino revenues exceeding $200 million to 70% on casino revenues exceeding $250 million. The bill also provided for increased tax rates for the lower revenue tiers as well as increased boarding fees. Based on current revenue levels, we estimate that this tax increase will reduce the contribution from our 50%-owned Grand Victoria by approximately $25-$30 million annually.
New tax legislation signed into law by the Governor of Nevada on July 22, 2003 will also increase the taxes applicable to our Nevada operations and those of our Nevada joint ventures. Based on our initial evaluation of the new Nevada tax law, we believe that its impact on our income from operations will be less than $10 million annually.
FINANCIAL POSITION AND CAPITAL RESOURCES
Operating Activities
For the three months ended April 30, 2003, net cash provided by operating activities was $143.0 million versus $170.6 million in the prior year. The decrease is due primarily to lower
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distributions from unconsolidated affiliates. In the prior year, Mandalay received a $20.0 million special distribution from Silver Legacy.
Mandalay had cash and cash equivalents of $161.4 million at April 30, 2003, sufficient for normal daily operating requirements.
Investing Activities
Net cash used in investing activities was $102.6 million for the three months ended April 30, 2003, versus $60.5 million in the prior year. Higher capital expenditures accounted for most of the increase.
Capital expenditures for the three months ended April 30, 2003, totaled $86.1 million, of which $21.2 million related to the construction of the new suites tower at Mandalay Bay, scheduled to open in fall 2003 (see "New Projects" for additional details), $14.4 million related to the construction of the new retail center at Mandalay Bay and $22.7 million related to the purchase of a new corporate airplane. In the corresponding three months last year, capital expenditures totaled $54.6 million, of which $33.6 million related to the construction of the new convention center at Mandalay Bay.
Financing Activities
For the three months ended April 30, 2003, financing activities used net cash of $27.4 million. The net proceeds of approximately $390 million from the issuance of the floating-rate convertible debentures were used to pay down our revolving credit facility. We subsequently utilized new borrowings under the revolving credit facility to fund the $100 million settlement of our equity forward agreement (see discussion under "Off Balance Sheet Arrangements—Equity Forward Agreements"). During the quarter, we also paid down $16.0 million of the Detroit credit facility. In the prior year, financing activities used net cash of $94.9 million, primarily to repay amounts outstanding under our revolving credit facility.
Credit Facilities
In August 2001, we replaced our $1.8 billion unsecured credit facility with three separate facilities that totaled $1.25 billion. These credit facilities included a $150 million capital markets term loan, which we paid in full using a portion of the net proceeds we received from the issuance of $300 million of Senior Subordinated Notes in December 2001. By paying off this facility, we reduced our borrowing capacity under the two remaining facilities to $1.1 billion. Those two facilities, which are for general corporate purposes, include a $250 million term loan facility and an $850 million revolving facility. The entire amount of the term loan facility was outstanding at April 30, 2003. Of the revolving facility, $110.0 million was outstanding at April 30, 2003. Each of our credit facilities is unsecured and provides for the payment of interest, at our option, at either (i) a Eurodollar-based rate; or (ii) a rate equal to or an increment above the higher of (a) the Bank of America prime rate, or (b) the Federal Reserve Board federal funds rate plus 50 basis points. At April 30, 2003, the effective rate of interest on the indebtedness outstanding under our credit facilities was 3.1%. Each of our credit facilities includes financial covenants regarding total debt and interest coverage, plus covenants that limit our ability to dispose of assets, make distributions on our capital stock, engage in a merger, incur liens and engage in transactions with our affiliates. On August 21, 2006, the entire principal amount then outstanding under our credit facilities becomes due and payable, unless the maturity date is extended with the consent of the lenders.
In December 2001, we amended the covenants under each of our credit facilities to provide for more liberal tests for total debt and interest coverage. These amendments were obtained to address the impact of the events of September 11, 2001.
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In February 2003, we again amended the covenants under each of our credit facilities. These amendments modify the definition of "Adjusted EBITDA" with respect to our 53.5% ownership of MotorCity Casino in Detroit, Michigan. As previously defined in our credit facilities, Adjusted EBITDA included only the cash distributions we actually received from MotorCity Casino. Under the amended definition, Adjusted EBITDA will include our 53.5% share of the Adjusted EBITDA of MotorCity Casino, whether or not distributed. These amendments also provide for a more liberal test for total debt coverage during the fiscal year ending January 31, 2004.
As of April 30, 2003, we were in compliance with all of the covenants in our credit facilities, including those related to total debt and interest coverage, and under the most restrictive covenant, we had the ability to issue additional debt of approximately $450 million. Our borrowing capacity under these covenants can fluctuate substantially from quarter to quarter depending upon our operating cash flow.
Convertible Senior Debentures
On March 21, 2003, we issued $350 million principal amount of floating-rate convertible senior debentures due 2033 ("convertible debentures"). An additional $50 million principal amount of the convertible debentures was issued on April 2, 2003, pursuant to an option granted to the initial purchasers. The convertible debentures bear interest at a floating rate equal to 3-month LIBOR (reset quarterly) plus 0.75%, subject to a maximum rate of 6.75%. The convertible debentures also provide for the payment of contingent interest after March 21, 2008 if the average market price of the convertible debentures reaches a certain threshold. Such contingent interest is considered an embedded derivative with a nominal value. The convertible debentures provide for an initial base conversion price of $57.30 per share, reflecting a conversion premium of 100% over Mandalay's closing stock price of $28.65 on March 17, 2003. The proceeds from this issuance were used to repay borrowings under our revolving credit facility.
Each convertible debenture is convertible into shares of Mandalay's common stock (i) during any calendar quarter beginning after June 30, 2003, if the closing price of Mandalay's common stock is more than 120% of the base conversion price (initially 120% of $57.30, or $68.76) for at least 20 of the last 30 trading days of the preceding calendar quarter; (ii) if a credit rating assigned to the convertible debentures falls below a specified level; (iii) if we take certain corporate actions; or (iv) if we call the convertible debentures for redemption. If the convertible debentures are converted, holders will receive 17.452 shares per convertible debenture, or an aggregate of 7.0 million shares of Mandalay common stock, subject to adjustment of the conversion rate for any stock dividend; any subdivision or combination, or certain reclassifications, of the shares of our common stock; any distribution to all holders of shares of our common stock of certain rights to purchase shares of our common stock for a period expiring within 60 days at less than the sale price per share of our common stock at the time; any distribution to all holders of shares of our common stock of our assets (including shares of capital stock of a subsidiary), debt securities or certain rights to purchase our securities; or any "extraordinary cash dividend." For this purpose, an extraordinary cash dividend is one the amount of which, together with all other cash dividends paid during the preceding 12-month period, is on a per share basis in excess of the sum of (i) 5% of the sale price of the shares of our common stock on the day preceding the date of declaration of such dividend and (ii) the quotient of the amount of any contingent cash interest paid on a convertible debenture during such 12-month period divided by the number of shares of common stock issuable upon conversion of a convertible debenture at the conversion rate in effect on the payment date of such contingent cash interest. In addition, if at the time of conversion the market price of Mandalay's common stock exceeds the then-applicable base conversion price, holders will receive up to an additional 14.2789 shares of Mandalay's common stock per convertible debenture, as determined pursuant to a specified formula, or up to an additional 5.7 million shares in the aggregate.
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We may redeem all or some of the convertible debentures for cash at any time on or after March 21, 2008, at their accreted principal amount plus accrued and unpaid interest, if any, to, but not including, the redemption date. At the option of the holders, we may be required to repurchase all or some of the convertible debentures on the 5th, 10th, 15th, 20th and 25th anniversaries of their issuance, at their accreted principal amount plus accrued and unpaid interest, if any, to, but not including, the purchase date. We may choose to pay the purchase price in cash, shares of Mandalay common stock or any combination thereof.
Interest Rate Swaps
In February 2003, we entered into two "reverse" interest rate swap agreements ("fair value hedges") with members of our bank group. Under one agreement, we received a fixed interest rate of 9.25% and paid a variable interest rate (based on LIBOR plus 6.35%) on $275 million notional amount. Under the other, we received a fixed rate of 6.45% and paid a variable interest rate (based on LIBOR plus 3.57%) on $200 million notional amount. In May 2003, we elected to terminate the $275 million swap and in June 2003, we elected to terminate the $200 million swap. We received $6.8 million in cash representing the fair market value of the swaps, and recorded corresponding debt premiums which will be amortized to interest expense, using an effective interest rate method, over the remaining lives of the related debt instruments.
We entered into the above swap agreements, which met the criteria established by the Financial Accounting Standards Board for hedge accounting, in order to further manage our interest expense and achieve a better balance of variable to fixed debt in our debt portfolio. By terminating these swaps, we effectively locked in these benefits as they pertain to these swaps, which will contribute to lower interest expense in the future.
Recent Transactions
On June 30, 2003, we entered into a $145 million capital lease facility covering certain equipment at Mandalay Bay and, subject to certain conditions, we may increase the amount of this facility by up to an additional $105 million on or before December 31, 2003. On June 30, 2003, we also exercised our option under two operating leases relating to equipment located at several of our Nevada properties and purchased the equipment for a total purchase price of $198.3 million, representing the equipment's estimated fair value based on independent appraisals. The purchase was financed utilizing the $145 million we received under the capital lease facility, with the balance being borrowed under our revolving credit facility.
On July 15, 2003, we called our $275 million 91/4% Senior Subordinated Notes due 2005 at a call price of 104.625% using borrowings under our revolving credit facility.
On July 31, 2003, we issued $250 million 61/2% Senior Notes due 2009. The net proceeds were used to repay borrowings under our revolving credit facility.
On June 12, 2003, we declared a dividend of $.23 per common share, which was paid August 1 to stockholders of record on June 26. On August 27, 2003, our Board of Directors declared a dividend of $.25 per common share payable November 1, 2003 to stockholders of record October 15, 2003.
New Projects
Mandalay Bay Suites Tower
We are currently building a new 1,122-suite hotel tower at Mandalay Bay. The 43-story tower will be located on the west side of the property. The new suites will average 750 square feet, among the largest room product in the Las Vegas market. The tower will also include meeting suites, a spa and fitness center, two restaurants and a lounge. We expect that the new suites will serve the demand
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generated by the new convention center. The tower broke ground during the third quarter last year, and should open in November 2003. The total cost of the project is estimated to be $230 million, excluding land, capitalized interest and preopening expenses. As of April 30, 2003, we had incurred costs of $39.7 million related to this project.
Retail Center
We are constructing a retail center between Mandalay Bay and Luxor. The center will include approximately 90,000 square feet of retail space and approximately 40 stores and restaurants, including several upscale, internationally-branded retailers. We started construction in the third quarter last year, with an expected opening in fall 2003. The cost is estimated to be approximately $30-$40 million, excluding land, capitalized interest and preopening expenses. As of April 30, 2003, we had incurred costs of $25.1 million related to this project.
We currently estimate that capital expenditures for fiscal 2004 will be in the vicinity of $350 million. The majority of these expenditures will relate to the new all-suites tower and the new retail center. Estimated capital expenditures also include maintenance capital spending, which consists of items necessary to maintain the operating condition of our properties, such as new slot machines, carpeting, computers and similar equipment. We anticipate capital expenditures for the balance of fiscal 2004 will be funded primarily from cash flow, though we also have funds available under our revolving credit facility. Actual capital expenditures for fiscal 2004 may differ significantly from the estimated range, particularly if we are able to proceed with the development of an expanded permanent facility in Detroit. See "Detroit" for additional details.
Detroit
We participate with the Detroit-based Atwater Casino Group in a joint venture that owns and operates a casino in Detroit, Michigan. This joint venture is one of three groups which negotiated casino development agreements with the City of Detroit. The Company has a 53.5% ownership interest in the joint venture.
Pursuant to a Revised Development Agreement approved by the Detroit City Council on August 2, 2002, MotorCity Casino is to be expanded into a permanent facility at its current location by December 31, 2005. Under the terms of this agreement, the joint venture paid the City a total of $24.5 million as of April 30, 2003. The joint venture paid another $2.5 million in June 2003, and is obligated to pay an additional $17 million in 12 equal monthly installments, the first of which was paid June 1, 2003.
The joint venture has a $150 million credit facility, which had a balance of $4.0 million outstanding at April 30, 2003. We have guaranteed this credit facility.
Under the terms of the joint venture's operating agreement, Mandalay is to receive a management fee for a period of ten years equal to 1.5% of the cost of the permanent casino facility. The management committee of the joint venture made a preliminary determination that Mandalay was entitled to the management fee commencing on the date the Revised Development Agreement was signed, since that agreement provides for the existing facility to become the permanent facility. However, the management committee recently determined that the management fee should not be paid until certain issues surrounding the completion of the permanent facility are closer to resolution. As a result, we reversed previously accrued management fee income of $1.8 million in the second quarter ended July 31, 2003.
The joint venture's operation of MotorCity Casino is subject to ongoing regulatory oversight, and its ability to proceed with an expanded hotel/casino project is contingent upon the receipt of all
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necessary governmental approvals, successful resolution of pending litigation and satisfaction of other conditions.
Share Purchases
In March 2003, the Board of Directors authorized the purchase of up to 10 million shares of our common stock that remain outstanding after our prior authorization is fully utilized. On March 31, 2003, we purchased the remaining 3.3 million shares under our equity forward agreements for $100 million (discussed more fully under "Off Balance Sheet Arrangements"). We made no additional share purchases during the quarter ended April 30, 2003, and as of that date, the number of additional shares we are authorized to purchase was approximately 10.3 million. Any share purchases we may make in the future pursuant to this authorization will be dependent upon cash flow, borrowing capacity and market conditions, and are expected to be made in accordance with the volume and other limitations of Rule 10b-18 under the Securities Exchanges Act of 1934.
Liquidity
We have various obligations in fiscal 2004 including the following: (i) existing cash obligations; (ii) capital commitments on projects under way (see "New Projects"); (iii) repayment of our $150 million 6.70% Debentures due 2096 (which are expected to be put by their holders in November 2003, as permitted under the indenture); and (iv) payment of dividends to the holders of our common stock. We believe we have sufficient capital resources to meet all of the above obligations, as well as provide for additional strategic purchases of our common stock or investments in new projects. This belief is based upon (i) our historically strong and dependable operating cash flows; (ii) the availability of borrowings under our revolving credit facility; and (iii) the ability to raise funds in the debt and equity markets. Under our revolving bank facility, which expires August 2006, we had $740.0 million of borrowing capacity available as of April 30, 2003, of which we could utilize approximately $450 million under the most restrictive of our loan covenants. (Our borrowing capacity under these covenants can fluctuate substantially from quarter to quarter depending upon our operating cash flow.)
Off Balance Sheet Arrangements
Operating Leases
In October 1998, we entered into a $200 million operating lease agreement with a group of financial institutions to lease equipment at Mandalay Bay. In December 2001, we entered into a series of sale and leaseback agreements covering equipment located at several Nevada properties. These agreements, again made with a group of financial institutions, totaled $130.5 million.
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The following table summarizes these operating lease agreements.
Summary of Operating Lease Agreements
(in thousands)
| |
Date of agreement |
|
|||||||
|---|---|---|---|---|---|---|---|---|---|
| |
10/30/98 |
12/21/01 |
Total |
||||||
| Initial value of leased equipment | $ | 200,000 | $ | 112,500 | $ | 312,500 | |||
| Purchase option at April 30, 2003(1) | $ | 118,200 | $ | 89,000 | $ | 207,200 | |||
| Current termination date | 6/30/03 | 12/21/04 | |||||||
| Purchase option at current termination(1) | $ | 113,900 | $ | 56,300 | $ | 170,200 | |||
| Maximum extended termination date(2) | 6/30/03 | 12/21/05 | |||||||
| Purchase option at maximum termination(1) | $ | 113,900 | $ | 45,000 | $ | 158,900 | |||
We entered into our operating leases solely to provide greater financial flexibility. The rent expense related to these operating leases was reported separately in the consolidated statements of income as operating lease rent. The operating lease agreements contained financial covenants regarding total debt and interest coverage that were similar to those under our credit facilities. The agreements also contained covenants regarding maintenance of the equipment, insurance requirements and prohibitions on liens. As of April 30, 2003, we were in compliance with all of the covenants in these agreements.
On June 30, 2003, we exercised our purchase option under these operating leases and purchased the equipment for a total purchase price of $198.3 million. The purchase was financed through a combination of borrowings under our new capital lease facility (discussed previously) and borrowings under our revolving credit facility.
Equity Forward Agreements
To facilitate our purchase of shares, we entered into equity forward agreements with Bank of America ("B of A" or "the Bank") providing for the Bank's purchase of up to an agreed amount of our outstanding common stock. Bank of America acquired a total of 6.9 million shares at a total cost of $138.7 million under these agreements. Pursuant to the interim settlement provisions and an amendment to the agreements, we had received a net of 3.6 million shares and reduced the notional amount of the agreements by $38.7 million as of January 31, 2003. On March 31, 2003, we purchased the remaining 3.3 million shares from B of A for the notional amount of $100 million. The settlement of the contract was funded under our revolving credit facility.
We incurred quarterly interest charges on the notional amount at a rate equal to LIBOR plus 1.95%. Total interest charges incurred from inception through March 31, 2003, amounted to $12.3 million, of which $0.7 million was incurred during the quarter ended April 30, 2003. We also incurred structuring fees and commission charges totaling $3.7 million, none of which were incurred during the quarter ended April 30, 2003. These interest charges and other fees are included in the cost of treasury stock, net of the related tax benefit.
Forward-Looking Statements
This report includes forward-looking statements which we have based on our current expectations about future events. They consist of statements with respect to our beliefs, plans, objectives, goals,
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expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including our business strategy and our current and future development plans. Forward-looking statements also are those that include the words "may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "plan" or similar expressions. These forward-looking statements are subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. Factors that could cause our financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements include the following: (i) our development and construction activities and those of the joint ventures in which we participate, (ii) competition, (iii) our dependence on existing management, (iv) leverage and debt service (including sensitivity to fluctuations in interest rates and ratings which national rating agencies assign to our outstanding debt securities), (v) domestic and global economic, credit and capital market conditions, (vi) changes in federal or state tax laws or the administration of those laws, (vii) changes in gaming laws or regulations (including the legalization or expansion of gaming in certain jurisdictions), (viii) expansion of gaming on Native American lands, including such lands in California, (ix) applications for licenses and approvals under applicable laws and regulations (including gaming laws and regulations), (x) regulatory or judicial proceedings, (xi) consequences of any future security alerts and/or terrorist attacks such as those that occurred on September 11, 2001, and (xii) consequences of the war with Iraq. Additional information concerning potential factors that we think could cause our actual results to differ materially from expected and historical results is included under the caption "Factors that May Affect Our Future Results" in Item 1 of our annual report on Form 10-K for the year ended January 31, 2003. If one or more of the assumptions underlying our forward-looking statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking statements. This statement is provided as permitted by the Private Securities Litigation Reform Act of 1995.
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Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
(b) Reports on Form 8-K.
During the period covered by this report, the Company filed the following reports on Form 8-K:
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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: September 2, 2003 |
By: |
/s/ GLENN SCHAEFFER Glenn Schaeffer President and Chief Financial Officer |
||
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| Exhibit No. |
Description |
|
|---|---|---|
| 31.1. | Certification of Michael S. Ensign, Chief Executive Officer. | |
| 31.2. | Certification of Glenn Schaeffer, Chief Financial Officer. | |
| 99.1.* | Certification of Michael S. Ensign Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.2.* |
Certification of Glenn Schaeffer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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