-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pz9dBWjQzcCQ2sPMYU7cX/Cz8vb0+vA5/PKhXNCWMJRkNYJoHR8qRQKf5gxAqtJe y5zPC/JcY7Xi3P6Tjk6d4Q== 0000898430-01-500319.txt : 20010501 0000898430-01-500319.hdr.sgml : 20010501 ACCESSION NUMBER: 0000898430-01-500319 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20010131 FILED AS OF DATE: 20010430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANDALAY RESORT GROUP CENTRAL INDEX KEY: 0000725549 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880121916 STATE OF INCORPORATION: NV FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08570 FILM NUMBER: 1616999 BUSINESS ADDRESS: STREET 1: 3950 LAS VEGAS BLVD S CITY: LAS VEGAS STATE: NV ZIP: 89119 BUSINESS PHONE: 7027340410 FORMER COMPANY: FORMER CONFORMED NAME: CIRCUS CIRCUS ENTERPRISES INC DATE OF NAME CHANGE: 19920703 10-K405 1 d10k405.txt FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 2001 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 Identification No.) incorporation or organization)
3950 Las Vegas Boulevard South, Las Vegas, Nevada 89119 (Address of principal executive offices) (Zip Code) (702) 632-6700 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class on which Registered ------------------- --------------------- Common Stock, $.01 2/3 Par Value New York Stock Exchange and Pacific Exchange Common Stock Purchase Rights New York Stock Exchange and Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None --------------- 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the Registrant held by persons other than the Registrant's directors and executive officers as of April 20, 2001 (based upon the last reported sale price on the New York Stock Exchange on such date) was $1,454,799,899. The number of shares of Registrant's Common Stock, $.01 2/3 par value, outstanding at April 20, 2001: 75,526,236. --------------- DOCUMENTS INCORPORATED BY REFERENCE PART III--Portions of the Registrant's definitive proxy statement in connection with the annual meeting of stockholders to be held on June 15, 2001, are incorporated by reference into Items 10 through 13, inclusive. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. In this report, when we use the terms "we," "our," "us" and "Mandalay," we are referring to Mandalay Resort Group and its subsidiaries as a combined entity, except where it is clear that reference is only to Mandalay Resort Group. Except as otherwise indicated, cross references in this report are to sections in this Item 1. Overview We are one of the largest hotel-casino operators in the United States in terms of guest rooms and casino square footage. Our "Mandalay Mile" is the largest scaled hotel-casino resort development in Las Vegas, the world's largest gaming market. This "Mandalay Mile" consists of three interconnected megaresorts on 230 acres, including our newest property, Mandalay Bay. We operate 16 properties with more than 27,000 guest rooms and more than one million square feet of casino space in Nevada, Mississippi, Illinois and Michigan. Of these properties, 12 are wholly owned and have more than 22,400 guest rooms and more than 800,000 square feet of casino space. In addition, we own a 50% interest in each of three joint venture casino properties that have approximately 4,700 guest rooms and more than 200,000 square feet of casino space and a 53.5% interest in a fourth joint venture casino with approximately 75,000 square feet of casino space. We have provided below information as of January 31, 2001 about our properties which, except as otherwise indicated, we wholly own and operate.
Approximate Guest Casino Square Gaming Parking Location/Property Rooms Footage Slots(1) Tables(2) Spaces ----------------- ------ ------------- ------- -------- ------- Las Vegas, Nevada Mandalay Bay(3).............. 3,700 135,000 2,219 136 7,000 Luxor........................ 4,404 120,000 1,994 106 3,200 Excalibur.................... 4,008 110,000 2,156 84 4,000 Circus Circus................ 3,744 109,000 2,220 79 4,700 Monte Carlo (50% Owned)...... 3,002 90,000 2,041 71 4,000 Slots-A-Fun.................. -- 16,700 519 26 -- Reno, Nevada Circus Circus................ 1,572 60,000 1,621 73 3,000 Silver Legacy (50% Owned).... 1,711 85,000 2,219 79 1,800 Laughlin, Nevada Colorado Belle............... 1,226 64,000 1,297 40 1,700 Edgewater.................... 1,450 44,000 1,274 37 2,300 Jean, Nevada Gold Strike.................. 812 37,000 1,020 20 2,100 Nevada Landing............... 303 36,000 1,020 21 1,400 Henderson, Nevada Railroad Pass................ 120 21,000 374 9 600 Tunica County, Mississippi Gold Strike.................. 1,066 48,000 1,430 53 1,400 Detroit, Michigan MotorCity Casino (53.5% Owned)(4)................... -- 75,000 2,531 104 3,450 Elgin, Illinois Grand Victoria (50% Owned)... -- 36,000 994 53 2,000 ------ --------- ------ --- ------ Total.......................... 27,118 1,086,700 24,929 991 42,650 ====== ========= ====== === ======
- -------- (1) Includes slot machines and other coin-operated devices. 2 (2) Generally includes blackjack ("21"), craps, pai gow poker, Caribbean stud poker, wheel of fortune and roulette. Mandalay Bay and MotorCity Casino also offer baccarat. (3) This property includes a Four Seasons Hotel with 424 guest rooms that we own and Four Seasons Hotels Limited manages. (4) This property is being operated pending the construction of a permanent hotel-casino facility. Property Descriptions We are providing below, for each of our markets, information concerning our properties within those markets. Las Vegas, Nevada Our Mandalay Mile, a 230-acre development situated at the south end of the Las Vegas Strip, is the site of our newest resort as well as our other two largest resorts. Mandalay Bay and our other Mandalay Mile resorts, Luxor and Excalibur, function as a cluster of interconnected entertainment destinations with more than 12,000 guest rooms and more than 360,000 square feet of casino space that have no similarly scaled competition in the United States. Mandalay Bay, Luxor and Excalibur are connected by a monorail system as well as a climate-controlled skyway system. Our Mandalay Mile, with its approximately one mile of frontage on the Las Vegas Strip, is a "Strip within the Strip" that offers our guests three distinctively themed hotel-casinos, complemented by an array of restaurants, shops and entertainment venues catering to a broad spectrum of Las Vegas visitors. Our most recently completed entertainment venue is the Shark Reef at Mandalay Bay, an aquarium exhibit, which opened June 20, 2000 and is being cross-marketed to guests at all of the hotel- casinos within our Mandalay Mile. Mandalay Bay. Mandalay Bay, our newest megaresort, is located on approximately 60 acres on the Las Vegas Strip, adjacent to our Luxor property and is the first major resort on the Las Vegas Strip to greet visitors arriving in Las Vegas on I-15, the primary thoroughfare between Las Vegas and southern California. The 43-story South Seas themed hotel-casino resort, which opened on March 2, 1999, has approximately 3,700 guest rooms, including a Four Seasons Hotel with 424 guest rooms that provides visitors with the only luxury "five-diamond" hospitality experience in Las Vegas. Mandalay Bay's attractions include an 11-acre tropical lagoon featuring a sand-and-surf beach and a three-quarter-mile lazy river ride. The property also features 14 restaurants such as Charlie Palmer's Aureole, Wolfgang Puck's Trattoria Del Lupo, China Grill, Red Square and Border Grill, as well as a House of Blues nightclub and restaurant, including its signature Foundation Room on the resort's top floor. Additional amenities include a 125,000-square-foot convention facility and a 30,000-square-foot spa. The property offers multiple entertainment venues that include a 1,700-seat showroom, the rumjungle nightclub and a 12,000-seat special events arena that features additional entertainment and sporting events. Luxor. This property is an Egyptian-themed hotel and casino complex situated on 64 acres of our Mandalay Mile, between Mandalay Bay and Excalibur. The resort features a 30-story pyramid and two 22-story hotel towers. Luxor offers 20,000 square feet of convention space, a 20,000-square-foot spa, a 1,200-seat showroom featuring the unique, off-Broadway show "Blue Man Group" which opened in March 2000, a nightclub, and food and entertainment venues on three different levels beneath a soaring hotel atrium. The pyramid's 2,454 guest rooms can be reached from the four corners of the building by state-of- the-art "inclinators" which travel at a 39-degree angle. Above the pyramid's casino, the property offers a special format motion base ride and an IMAX 2D/3D theater. Luxor's other public areas include a buffet with a seating capacity of approximately 800, eight restaurants including three gourmet restaurants, as well as a snack bar, a food court featuring national fast food franchises, several cocktail lounges and a variety of specialty shops. Excalibur. This property is a castle-themed hotel and casino complex situated on a 53-acre site immediately to the north of Luxor. Excalibur's public areas include a Renaissance fair, a medieval village, an amphitheater with a seating capacity of nearly 1,000 where nightly mock jousting tournaments and costume 3 drama are presented, two dynamic motion theaters, various artisans' booths and medieval games of skill. In addition, Excalibur has a buffet restaurant with a seating capacity of approximately 1,000, six themed restaurants, as well as several snack bars, cocktail lounges and a variety of specialty shops. Circus Circus-Las Vegas. This property, which is our original resort, is a circus-themed hotel and casino complex situated on approximately 69 acres on the north end of the Las Vegas Strip. From a "Big Top" above the casino, Circus Circus-Las Vegas offers its guests a variety of circus acts performed daily, free of charge. A mezzanine area overlooking the casino has a circus midway with carnival-style games and an arcade that offers a variety of amusements and electronic games. Also available to the guests at Circus Circus-Las Vegas are four specialty restaurants, a buffet with a seating capacity of approximately 1,000, a coffee shop, four fast food snack bars, several cocktail bars and a variety of gift shops and specialty shops. The Adventuredome, covering approximately five acres, offers theme park entertainment that includes a high-speed, double-loop, double-corkscrew roller coaster, a coursing river flume ride on white-water rapids, an IMAX motion base ride, several rides and attractions designed for preschool age children, themed carnival-style midway games, a state-of-the-art arcade, a 65-foot waterfall, animated life-size dinosaurs, food kiosks and souvenir shops, all in a climate-controlled setting under a giant space-frame dome. Circus Circus- Las Vegas also offers accommodations for approximately 400 recreational vehicles at the property's Circusland Recreational Vehicle Park. Monte Carlo (50% owned). Through a wholly owned entity, we are a 50% participant with a subsidiary of MGM MIRAGE in a joint venture which owns and operates Monte Carlo, a hotel and casino resort situated on 46 acres with approximately 600 feet of frontage on the Las Vegas Strip. The property is situated between Bellagio, a 3,000-room resort owned and operated by MGM MIRAGE and connected to Monte Carlo by a monorail, and New York-New York, a 2,000-room hotel-casino resort owned by MGM MIRAGE. Monte Carlo's casino reflects a palatial style reminiscent of the Belle Epoque, the French Victorian architecture of the late 19th century. Amenities at Monte Carlo include three specialty restaurants, including the popular Andre's gourmet restaurant, a buffet, a coffee shop, a food court, a microbrewery which features live entertainment, approximately 15,000 square feet of meeting and banquet space and tennis courts. A 1,200-seat replica of a plush vaudeville theater, including a balcony and proscenium arch, features an elaborately staged show of illusions by the world-renowned magician, Lance Burton. Reno, Nevada Circus Circus-Reno. This property is a circus-themed hotel and casino complex situated in downtown Reno, Nevada. Like its sister property in Las Vegas, Circus Circus-Reno offers its guests a variety of circus acts performed daily, free of charge. A mezzanine area has a circus midway with carnival- style games and an arcade that offers a variety of amusements and electronic games. The property also has two specialty restaurants, a buffet with a seating capacity of approximately 450, a coffee shop, a deli/bakery, a fast food snack bar, cocktail lounges, a gift shop and specialty shops. Silver Legacy (50% owned). Through a wholly owned subsidiary, we are a 50% participant with Eldorado Limited Liability Company in a joint venture which owns and operates Silver Legacy, a hotel-casino and entertainment complex situated on two city blocks in downtown Reno, Nevada. The property is located between Circus Circus-Reno and the Eldorado Hotel & Casino, which is owned and operated by an affiliate of our joint venture partner at Silver Legacy. Silver Legacy's casino and entertainment complex is connected at the mezzanine level with Circus Circus-Reno and the Eldorado by enclosed climate-controlled skyways above the streets between the respective properties. The property's exterior is themed to evoke images of historical Reno. At the main pedestrian entrances to the casino (located on all four sides of the complex), patrons enter by passing store fronts reminiscent of turn-of-the-century Reno. Silver Legacy's attractions include a 120-foot tall mining rig, which is situated over a replica of a silver mine and extends up from the center of the casino floor into a 180-foot diameter dome structure. Silver Legacy also features four restaurants and several bars, a 25,000-square-foot special events center, custom retail shops, a health spa and an outdoor pool and sun deck. 4 Laughlin, Nevada Laughlin is situated on the Colorado River at the southern tip of Nevada approximately 90 miles south of Las Vegas. Colorado Belle. This property is situated on a 22-acre site on the bank of the Colorado River (with nearly 1,080 feet of river frontage) in Laughlin, Nevada. Colorado Belle, which features a 600-foot replica of a Mississippi riverboat, includes a 350-seat buffet, a coffee shop, three specialty restaurants, a microbrewery, fast food snack bars and cocktail lounges, as well as a gift shop and other specialty shops. Edgewater. This property is situated on a 16-acre site adjacent to Colorado Belle with nearly 1,640 feet of frontage on the Colorado River. Edgewater's facilities include a specialty restaurant, a coffee shop, a 600-seat buffet, a snack bar and cocktail lounges. Jean, Nevada Jean is located between Las Vegas and southern California, approximately 25 miles south of Las Vegas and 12 miles north of the California-Nevada state line. Jean attracts gaming customers almost entirely from the large number of people traveling between Las Vegas and southern California on Interstate-15, the principal highway between Las Vegas and southern California which passes directly through Jean. Gold Strike-Jean. This property is an "Old West" themed hotel-casino located on approximately 51 acres of land on the east side of Interstate-15. The property has, among other amenities, a swimming pool and spa, several restaurants, a banquet center equipped to serve 260 people, a gift shop and an arcade. The casino has a stage bar with regularly scheduled live entertainment and a casino bar. Nevada Landing. This property is a turn-of-the-century riverboat themed hotel-casino located on approximately 55 acres of land across Interstate-15 from Gold Strike. Nevada Landing includes a 70-seat Chinese restaurant, a full-service coffee shop, a buffet with a seating capacity of 140, a snack bar, a gift shop, a swimming pool and spa and a 300-guest banquet facility. Henderson, Nevada Henderson is a suburb located southeast of Las Vegas. Railroad Pass. This property is situated on approximately 56 acres along US-93, the direct route between Las Vegas and Phoenix, Arizona. The property includes, among other amenities, two full-service restaurants, a buffet, a gift shop, two bars, a swimming pool and a banquet facility that will accommodate approximately 200 guests. In contrast with our other Nevada properties, Railroad Pass caters to local residents, particularly from Henderson, who may prefer the informal atmosphere and easy access of Railroad Pass over the casinos on the Las Vegas Strip. Tunica County, Mississippi Tunica County is located 20 miles south of Memphis, Tennessee on the Mississippi River. Tunica County attracts customers from Mississippi and surrounding states, including cities such as Memphis, Tennessee and Little Rock, Arkansas. Gold Strike-Tunica. This property is a dockside casino situated on a 24- acre site along the Mississippi River in Tunica County, approximately three miles west of Mississippi State Highway 61 (a major north/south highway connecting Memphis with Tunica County) and 20 miles south of Memphis. The property features an 800-seat showroom, a coffee shop, a specialty restaurant, a 300-seat buffet, a snack bar and several cocktail lounges. Gold Strike- Tunica is part of a three-casino development covering approximately 72 acres. The other two casinos are owned and operated by unaffiliated third parties. We also own an undivided one-half interest in an additional 388 acres of land which may be used for future development. 5 Detroit, Michigan MotorCity Casino (53.5% owned). On December 14, 1999, along with our joint venture partner, Atwater Casino Group, we opened MotorCity Casino, a temporary casino facility in Detroit, Michigan, which is being operated pending the construction of a permanent hotel-casino. The temporary facility includes, in addition to a 75,000-square-foot casino, five restaurants and a 3,500-space parking facility. Under a plan agreed to by the City of Detroit development authorities but not yet approved by the Detroit City Council, we would expand our temporary facility into a permanent facility by adding approximately 800 hotel rooms and expanding our gaming areas, adding additional restaurants, retail space, convention space and other amenities. There can be no assurance that the Detroit City Council will approve the proposed plan, in which event the existing agreement to build a permanent casino at a different location would remain in effect. The cost of the permanent facility, which cannot be determined at this time, will depend on a number of factors, including the decision whether we expand the temporary facility or build on a new site and the ultimate design and schedule for completion of the facility. We are committed to contribute 20% of the development costs of any permanent facility in the form of equity and we plan to fund the balance through project-specific debt financing. We chose to participate in this project due to Detroit's strong demographics and limited competition and to further diversify our cash flow stream. The development agreement for Detroit provides that Mandalay will guarantee completion of the project and will enter into a keep-well guarantee with the city, pursuant to which we could be required to contribute additional funds, if and as needed, to continue operation of the permanent facility for a period of two years. When the permanent facility is completed and opened, we will manage the property and will receive a management fee for our services from the Detroit joint venture. The ability to construct, open and operate the planned permanent facility is contingent upon the receipt of all necessary gaming approvals and satisfaction of other conditions. See "Regulation and Licensing--Michigan Gaming Laws." Various lawsuits have been filed in the state and federal courts challenging the constitutionality of the Detroit Casino Competitive Selection Process and the Michigan Gaming Control and Revenue Act, and seeking to appeal the issuance of a certificate of suitability to MotorCity Casino. No assurance can be given regarding the timing and outcome of these proceedings. An adverse ruling in any of these lawsuits could adversely impact the status of our joint venture's operation of the temporary facility, as well as the ability to obtain a certificate of suitability and a casino license for its permanent facility. See "Detroit Litigation" in Item 3 of this report. Elgin, Illinois Grand Victoria (50% owned). Through a wholly owned subsidiary, we are a 50% participant with an affiliate of Hyatt Development Corporation in a joint venture which owns and operates Grand Victoria. Grand Victoria is a Victorian themed riverboat casino and land-based entertainment complex in Elgin, Illinois, a suburb approximately 40 miles northwest of downtown Chicago. The two-story vessel is 420 feet in length and 110 feet in width, and provides a maximum 80,000 square feet of casino space, approximately 36,000 square feet of which was being used as of January 31, 2001. As a result of gaming legislation enacted in June 1999, the boat now offers dockside gaming, which means its operation is no longer restricted by fixed cruising schedules. In addition to the boat, a dockside complex with an approximately 83,000-square- foot pavilion has an approximately 400-seat buffet, a 76-seat fine dining restaurant, a VIP lounge, two movie theaters and a gift shop. Grand Victoria is strategically located in Elgin among the residential suburbs of Chicago, with nearby freeway access and direct train service from downtown Chicago. Grand Victoria is located approximately 20 miles and 40 miles, respectively, from its nearest competitors in Aurora, Illinois and Joliet, Illinois, and holds one of only nine riverboat gaming licenses currently granted state-wide. Recently passed legislation in Illinois would allow a casino in Rosemont, approximately 16 miles from Grand Victoria. This legislation is being challenged in court. Repeal of this legislation would also repeal dockside gaming. 6 Marketing We have historically followed a marketing and operating philosophy which has emphasized high-volume business by providing moderately priced hotel rooms, food and beverage and alternative entertainment in combination with our gaming operations. With the opening of Mandalay Bay, which was designed to attract a higher income customer than we had previously targeted, and to a lesser extent at Luxor, we have begun to serve higher income casino customers and to host conventions. Our philosophy remains one of providing the best value in each of the market segments where we compete. Our Mandalay Mile provides us with a unique cross-marketing opportunity. We have begun to promote the restaurants, entertainment and other amenities located throughout the Mandalay Mile properties--Mandalay Bay, Luxor and Excalibur--to each other and to our other properties located outside the Mandalay Mile. We have utilized a variety of means including video screens, in-room brochures and displays located within each property and in the skyway and monorail systems that connect the Mandalay Mile properties. Mandalay Bay. Mandalay Bay, which opened March 2, 1999, contributed 22% of our revenues in the year ended January 31, 2001 (and 22% in the year ended January 31, 2000). This property offers a level of entertainment and hotel accommodations which is designed to draw a higher-income customer than we have historically targeted. Designed with a South Seas theme, Mandalay Bay offers its guests internationally renowned restaurants which provide a wide variety of dining options. Mandalay Bay's entertainment attractions include an 11-acre lagoon with a surfing beach and a lazy river ride, Shark Reef at Mandalay Bay, a House of Blues, rumjungle, a 1,700-seat showroom and a 12,000-seat special events arena where brand-name entertainment and sporting events are offered. In addition, Mandalay Bay's 125,000-square-foot convention facility marks our entry into competition for the convention and meeting segment of visitors to Las Vegas. Luxor. Luxor contributed 16% of our revenues in the year ended January 31, 2001 (and 17% and 24%, respectively, in the years ended January 31, 2000 and 1999). This property offers a level of entertainment and hotel accommodations which is designed to attract the top segment of the middle-income stratum of customers. Designed with an Egyptian theme and highly decorated rooms, Luxor's 30-story pyramid offers its guests a tri-level entertainment area, including an IMAX theater, dynamic motion rides, a popular nightclub and theatrical revues. This property also has 20,000 square feet of convention space, a 1,200-seat showroom featuring the unique, off-Broadway show "Blue Man Group," which opened in March 2000, and a spa. Excalibur. Excalibur contributed 12% of our revenues in the year ended January 31, 2001 (and 14% and 19%, respectively, in the years ended January 31, 2000 and 1999). This property attracts customers by offering guest rooms, food and entertainment at medium prices. By way of entertainment, the medieval castle-themed Excalibur offers a medieval village, an amphitheater where mock tournaments and costume drama are presented, dynamic motion theaters, various artisans' booths and medieval games of skill. Circus Circus-Las Vegas and Circus Circus-Reno. Circus Circus-Las Vegas and Circus Circus-Reno together contributed 15% of our revenues in the year ended January 31, 2001 (and 18% and 24%, respectively, in the years ended January 31, 2000 and 1999). Each of these properties has a popular buffet, attractive because of its variety, quality and low price. From a "Big Top" above the casino, each of these properties offers a variety of circus acts performed free of charge to the public on a daily basis. A mezzanine area overlooking each casino has a circus midway with carnival-style games and an arcade that offers a variety of amusements and electronic games. The Adventuredome, an enclosed and climate-controlled five-acre structure, offers additional theme park attractions at Circus Circus-Las Vegas. Colorado Belle and Edgewater. The Colorado Belle and Edgewater together contributed 7% of our revenues in the year ended January 31, 2001 (and 8% and 11%, respectively, in the years ended January 31, 2000 and 1999). These properties offer quality rooms, food and entertainment at moderate prices. The Colorado Belle offers a classic Mississippi riverboat theme, complete with a 60-foot paddle wheel. The Edgewater's southwestern motif provides a relaxing atmosphere to enjoy that property's casino and other facilities. Connected by a scenic walkway, the two resorts form an inviting shoreline along the Colorado River. 7 Gold Strike and Nevada Landing. Gold Strike and Nevada Landing together contributed 3% of our revenues in the year ended January 31, 2001 (and 4% and 5%, respectively, in the years ended January 31, 2000 and 1999). These properties are located on opposite sides of I-15, the primary thoroughfare between Las Vegas and southern California, approximately 25 miles south of Las Vegas and 12 miles north of the California-Nevada border. The properties are conveniently located at the only highway interchange within 12 miles in either direction and are strategically positioned to attract visitors from the large number of people traveling to and from Las Vegas. Gold Strike-Tunica. Gold Strike-Tunica contributed 5% of our revenues in the year ended January 31, 2001 (and 6% and 7%, respectively, in the years ended January 31, 2000 and 1999). Gold Strike-Tunica, our first wholly owned casino outside of Nevada, is part of an integrated three casino development (Casino Center) that provides patrons with the opportunity to visit any of the three casinos without driving, a unique experience in the Tunica County market. In the first quarter of 1998, we completed the opening of a 31-story hotel tower with 1,066 guest rooms at Gold Strike-Tunica, which previously had no hotel rooms. This property's original circus-themed casino and other facilities were also remodeled and rethemed into a more elegant resort. MotorCity Casino. MotorCity Casino, which opened December 14, 1999, contributed 13% of our revenues in the year ended January 31, 2001 (and 2% in the year ended January 31, 2000). MotorCity Casino is a temporary casino facility and is one of only three licensees in Detroit, Michigan. Designed with a classic automobile theme, MotorCity Casino offers its guests four floors of gaming, dining and entertainment experiences. We maintain an active media advertising program through radio, television, billboards and printed publications primarily in Nevada, California and Arizona for our Nevada properties and in the Memphis area for our Gold Strike- Tunica property. In addition, we advertise on and allow patrons to make room reservations via the Internet, where we believe we are in the forefront of our competition. We also offer complimentary hotel accommodations, meals and drinks to selected customers. Operations and Cost Controls The primary source of our revenues is casinos, although our hotels, restaurants, bars, shops, midway games and other entertainment attractions and other services are an important adjunct to the casinos. The following table sets forth the contribution to our net revenues on a dollar and percentage basis of our major activities for each of our three most recent fiscal years.
Year Ended January 31, ---------------------------------------------------- 2001 2000 1999 ---------------- ---------------- ---------------- (Dollars in thousands) Revenues:(1) Casino(2).............. $1,250,035 49.5% $ 951,492 46.4% $ 709,909 48.0% Rooms(3)............... 611,352 24.2% 534,132 26.0% 355,635 24.0% Food and beverage(3)... 418,081 16.6% 346,647 16.9% 246,622 16.7% Other(3)............... 299,753 11.9% 251,509 12.3% 170,701 11.5% Earnings of unconsolidated affiliates............ 114,645 4.5% 98,627 4.8% 83,967 5.7% ---------- ----- ---------- ----- ---------- ----- 2,693,866 106.7% 2,182,407 106.4% 1,566,834 105.9% Less: Complimentary allowances(3)......... 169,642 6.7% 131,509 6.4% 87,054 5.9% ---------- ----- ---------- ----- ---------- ----- Net revenues............. $2,524,224 100.0% $2,050,898 100.0% $1,479,780 100.0% ========== ===== ========== ===== ========== =====
- -------- (1) Includes operations of Silver City to October 31, 1999, operations of Mandalay Bay from March 2, 1999 and MotorCity Casino from December 14, 1999. 8 (2) Casino revenues are the net difference between the sums received as winnings and the sums paid as losses, as well as incentives provided to customers in the form of discounts. (3) Rooms, Food and beverage and Other include the retail value of services which are provided to casino customers and others on a complimentary basis. Such amounts are then deducted as complimentary allowances to arrive at net revenue. We maintain stringent cost controls which historically have been exemplified by a general policy of offering minimal credit to gaming customers at our properties. Since its opening in March 1999, Mandalay Bay has extended credit to gaming customers on a selective basis in an effort to appeal to a broader segment of the gaming market. We had begun following this policy at Luxor during fiscal 1998. As a result, while our other properties continue to offer minimal credit, credit play now represents a more significant portion of the volume of table games play at Mandalay Bay and, to a lesser extent, at Luxor. We maintain strict controls over the issuance of credit and aggressively pursue collection of customer debts. These collection efforts are similar to those used by most large corporations, including the mailing of statements and delinquency notices, personal and other contacts, the use of outside collection agencies and civil litigation. Nevada gaming debts evidenced by written credit instruments are enforceable under the laws of Nevada. All other states are required to enforce a judgment on a gaming debt entered in Nevada pursuant to the Full Faith and Credit Clause of the United States Constitution. Gaming debts are not legally enforceable in some foreign countries, but the United States assets of foreign debtors may be reached to satisfy judgments entered in the United States. While the portion of our accounts receivable that is owed by foreigners is not currently material, to the extent we hold obligations of foreign debtors, the collectibility of those debts may be affected by a number of factors, including changes in currency exchange rates and economic conditions in the customers' home countries. Our current operations at each of our casinos are conducted 24 hours a day, every day of the year, with the exception of Grand Victoria which operates 22 hours a day, every day of the year. We emphasize courteous and prompt service to our customers and aspire to a high standard of excellence in all of our operations. We do not consider our business to be highly seasonal, although our operating income is typically somewhat lower in the fourth quarter, affected by slower travel leading up to the holiday period. While our business is not considered to be highly seasonal, our results from quarter-to-quarter are more event driven than a lot of other businesses. Special events such as a championship boxing match or a concert, or visits by high-budget players, or the timing of holidays, or even bad weather can impact our results for the respective periods during which such events occur. In connection with our gaming activities, we follow a policy of stringent controls and cross checks on the recording of all receipts and disbursements. The audit and cash controls we have developed and utilize include the following: . locked cash boxes; . independent counters; . checkers and observers to perform the daily cash and coin counts; . floor observation of the gaming areas; . closed-circuit television observation of certain areas; . computer tabulation of receipts and disbursements for each of our slot machines, tables and other games; and . the rapid analysis and resolution of discrepancies or deviations from normal performance. 9 Future Expansion Activities Consistent with past practice and the longstanding policy of making substantial investments in our business at regular intervals, we continue to actively pursue new projects, either by development or acquisition. New investments may involve the expansion of existing facilities or the development of new properties. Projects may be undertaken in Nevada, where all but one of our wholly owned operating properties are currently located, or in other jurisdictions within the United States or abroad where gaming has been legalized. Our new investments may be in properties that are wholly owned and operated by us, or may be in properties that are developed, owned and/or operated through joint ventures with one or more other parties. Mandalay Mile. Our Mandalay Mile, which is the site of Mandalay Bay, our most recently completed resort, as well as our Luxor and Excalibur properties, includes approximately 60 acres of land which is yet to be developed. In late April 2001, we announced a proposal to build a three-level, 1.8 million square-foot convention center complex, subject to receipt of appropriate permits and approvals. The facility will be located on 16.5 acres adjacent to the existing Mandalay Bay Conference Center and will include more than 1 million square feet of exhibit space. Upon completion of the project, Mandalay Bay will offer a total of almost 2 million gross square feet of conference and exhibit space. The project is expected to break ground in June 2001 and open in Summer 2002. Specific details regarding the cost of the proposed project are not yet available. The long-term plan for completion of our Mandalay Mile presently includes as many as two additional resorts and additional entertainment facilities. At this time, we have not determined the timing, scope or design of any additional future development on our Mandalay Mile. Detroit, Michigan. For information concerning the planned construction of a hotel-casino in downtown Detroit, Michigan, see "Property Descriptions-- Detroit, Michigan." Mississippi Gulf Coast. Some time ago, we announced plans to develop a casino resort on the Bay of St. Louis, along the Mississippi Gulf Coast. In August 2000, the United States District Court for the District of Columbia issued an opinion which had the effect of revoking one of the permits issued for this project and requiring the Army Corps of Engineers to have an environmental impact statement completed prior to issuing new permits for the development of casinos in this area. In light of the estimated time to complete the environmental impact statement and potential legal challenges that may result from the environmental impact statement, we have decided not to pursue this development along the Mississippi Gulf Coast at this time. Construction Risks. Any major construction project that we, or any joint venture in which we own an interest, may undertake will involve many risks, including potential shortages of materials and labor, work stoppages, labor disputes, weather interference, unforeseen engineering, environmental or geological problems and unanticipated cost increases, any of which could give rise to delays or cost overruns. Construction, equipment or staffing requirements or problems or difficulties in obtaining any of the requisite licenses, permits, allocations or authorizations from regulatory authorities could increase the cost or delay the construction or opening of the facilities or otherwise affect the planned design and features. It is possible that any budget and construction plans developed for a project may be changed for competitive or other reasons. In addition, construction by our Detroit joint venture of a proposed hotel-casino in downtown Detroit, Michigan is dependent on the approval of the Detroit City Council to allow the permanent casino to be built on the temporary casino site or the acquisition of a permanent site at another location and the satisfactory resolution of pending litigation. See "Detroit Litigation" in Item 3 of this report. Accordingly, there can be no assurance as to the commencement or successful completion of any projects that we, or any joint venture in which we are a participant, may undertake, including the one contemplated by the Detroit joint venture. 10 Competition General The hotel and casino industry is very competitive and the level of competition has increased as gaming has expanded dramatically in the United States in recent years. Forms of gaming include: . riverboats; . dockside gaming facilities; . Native American gaming ventures; . land-based casinos; . state-sponsored lotteries; . off-track wagering; . Internet gaming; and . card parlors. Since 1990, when there were casinos in only three states (excluding casinos on Native American lands), gaming has spread to a number of additional states. In addition, other states are currently considering, or may in the future consider, legalizing casino gaming in specific geographic areas within their states. Many Native American tribes conduct casino gaming throughout the United States and other Native American tribes are either in the process of establishing or are considering establishing gaming at additional locations. We believe the operation of Native American casinos in California and Arizona has impacted our gaming operations in Nevada, particularly in Reno, Laughlin and Jean. The competitive impact on Nevada gaming establishments, in general, and our operations, in particular, from the continued growth of gaming in jurisdictions outside Nevada cannot be determined at this time. We believe that the continued growth of casino gaming in markets close to Nevada, such as California and Arizona, and the expansion of the types of gaming permitted in California under the amendment to the California constitution approved on March 7, 2000, could have an adverse impact on our operations and, depending on the nature, location and extent of those operations outside of Nevada, the impact could be material. Las Vegas, Nevada Our hotel-casino operations in Las Vegas, which are conducted from properties located along the Las Vegas Strip, compete with a large number of other hotel-casinos in the Las Vegas area. Currently there are over 25 hotel- casinos, including our own, that are located on or near the Las Vegas Strip. Our Las Vegas operations also compete with a dozen major hotel-casinos located in downtown Las Vegas, approximately five miles from the center of the Strip, and other hotel-casinos elsewhere in the Las Vegas area, including our own Railroad Pass in the suburb of Henderson. To a lesser extent, our Las Vegas properties also compete with casino and hotel properties in other parts of Nevada, including Laughlin, Reno and along I-15 (the principal highway between Las Vegas and southern California) near the California-Nevada state line. As discussed above, our Las Vegas casinos also compete with Native American casinos in southern California (the principal source of business for Las Vegas casinos, including our own) and central Arizona and, to a lesser extent with casinos in other parts of the country. Casino and guest room capacity has increased significantly in the Las Vegas market. During the period from October 1998 through August 2000, five major hotel-casino resorts, including our own Mandalay Bay, opened on the Las Vegas Strip. As a result of these openings, the number of guest rooms increased by approximately 15,000, including the 3,700 at Mandalay Bay. Additional new hotel-casinos and expansion projects at existing Las Vegas properties have been proposed, and it is anticipated that others will be. The impact on our future operations of Las Vegas' increased hotel and casino capacity and any capacity subsequently opened in or around 11 Las Vegas will depend to a large extent on the ability of the newer properties, including Mandalay Bay, to produce a significant and sustained increase in the flow of visitors to the Las Vegas market. Reno, Nevada Circus Circus-Reno competes with approximately 11 other major hotel- casinos, including Silver Legacy, a hotel-casino complex with 1,711 guest rooms, which is 50% owned by one of our wholly owned subsidiaries. Circus Circus-Reno and Silver Legacy also compete with numerous other smaller casinos in the greater Reno area and, to a lesser extent, with casinos and hotels in Lake Tahoe and other parts of Nevada and Native American casinos in northern California and the Northwest. The Reno market has begun to encounter increased competition from Native American casinos in northern California. Following the passage of Proposition 5, these Native American casinos began adding more and newer (i.e., more competitive) slot machines, which has had a negative impact on our Reno area properties. Laughlin, Nevada In Laughlin, the Colorado Belle and the Edgewater, which together accounted for approximately 25% of the rooms in Laughlin as of January 31, 2001, compete with eight other Laughlin casinos. They also compete with the hotel-casinos in Las Vegas and those on I-15 (the principal highway between Las Vegas and southern California) near the California-Nevada state line, as well as a growing number of Native American casinos in Laughlin's regional market. The expansion of hotel and casino capacity in Las Vegas in recent years and the growth of Native American casinos in central Arizona and southern California have had a negative impact on Colorado Belle and Edgewater, by drawing visitors from the Laughlin market. This has, in turn, resulted in increased competition among Laughlin properties for a reduced number of visitors which contributes to generally lower revenues and profit margins at Colorado Belle and Edgewater. Jean, Nevada Our Jean, Nevada properties, Gold Strike and Nevada Landing, are located on I-15 (the principal highway between Las Vegas and southern California), approximately 25 miles south of Las Vegas and 12 miles north of the California-Nevada border. These properties attract their customers almost entirely from the people traveling between Las Vegas and southern California. Accordingly, these properties compete with the large concentration of hotel, casino and other entertainment options available in Las Vegas as well as three hotel-casinos located at the California-Nevada border. They also compete with the growing number of Native American casinos in southern California. Tunica County, Mississippi Gold Strike-Tunica competes with 10 other casinos in Tunica County, Mississippi, including a hotel-casino which is closer to Memphis, the largest city in Tunica County's principal market, than any of the other facilities currently in operation in Tunica County. Gold Strike-Tunica's hotel tower, which has 1,066 guest rooms, was completed in early 1998 and provides this property with the second largest number of guest rooms in the Tunica County market. Growth in this market appears to be slowing, creating heightened competition for business. Elgin, Illinois Grand Victoria is a 50% owned riverboat casino and land-based entertainment complex in Elgin, Illinois, a suburb approximately 40 miles northwest of downtown Chicago. Grand Victoria is one of nine licensed gaming riverboats currently operating in Illinois and is located approximately 20 miles and 40 miles, respectively, from its nearest competitors in Aurora, Illinois and Joliet, Illinois. Recently passed legislation in Illinois would allow a casino in Rosemont, approximately 16 miles from Grand Victoria. This legislation is being challenged in court. Repeal of this legislation would also repeal dockside gaming. 12 Detroit, Michigan MotorCity Casino, a 53.5% owned temporary casino in Detroit, Michigan, is one of three licensed casinos in Detroit. In addition to the other two Detroit casinos, MotorCity Casino competes with a government-owned casino and a racetrack which has an estimated 2,000 slot machines, each of which is located in Windsor, Ontario, directly across the Detroit River from Detroit. A number of Native American casinos are currently operating in central and northern Michigan, but the nearest of these casinos is approximately 150 miles from Detroit. Regulation and Licensing Each of our casinos, including those owned and operated by the joint ventures in which we participate, is subject to extensive regulation under laws, rules and supervisory procedures primarily in the jurisdiction where located or docked. Set forth below is a discussion of the applicable gaming laws and regulations of each jurisdiction where gaming is conducted by us or by a joint venture in which we participate. Nevada Gaming Laws The ownership and operation of casino gaming facilities in the State of Nevada, such as the Nevada gaming facilities we and the joint ventures in which we participate own and operate, are subject to the Nevada Gaming Control Act and the regulations promulgated under this Act and various local regulations. Our Nevada gaming operations and those of its Nevada joint ventures are subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board and, depending on the facility's location, the Clark County Liquor and Gaming Licensing Board or the City of Reno, which we refer to collectively as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy that are concerned with, among other things: . the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; . the establishment and maintenance of responsible accounting practices and procedures; . the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; . the prevention of cheating and fraudulent practices; and . providing a source of state and local revenues through taxation and licensing fees. Changes in these laws, regulations and procedures could have an adverse affect on our gaming operations. Each of Mandalay's subsidiaries that currently operates a casino in Nevada is required to be licensed by the Nevada Gaming Authorities. The gaming license requires the periodic payment of fees and taxes and is not transferable. Mandalay is required to be registered by the Nevada Gaming Commission as a publicly traded corporation and as such, is required periodically to submit detailed financial and operating reports to the Nevada Gaming Commission and furnish any other information that the Nevada Gaming Commission may require. No person may become a stockholder of, or receive any percentage of profits from, a licensed casino without first obtaining licenses and approvals from the Nevada Gaming Authorities. We have obtained from the Nevada Gaming Authorities the various registrations, findings of suitability, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, Mandalay or any of its licensed subsidiaries in order to determine whether the individual is suitable or should be licensed as a business associate of a gaming licensee. Mandalay and its 13 licensed subsidiaries' officers, directors and key employees must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. An applicant for licensing or an applicant for a finding of suitability must pay for all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and, in addition to their authority to deny an application for a finding of suitability or licensing, the Nevada Gaming Authorities have the jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with Mandalay or any licensed subsidiary, Mandalay and the licensed subsidiary would have to sever all relationships with that person. In addition, the Nevada Gaming Commission may require Mandalay or a licensed subsidiary to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Nevada. Mandalay and all of its licensed subsidiaries are required to submit detailed financial and operating reports to the Nevada Gaming Commission. Substantially all of our or our licensed subsidiaries' material loans, leases, sales of securities and similar financing transactions must be reported to, or approved by, the Nevada Gaming Commission. If the Nevada Gaming Commission determined that Mandalay or a licensed subsidiary violated the Nevada Gaming Control Act, it could limit, condition, suspend or revoke our gaming licenses. In addition, Mandalay, the licensed subsidiary, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Gaming Control Act at the discretion of the Nevada Gaming Commission. Further, a supervisor could be appointed by the Nevada Gaming Commission to operate a licensed subsidiary's gaming establishment and, under specified circumstances, earnings generated during the supervisor's appointment, except for the reasonable rental value of the premises, could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license of a licensed subsidiary and the appointment of a supervisor could, or revocation of any gaming license would, have a material adverse effect on our gaming operations. Any beneficial holder of our common stock, or any of our other voting securities, regardless of the number of shares owned, may be required to file an application, be investigated and have that person's suitability as a beneficial holder of our voting securities determined if the Nevada Gaming Commission has reason to believe that the ownership would otherwise be inconsistent with the declared policies of the State of Nevada. The applicant must pay all costs of the investigation incurred by the Nevada Gaming Authorities in conducting any investigation. The Nevada Gaming Control Act requires any person who acquires a beneficial ownership of more than 5% of Mandalay's voting securities to report the acquisition to the Nevada Gaming Commission. The Nevada Gaming Control Act requires that beneficial owners of more than 10% of Mandalay's voting securities apply to the Nevada Gaming Commission for a finding of suitability within thirty days after the Chairman of the Nevada State Gaming Control Board mails the written notice requiring such filing. An "institutional investor," as defined in the Nevada Act, which acquires beneficial ownership of more than 10%, but not more than 15%, of Mandalay's voting securities may apply to the Nevada Gaming Commission for a waiver of a finding of suitability if the institutional investor holds Mandalay's voting securities for investment purposes only. An institutional investor will be deemed to hold Mandalay's voting securities for investment purposes if it acquired and holds Mandalay's voting securities in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly: . the election of a majority of the members of Mandalay's board of directors; . any change in Mandalay's corporate charter, bylaws, management, policies or operations, or any of its gaming affiliates; or . any other action which the Nevada Gaming Commission finds to be inconsistent with holding Mandalay's voting securities for investment purposes only. 14 Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: . voting on all matters voted on by stockholders; . making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and . other activities as the Nevada Gaming Commission may determine to be consistent with investment intent. If the beneficial holder of Mandalay's voting securities who must be found suitable is a corporation, partnership, limited partnership, limited liability company or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Gaming Commission or by the Chairman of the Nevada State Gaming Control Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of Mandalay's voting securities beyond the period of time as may be prescribed by the Nevada Gaming Commission may be guilty of a criminal offense. Mandalay will be subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with it or a licensed subsidiary, it: . pays that person any dividend or interest upon any of Mandalay's voting securities; . allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; . pays remuneration in any form to that person for services rendered or otherwise; or . fails to pursue all lawful efforts to require the unsuitable person to relinquish the voting securities including, if necessary, the immediate purchase of the voting securities for cash at fair market value. Additionally, the Clark County Liquor and Gaming Licensing Board has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming licensee. The Nevada Gaming Commission may, in its discretion, require the holder of any debt security of a registered publicly traded corporation to file applications, be investigated and be found suitable to own the debt security of the registered corporation. If the Nevada Gaming Commission determines that a person is unsuitable to own the security, then under the Nevada Gaming Control Act, the registered publicly traded corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Gaming Commission, it: . pays to the unsuitable person any dividend, interest or any distribution whatsoever; . recognizes any voting right by the unsuitable person in connection with the securities; . pays the unsuitable person remuneration in any form; or . makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. Mandalay is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make the disclosure may be grounds for finding the record holder unsuitable. Mandalay is also required to render maximum assistance in determining the identity of the beneficial owner of any of our voting securities. The 15 Nevada Gaming Commission has the power to require our stock certificates to bear a legend indicating that the securities are subject to the Nevada Gaming Control Act. To date, the Nevada Gaming Commission has not imposed that requirement on us. Mandalay may not make a public offering of its securities without the prior approval of the Nevada Gaming Commission if it intends to use the securities or the proceeds from the offering to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for those purposes or for similar transactions. On January 25, 2001, the Nevada Gaming Commission granted Mandalay prior approval to make public offerings for a period of two years, subject to some conditions, which we refer to as the "shelf approval." The shelf approval also applies to any company that Mandalay wholly owns which is a publicly traded corporation or would become a publicly traded corporation pursuant to a public offering. The shelf approval also includes approval for our registered and licensed subsidiaries to guarantee any security issued by, and to hypothecate their assets to secure the payment or performance of any obligations evidenced by a security issued by, Mandalay or an affiliate in a public offering under the shelf registration. The shelf approval also includes approval to place restrictions upon the transfer of and enter into agreements not to encumber the equity securities of the licensed subsidiaries, which we refer to as "stock restrictions." The shelf approval, however, may be rescinded for good cause without prior notice upon the issuance of an interlocutory stop order by the Chairman of the Nevada State Gaming Control Board. The shelf approval does not constitute a finding, recommendation or approval of the Nevada Gaming Authorities as to the accuracy or adequacy of the prospectus or other disclosure document by which securities are offered or the investment merits of such securities. Mandalay must obtain prior approval of the Nevada Gaming Commission with respect to a change in control through: . merger; . consolidation; . stock or asset acquisitions; . management or consulting agreements; or . any act or conduct by a person whereby the person obtains control of Mandalay. Entities seeking to acquire control of a registered publicly traded corporation must satisfy the Nevada State Gaming Control Board and Nevada Gaming Commission in a variety of stringent standards before assuming control of the registered corporation. The Nevada Gaming Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licenses, and registered publicly-traded corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Gaming Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: . assure the financial stability of corporate gaming operators and their affiliates; . preserve the beneficial aspects of conducting business in the corporate form; and . promote a neutral environment for the orderly governance of corporate affairs. Approvals may be required from the Nevada Gaming Commission before Mandalay can make exceptional repurchases of voting securities above their current market price and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by our board of directors in response to a tender offer made directly to its stockholders for the purpose of acquiring control of Mandalay. 16 License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the licensed subsidiaries respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: . a percentage of the gross revenues received; . the number of gaming devices operated; or . the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling or serving of food or refreshments or the selling of merchandise. Nevada corporate licensees that hold a license as an operator of a slot machine route, or a manufacturer's or distributor's license, also pay fees and taxes to the State of Nevada. The licensed subsidiaries currently pay monthly fees to the Nevada Gaming Commission equal to a maximum of 6.25% of gross revenues. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with those persons (collectively, "licensees"), and who proposes to become involved in a gaming venture outside of Nevada, is required to deposit with the Nevada State Gaming Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada State Gaming Control Board of the licensee's participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Gaming Commission. Thereafter, licensees are required to comply with the reporting requirements imposed by the Nevada Gaming Control Act. A licensee is also subject to disciplinary action by the Nevada Gaming Commission if it: . knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation; . fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations; . engages in activities or enters into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees; or . employs, contracts with or associates with a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of alcoholic beverages at establishments operated by a licensed subsidiary is subject to licensing, control and regulation by applicable local regulatory agencies. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any license, and any disciplinary action could, and revocation would, have a material adverse affect upon the operations of the licensed subsidiary. Mississippi Gaming Laws Mandalay conducts its Mississippi gaming operations through a Mississippi subsidiary, Circus Circus Mississippi, Inc. ("CCMI"), which owns and operates the Gold Strike Casino Resort in Tunica County, Mississippi. The ownership and operation of casino facilities in Mississippi are subject to extensive state and local regulation, but primarily the licensing and regulatory control of the Mississippi Gaming Commission and the Mississippi State Tax Commission. The Mississippi Gaming Control Act, which legalized dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although not identical, the Mississippi Gaming Control Act is similar to the Nevada Gaming Control Act. Effective October 29, 1991, the Mississippi Gaming Commission adopted regulations in furtherance of the Mississippi Gaming Control Act (the "regulations"), which are also similar in many respects to the Nevada gaming regulations. 17 The laws, regulations and supervisory procedures of Mississippi and the Mississippi Gaming Commission seek to: . prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; . establish and maintain responsible accounting practices and procedures; . maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Mississippi Gaming Commission; . prevent cheating and fraudulent practices; . provide a source of state and local revenues through taxation and licensing fees; and . ensure that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Mississippi Gaming Commission. Changes in Mississippi law or the regulations or the Mississippi Gaming Commission's interpretations thereof may limit or otherwise materially affect the types of gaming that may be conducted, and could have a material adverse affect on Mandalay and CCMI's Mississippi gaming operations. The Mississippi Gaming Control Act provides for legalized dockside gaming at the discretion of the 14 counties that either border the Gulf Coast or the Mississippi River, but only if the voters in these counties have not voted to prohibit gaming in that county. As of April 1, 2001, dockside gaming was permissible in nine of the 14 eligible counties in the state and gaming operations had commenced in Adams, Coahoma, Hancock, Harrison, Tunica, Warren and Washington counties. Under Mississippi law, gaming vessels must be located on the Mississippi River or on navigable waters in eligible counties along the Mississippi River, or in the waters of the State of Mississippi lying south of the state in eligible counties along the Mississippi Gulf Coast. The law permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis and does not restrict the percentage of space which may be utilized for gaming. There are no limitations on the number of gaming licenses which may be issued in Mississippi. The legal age for gaming in Mississippi is 21. Mandalay and its Mississippi licensee subsidiary CCMI are subject to the licensing and regulatory control of the Mississippi Gaming Commission. Mandalay is registered under the Mississippi Gaming Control Act as a publicly- traded holding company of CCMI and is required to periodically submit detailed financial, operating and other reports to the Mississippi Gaming Commission and furnish any other information which the Mississippi Gaming Commission may require. If we are unable to satisfy the registration requirements of the Mississippi Gaming Control Act, Mandalay and CCMI cannot own or operate gaming facilities in Mississippi. CCMI must maintain a gaming license from the Mississippi Gaming Commission to operate a casino in Mississippi. The Mississippi Gaming Commission issues the licenses. CCMI also is required to periodically submit detailed financial, operating and other reports to the Mississippi Gaming Commission and the Mississippi State Tax Commission and to furnish any other information required thereby. Gaming licenses require the periodic payment of fees and taxes and are not transferable. Gaming licenses are issued for a maximum term of three years and must be renewed periodically thereafter. CCMI received its Mississippi gaming license on August 18, 1994 and renewals on August 19, 1996, August 20, 1998 and August 21, 2000. No person may become a stockholder of or receive any percentage of profits from a licensed subsidiary of a holding company without first obtaining licenses and approvals from the Mississippi Gaming Commission. Certain of Mandalay's officers, directors and employees and the officers, directors and key employees of CCMI who are actively and directly engaged in the administration or supervision of gaming in Mississippi must be found suitable or be licensed by the Mississippi Gaming Commission. Mandalay believes it and CCMI have applied for all necessary findings of suitability with respect to these persons, although the Mississippi Gaming 18 Commission, in its discretion, may require additional persons to file applications for findings of suitability. In addition, any person having a material relationship or involvement with Mandalay or CCMI may be required to be found suitable, in which case those persons must pay the costs and fees associated with the investigation. A finding of suitability requires submission of detailed personal and financial information followed by a thorough investigation. There can be no assurance that a person who is subject to a finding of suitability will be found suitable by the Mississippi Gaming Commission. The Mississippi Gaming Commission may deny an application for a finding of suitability for any cause that it deems reasonable. Findings of suitability must be periodically renewed. Changes in certain licensed positions must be reported to the Mississippi Gaming Commission. In addition to its authority to deny an application for a finding of suitability, the Mississippi Gaming Commission has jurisdiction to disapprove a change in a licensed position. The Mississippi Gaming Commission has the power to require Mandalay and CCMI to suspend or dismiss officers, directors and other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in their capacities. Employees associated with gaming must obtain work permits that are subject to immediate suspension. The Mississippi Gaming Commission will refuse to issue a work permit to a person convicted of a felony and it may refuse to issue a work permit to a gaming employee if the employee has committed various misdemeanors or knowingly violated the Mississippi Gaming Control Act or for any other reasonable cause. At any time, the Mississippi Gaming Commission has the power to investigate and require a finding of suitability of any of Mandalay's record or beneficial stockholders, regardless of the percentage of ownership. Mississippi law requires any person who acquires more than 5% of the common stock of a publicly-traded corporation registered with the Mississippi Gaming Commission to report the acquisition to the Mississippi Gaming Commission, and that person may be required to be found suitable. Also, any person who becomes a beneficial owner of more than 10% of the common stock of such a company, as reported to the Mississippi Gaming Commission, must apply for a finding of suitability by the Commission and must pay the costs and fees that the Mississippi Gaming Commission incurs in conducting the investigation. The Mississippi Gaming Commission has generally exercised its discretion to require a finding of suitability of any beneficial owner of more than 5% of a registered public company's common stock. However, the Mississippi Gaming Commission has adopted a policy that may permit institutional investors to own beneficially up to 15% of a registered public company's common stock without a finding of suitability. Under certain circumstances, an "institutional investor," as defined by the Mississippi Gaming Commission's Policy on Findings of Suitability of Institutional Shareholders (adopted January 20, 2000), which acquires more than 10% but not more than 15% of a registered public company's voting securities, may apply to the Executive Director of the Mississippi Gaming Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the registered public company, any change in the registered public company's corporate charter, bylaws, management, policies or operations of the registered public company or any of its gaming affiliates, or any other action which the Mississippi Gaming Commission finds to be inconsistent with holding the registered public company's voting securities for investment purposes only. Activities that are not deemed to be inconsistent with holding voting securities for investment purposes only include: . voting, directly or indirectly through the delivery of a proxy furnished by the board of directors, on all matters voted upon by the holders of such voting securities; . serving as a member of any committee of creditors or security holders; . nominating any candidate for election or appointment to the board of directors in connection with a debt restructuring; 19 . accepting appointment or election (or having a representative accept appointment or election) as a member of the board of directors in connection with a debt restructuring and serving in that capacity until the conclusion of the member's term; . making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and . such other activities as the Mississippi Gaming Commission may determine to be consistent with such investment intent. If a stockholder who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The Mississippi Gaming Commission may at any time dissolve, suspend, condition, limit or restrict a finding of suitability to own Mandalay's equity interests for any cause it deems reasonable. Mandalay may be required to disclose to the Mississippi Gaming Commission upon request the identities of the holders of any debt or other securities. In addition, under the Mississippi Gaming Control Act the Mississippi Gaming Commission may, in its discretion: . require holders of debt securities of registered corporations to file applications; . investigate the holders; and . require the holders to be found suitable to own the debt securities. Although the Mississippi Gaming Commission generally does not require the individual holders of obligations such as notes to be investigated and found suitable, the Mississippi Gaming Commission retains the discretion to do so for any reason, including but not limited to a default, or where the holder of the debt instrument exercises a material influence over the gaming operations of the entity in question. Any holder of debt or equity securities required to apply for a finding of suitability must pay all investigative fees and costs of the Mississippi Gaming Commission in connection with the investigation. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Mississippi Gaming Commission may be found unsuitable. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of Mandalay's securities beyond the time that the Mississippi Gaming Commission prescribes, may be guilty of a misdemeanor. Mandalay is subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder, a holder of debt securities or to have any other relationship with Mandalay or CCMI, Mandalay: . pays the unsuitable person any dividend, interest or other distribution upon its voting securities; . recognizes the exercise, directly or indirectly, of any voting rights conferred through such securities held by the unsuitable person; . pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in limited and specific circumstances; or . fails to pursue all lawful efforts to require the unsuitable person to divest himself of the securities, including, if necessary, the immediate purchase of the securities for cash at a fair market value. CCMI must maintain in Mississippi a current ledger with respect to the ownership of its equity securities and Mandalay must maintain in Mississippi a current list of its stockholders which must reflect the record ownership of each outstanding share of any equity security issued by Mandalay. The ledger and stockholder lists must be available for inspection by the Mississippi Gaming Commission at any time. If any of Mandalay's securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Gaming Commission. A failure to make that disclosure may be grounds for finding the record holder unsuitable. Mandalay must also render maximum assistance in determining the identity of the beneficial owner. 20 The Mississippi Gaming Control Act requires that the certificates representing securities of a registered publicly-traded corporation bear a legend to the general effect that the securities are subject to the Mississippi Gaming Control Act and the regulations of the Mississippi Gaming Commission. The Mississippi Gaming Commission has granted Mandalay a waiver of this legend requirement. The Mississippi Gaming Commission has the power to impose additional restrictions on Mandalay and the holders of its securities at any time. Substantially all loans, leases, sales of securities and similar financing transactions by a licensed gaming subsidiary must be reported to or approved by the Mississippi Gaming Commission. A licensed gaming subsidiary may not make a public offering of its securities, but may pledge or mortgage casino facilities if it obtains the prior approval of the Mississippi Gaming Commission. Mandalay may not make a public offering of its securities without the prior approval of the Mississippi Gaming Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi or to retire or extend obligations incurred for those purposes. The approval, if given, does not constitute a recommendation or approval of the accuracy or adequacy of the prospectus or the investment merits of the securities subject to the offering. On February 17, 2000, the Mississippi Gaming Commission granted Mandalay a waiver of the prior approval requirement for its securities offerings for a period of two years, subject to certain conditions. The waiver may be rescinded for good cause without prior notice upon the issuance of an interlocutory stop order by the Executive Director of the Mississippi Gaming Commission. Under the regulations of the Mississippi Gaming Commission, CCMI may not guarantee a security issued by Mandalay pursuant to a public offering, or pledge its assets to secure payment or performance of the obligations evidenced by the security issued by Mandalay, without the prior approval of the Mississippi Gaming Commission. Similarly, Mandalay may not pledge the stock or other ownership interests of CCMI, nor may the pledgee of these ownership interests foreclose on the pledge, without the prior approval of the Mississippi Gaming Commission. Moreover, restrictions on the transfer of an equity security issued by CCMI and agreements not to encumber these securities are ineffective without the prior approval of the Mississippi Gaming Commission. The waiver of the prior approval requirement for Mandalay's securities offerings received from the Mississippi Gaming Commission on February 17, 2000 includes a waiver of the prior approval requirement for such guarantees, pledges and restrictions of CCMI, subject to certain conditions. Mandalay cannot change its control through merger, consolidation, acquisition of assets, management or consulting agreements or any form of takeover without the prior approval of the Mississippi Gaming Commission. The Mississippi Gaming Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Mississippi Legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect corporate gaming licensees in Mississippi and corporations whose stock is publicly-traded that are affiliated with those licensees, may be injurious to stable and productive corporate gaming. The Mississippi Gaming Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Mississippi's gaming industry and to further Mississippi's policy to: . assure the financial stability of corporate gaming operators and their affiliates; . preserve the beneficial aspects of conducting business in the corporate form; and . promote a neutral environment for the orderly governance of corporate affairs. Mandalay may be required to obtain approval from the Mississippi Gaming Commission before it may make exceptional repurchases of voting securities in excess of the current market price of its common stock (commonly called "greenmail") or before it may consummate a corporate acquisition opposed by management. The regulations will also require prior approval by the Mississippi Gaming Commission if Mandalay adopts a plan of recapitalization proposed by its board of directors opposing a tender offer made directly to the stockholders for the purpose of acquiring control of Mandalay. 21 Neither Mandalay nor CCMI may engage in gaming activities in Mississippi while Mandalay, CCMI and/or persons found suitable to be associated with the gaming license of CCMI conduct gaming operations outside of Mississippi without approval of the Mississippi Gaming Commission. The Mississippi Gaming Commission may require means for it to have access to information concerning Mandalay's and Mandalay's affiliates' out-of-state gaming operations. Mandalay received waivers of foreign gaming approval from the Mississippi Gaming Commission for the conduct of gaming operations in Nevada, Indiana, Louisiana, Illinois, New Jersey, Michigan and Ontario, Canada, but may be required to obtain the approval or a waiver of such approval from the Mississippi Gaming Commission before engaging in any additional future gaming operations outside of Mississippi. If the Mississippi Gaming Commission decides that a licensed gaming subsidiary violated a gaming law or regulation, the Mississippi Gaming Commission could limit, condition, suspend or revoke the license of the subsidiary. In addition, we, the licensed subsidiary and the persons involved could be subject to substantial fines for each separate violation. A violation under any of Mandalay's other operating subsidiaries' gaming licenses may be deemed a violation of CCMI's gaming license. Because of a violation, the Mississippi Gaming Commission could attempt to appoint a supervisor to operate the casino facilities. Limitation, conditioning or suspension of CCMI's gaming license or Mandalay's registration as a publicly-traded holding company of CCMI, or the appointment of a supervisor could, and revocation of any gaming license or registration would, materially adversely affect Mandalay's Mississippi gaming operations. A licensed gaming subsidiary must pay license fees and taxes, computed in various ways depending on the type of gaming involved, to the State of Mississippi and to the county or city in which the licensed gaming subsidiary conducts operations. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon: . a percentage of the gross gaming revenues received by the casino operation; . the number of slot machines operated by the casino; and . the number of table games operated by the casino. The license fee payable to the State of Mississippi is based upon "gaming receipts," generally defined as gross receipts less payouts to customers as winnings, and equals: . 4% of gaming receipts of $50,000 or less per month; . 6% of gaming receipts over $50,000 and less than $134,000 per month; and . 8% of gaming receipts over $134,000 per month. These license fees are allowed as a credit against our Mississippi income tax liability for the year paid. The gross revenue fee imposed by the Mississippi cities and counties in which casino operations are located is in addition to the fees payable to the State of Mississippi and equals approximately 4% of the gaming receipts. The Mississippi Gaming Commission adopted a regulation in 1994 requiring as a condition of licensure or license renewal that a gaming establishment's plan include a 500-car parking facility in close proximity to the casino complex and infrastructure facilities which will amount to at least 25% of the casino cost. Infrastructure facilities are defined in the regulation to include a hotel with at least 250 rooms, theme park, golf course and other similar facilities. With the opening of its resort hotel and other amenities, CCMI is in compliance with this requirement. On January 21, 1999, the Mississippi Gaming Commission adopted an amendment to this regulation which increased the infrastructure requirement to 100% from the existing 25%; however, the regulation grandfathers existing licensees and applies only to new casino projects and casinos that are not operating at the time of acquisition or purchase, and would therefore not apply to CCMI. Both the local jurisdiction and the Alcoholic Beverage Control Division of the Mississippi State Tax Commission license, control and regulate the sale of alcoholic beverages by CCMI. The Gold Strike Casino 22 Resort owned and operated by CCMI is in an area designated as a special resort area, which allows casinos located therein to serve alcoholic beverages on a 24-hour basis. The Alcohol Beverage Control Division has the full power to limit, condition, suspend or revoke any license for the service of alcoholic beverages or to place a licensee on probation with or without conditions. Any disciplinary action could, and revocation would, have a material adverse affect upon the casino's operations. Mandalay's and CCMI's key officers and managers must be investigated by the Alcoholic Beverage Control Division in connection with its liquor permits and changes in key positions must be approved by the Alcoholic Beverage Control Division. Illinois Gaming Laws We are subject to the jurisdiction of the Illinois gaming authorities as a result of our 50% interest in Grand Victoria Riverboat Casino based in Elgin, Illinois. In February 1990, the State of Illinois legalized riverboat gambling. The Illinois Riverboat Gambling Act (the "Illinois Act") authorizes the five- member Illinois Gaming Board (the "Illinois Board") to issue up to ten riverboat gaming owners' licenses on navigable streams within or forming a boundary of the State of Illinois except for Lake Michigan and any waterway in Cook County, which includes Chicago. Pursuant to the initial Illinois Act, a licensed owner who holds greater than a 10% interest in one riverboat operation, could hold no more than a 10% interest in any other riverboat operation. In addition, the initial Illinois Act restricted the location of certain of the ten owners' licenses. Four of the licenses were to be located on the Mississippi River, one license was to be at a location on the Illinois River south of Marshall County and one license had to be located on the Des Plaines River in Will County. The remaining licenses were not restricted as to location. Currently, nine owner's licenses are in operation in Alton, Aurora, East Peoria, East St. Louis, Elgin, Metropolis, Rock Island and two licenses in Joliet. The tenth license, which was initially granted to an operator in East Dubuque, was not renewed by the Illinois Board and has been the subject of on-going litigation. Furthermore, under the initial Illinois Act, no gambling could be conducted while a riverboat was docked. A gambling excursion could last no more than four hours, and a gaming excursion was deemed to have started when the first passenger boarded a riverboat. Gaming could continue during passenger boarding for a period of up to 30 minutes. Gaming was also allowed for a period of up to 30 minutes after the gangplank or its equivalent was lowered, thereby allowing passengers to exit the riverboat. During the 30-minute exit time period, new passengers were not allowed to board the riverboat. Although riverboats were mandated to cruise, there were certain exceptions. If a riverboat captain reasonably determined that either it was unsafe to transport passengers on the waterway due to inclement weather or the riverboat had been rendered temporarily inoperable by unforeseeable mechanical or structural difficulties or river icing, the riverboat could remain dockside or return to the dock. In those situations, a gaming excursion could begin or continue while the gangplank or its equivalent was raised and remained raised, in which event the riverboat was not considered docked. If a gaming excursion had to begin or continue with the gangplank or its equivalent raised, and the riverboat did not leave the dock, entry of new patrons on to the riverboat was prohibited until the completion of the excursion. In June of 1999, amendments to the Illinois Act were passed by the legislature and signed into law by the Governor. The amended Illinois Act redefined the conduct of gaming in the state. Pursuant to the amended Illinois Act, riverboats can conduct gambling without cruising and passengers can enter and leave a riverboat at any time. In addition, riverboats may now be located upon any water within Illinois and not just navigable waterways. There is no longer any prohibition of a riverboat being located in Cook County. Riverboats are now defined as self-propelled excursion boats or permanently moored barges. The amended Illinois Act requires that only three, rather than four owner's licenses, be located on the Mississippi River. The 10% ownership prohibition has also been removed. Therefore, subject to certain Illinois Board rules, individuals or entities could own more than one riverboat operation. The amended Illinois Act also allows for the relocation of a riverboat home dock. A licensee that was not conducting riverboat gambling on January 1, 1998, may apply to the Illinois Board for renewal and approval of relocation to a new home dock and the Illinois Board shall grant the application and approval of the new home 23 dock upon the licensee providing to the Illinois Board authorization from the new dockside community. Pursuant to the amended Illinois Act, the former owner and operator of the East Dubuque riverboat has applied for renewal of its license and to relocate its operation to Rosemont, Illinois. The Illinois Board recently voted to deny this renewal application. Pursuant to Illinois Board rules, this entity filed a Request for Hearing, thereby challenging the Illinois Board's action. Therefore, this license may be the subject of on- going litigation. Any licensee that relocates in accordance with the provisions of the amended Illinois Act, must attain a level of at least 20% minority ownership of such a gaming operation. The constitutionality of the amended Illinois Act was challenged. The lawsuit was dismissed because the court determined that the plaintiff lacked standing to challenge the amended act. It is still unknown whether the plaintiff can or will timely appeal the circuit court decision. There is no assurance that the circuit court decision will be affirmed on appeal. If there is on-going litigation, there is no assurance that the amended Illinois Act will be upheld as constitutional. If the amended Illinois Act is deemed unconstitutional, all of the new provisions would no longer be in effect. Specifically, in that situation, riverboats would have to return to cruising in order to conduct gaming. The Illinois Act strictly regulates the facilities, persons, associations and practices related to gaming operations. The Illinois Act grants the Illinois Board specific powers and duties, and all other powers necessary and proper to fully and effectively execute the Illinois Act for the purpose of administering, regulating and enforcing the system of riverboat gaming. The Illinois Board has authority over every person, association, corporation, partnership and trust involved in riverboat gaming operations in the State of Illinois. The Illinois Act requires the owner of a riverboat gaming operation to hold an owner's license issued by the Illinois Board. Each owner's license permits the holder to own up to two riverboats, however, gaming participants are limited to 1,200 for any owner's license. The number of gaming participants will be determined by the number of gaming positions available. Gaming positions are counted as follows: . electronic gaming devices positions will be determined as 90% of the total number of devices available for play; . craps tables will be counted as having ten gaming positions; and . games utilizing live gaming devices, except for craps, will be counted as having five gaming positions. Each owner's license initially runs for a period of three years. Thereafter, the license must be renewed annually. Under the amended Illinois Act, the Board may renew an owner's license for up to four years. An owner licensee is eligible for renewal upon payment of the applicable fee and a determination by the Illinois Board that the licensee continues to meet all of the requirements of the Illinois Act and Illinois Board rules. The owner's license for Grand Victoria Riverboat Casino was issued in October 1994 and was valid for three years. Since that time, the license has been renewed annually, and in October 2000, the license was renewed for four years. An ownership interest in an owner's license may not be transferred or pledged as collateral without the prior approval of the Illinois Board. Pursuant to the amended Illinois Act, which lifted the 10% ownership prohibition, the Illinois Board established certain rules to effectuate this statutory change. In deciding whether to approve direct or indirect ownership or control of an owner's license, the Illinois Board shall consider the impact of any economic concentration of the ownership or control. No direct or indirect ownership or control may be approved which will result in undue economic concentration of the ownership of a riverboat gambling operation in Illinois. Undue economic concentration means that a person or entity would have actual or potential domination of riverboat gambling in Illinois sufficient to: . substantially impede or suppress competition among holders of owner's licenses; . adversely impact the economic stability of the riverboat casino industry in Illinois; or . negatively impact the purposes of the Illinois Act, including tourism, economic development, benefits to local communities and state and local revenues. 24 The Illinois Board will consider the following criteria in determining whether the approval of the issuance, transfer or holding of a license will create undue economic concentration: . percentage share of the market presently owned or controlled by the person or entity; . estimated increase in the market share if the person or entity is approved to hold the owner's license; . relative position of other persons or entities that own or control owner's licenses in Illinois; . current and projected financial condition of the riverboat gaming industry; . current market conditions, including proximity and level of competition, consumer demand, market concentration and any other relevant characteristics of the market; . whether the license to be approved has separate organizational structures or other independent obligations; . potential impact on the projected future growth and development of the riverboat gambling industry, the local communities in which licenses are located and the State of Illinois; . barriers to entry into the riverboat gambling industry and if the approval of the license will operate as a barrier to new companies and individuals desiring to enter the market; . whether the approval of the license is likely to result in enhancing the quality and customer appeal of products and services offered by riverboat casinos in order to maintain or increase their respective market shares; . whether a restriction on the approval of the additional license is necessary in order to encourage and preserve competition in casino operations; and . any other relevant information. The Illinois Act does not limit the maximum bet or per patron loss. Minimum and maximum wagers on games are set by the owner licensee. Wagering may not be conducted with money or other negotiable currency. No person under the age of 21 is permitted to wager and wagers may only be received from a person present on the riverboat. With respect to electronic gaming devices, the payout percentage may not be less than 80% nor more than 100%. An admission tax is imposed on the owner of a riverboat operation. Under the amended Illinois Act, a $2.00 admission tax is imposed for each admission to a riverboat casino. Additionally, a wagering tax is imposed on the adjusted gross receipts, as defined in the Illinois Act, of a riverboat operation. As of January 1, 1998, the wagering tax is as follows: . 15% of adjusted gross receipts up to and including $25,000,000; . 20% of adjusted gross receipts in excess of $25,000,000 but not exceeding $50,000,000; . 25% of adjusted gross receipts in excess of $50,000,000 but not exceeding $75,000,000; . 30% of adjusted gross receipts in excess of $75,000,000 but not exceeding $100,000,000; and . 35% of adjusted gross receipts in excess of $100,000,000. The owner licensee is required, on a daily basis, to wire the wagering tax payment to the Illinois Board. In addition to owner's licenses, the Illinois Board also requires licensing for all vendors of gaming supplies and equipment and for all employees of a riverboat gaming operation. The Illinois Board is authorized to conduct investigations into the conduct of gaming and into alleged violations of the Illinois Act and the Illinois Board rules. Employees and agents of the Illinois Board have access to and may inspect any facilities relating to the riverboat gaming operation. 25 A holder of any license is subject to imposition of fines, suspension or revocation of such license, or other action for any act or failure to act by himself or his agents or employees, that is injurious to the public health, safety, morals, good order and general welfare of the people of the State of Illinois, or that would discredit or tend to discredit the Illinois gaming industry or the State of Illinois. Any riverboat operations not conducted in compliance with the Illinois Act may constitute an illegal gaming place and consequently may be subject to criminal penalties, including possible seizure, confiscation and destruction of illegal gaming devices and seizure and sale of riverboats and dock facilities to pay any unsatisfied judgment that may be recovered and any unsatisfied fine that may be levied. The Illinois Act also provides for civil penalties, equal to the amount of gross receipts derived from wagering on the gaming, whether unauthorized or authorized, conducted on the day of any violation. The Illinois Board may revoke or suspend licenses, as the Illinois Board may see fit and in compliance with applicable laws of the State of Illinois regarding administrative procedures and may suspend an owner's license, without notice or hearing, upon a determination that the safety or health of patrons or employees is jeopardized by continuing a riverboat's operation. The suspension may remain in effect until the Illinois Board determines that the cause for suspension has been abated and it may revoke the owner's license upon a determination that the owner has not made satisfactory progress toward abating the hazard. If the Illinois Board has suspended, revoked or refused to renew the license of an owner or if a riverboat gambling operation is closing and the owner is voluntarily surrendering its owner's license, the Illinois Board may petition the local circuit court in which the riverboat is situated for appointment of a receiver. The circuit court shall have sole jurisdiction over any and all issues pertaining to the appointment of a receiver. The Illinois Board shall specify the specific powers, duties and limitations for the receiver, including but not limited to the authority to: . hire, fire, promote and discipline personnel and retain outside employees or consultants; . take possession of any and all property, including but not limited to its books, records, papers; . preserve and/or dispose of any and all property; . continue and direct the gaming operations under the monitoring of the Board; . discontinue and dissolve the operation; . enter into and cancel contracts; . borrow money and pledge, mortgage or otherwise encumber the property; . pay all secured and unsecured obligations; . institute or define actions by or on behalf of the holder of an Owner's license; and . distribute earnings derived from gaming operations in the same manner as admission wagering taxes are distributed under Sections 12, 13 of the Riverboat Gambling Act. The Illinois Board shall submit at least three nominees to the court. The nominees may be individuals or entities selected from an Illinois Board approved list of pre-qualified receivers who meet the same criteria for a finding of preliminary suitability for licensure under Illinois Board Rules, Sections 3000.230(c)(2)(B) and (C). In the event that the Illinois Board seeks the appointment of a receiver on a emergency basis, the Illinois Board shall issue a Temporary Operating Permit to the receiver appointed by the court. A receiver, upon appointment by the court, shall before assuming his or her duties, execute and post the same bond as an owner's licensee pursuant to Section 10 of the Illinois Act. The receiver shall function as an independent contractor, subject to the direction of the court. However, the receiver shall also provide to the Illinois Board regular reports and provide any information deemed necessary for the Illinois Board to ascertain the receiver's compliance with all applicable rules and laws. From time to time, the Illinois Board may, at its sole discretion, report to the court on the receiver's level of compliance and any other information deemed appropriate for disclosure to the court. The term and compensation of the receiver 26 shall be set by the court. The receiver shall provide to the court and the Illinois Board at least 30 days written notice of any intent to withdraw from the appointment or to seek modification of the appointment. Except as otherwise provided by action to the Illinois Board the gaming operation shall be deemed a licensed operation subject to all rules of the Illinois Board during the tenure of any receivership. The Illinois Board requires that a "Key Person" of an owner licensee submit a Personal Disclosure or Business Entity Form and be investigated and approved by the Illinois Board. The Illinois Board shall certify for each applicant for or holder of an owner's license each position, individual or Business Entity that is to be approved by the Board and maintain suitability as a Key Person. With respect to an applicant for or the holder of an owner's license, a Key Person shall include: . any Business Entity and any individual with an ownership interest or voting rights of more than 5% in the licensee or applicant and the trustee of any trust holding such ownership interest or voting rights; . the directors of the licensee or applicant and its chief executive officer, president and chief operating officer or their functional equivalents; and . all other individuals or Business Entities that, upon review of the applicant's or licensees Table of Organization, Ownership and Control the Board determines hold a position or a level of ownership, control or influence that is material to the regulatory concerns and obligations of the Illinois Board for the specified licensee or applicant. In order to assist the Illinois Board in its determination of Key Persons, applicants for or holders of an owner's license must provide to the Illinois Board a Table of Organization, Ownership and Control (the "Table"). The Table must identify in sufficient detail the hierarchy of individuals and Business Entities that, through direct or indirect means, manage, own or control the interest and assets of the applicant or licensee holder. If a Business Entity identified in the Table is a publicly traded company, the following information must be provided in the Table: . the name and percentage of ownership interest of each individual or Business Entity with ownership of more than 5% of the voting shares of the entity, to the extent this information is known or contained in Schedule 13D or 13G SEC filings; . to the extent known, the names and percentage of interest of ownership of persons who are relatives of one another and who together (as individuals or through trusts) exercise control over or own more than 10% of the voting shares of the entity; and . any trust holding more than 5% ownership or voting interest in Mandalay, to the extent this information is known or contained in Schedule 13D or 13G SEC filings. The Table may be disclosed under the Freedom of Information Act. Each owner licensee must provide a means for the economic disassociation of a Key Person in the event such economic disassociation is required by an order of the Illinois Board. Based upon findings from an investigation into the character, reputation, experience, associations, business probity and financial integrity of a Key Person, the Illinois Board may enter an order upon the licensee or require the economic disassociation of the Key Person. Furthermore, each applicant or owner licensee must disclose the identity of every person, association, trust or corporation having a greater than 1% direct or indirect pecuniary interest in an owner licensee or in the riverboat gaming operation with respect to which the license is sought. The Illinois Board may also require an applicant or owner licensee to disclose any other principal or investor and require the investigation and approval of these individuals. The Illinois Board (unless the investor qualifies as an institutional investor) requires a Personal Disclosure Form or a Business Entity Form from any person or entity who or which, individually or in association with 27 others, acquires directly or indirectly, beneficial ownership of more than 5% of any class of voting securities or non-voting securities convertible into voting securities of a publicly-traded corporation which holds an ownership interest in the holder of an owner's license. If the Illinois Board denies an application for such a transfer and if no hearing is requested, the applicant for the transfer of ownership interest must promptly divest those shares in the publicly-traded parent corporation. The holder of an owner's license would not be able to distribute profits to a publicly-traded parent corporation until such shares have been divested. If a hearing is requested, the shares need not be divested and profits may be distributed to a publicly-held parent corporation pending the issuance of a final order from the Illinois Board. An institutional investor that individually or jointly with others, cumulatively acquires, directly or indirectly, 5% or more of any class of voting securities of a publicly-traded licensee or a licensee's publicly- traded parent corporation shall, within no less than ten days after acquiring these securities, notify the Administrator of the Board of such ownership and shall provide any additional information as may be required. If an institutional investor (as specified above) acquires 10% or more of any class of voting securities of a publicly-traded licensee or a licensee's publicly- traded parent corporation it shall file an Institutional Investor Disclosure Form within 45 days after acquiring this level of ownership interest. The owner licensee shall notify the Administrator as soon as possible after it becomes aware that it or its parent is involved in an ownership acquisition by an institutional investor. The institutional investor also has an obligation to notify the Administrator of its ownership interest. In addition to Institutional Investor Disclosure Forms, certain other forms may be required to be submitted to the Illinois Board. An owner-licensee must submit a Marketing Agent Form to the Illinois Board for each Marketing Agent with whom it intends to do business. A Marketing Agent is a person or entity, other than a junketeer or an employee of a riverboat gaming operation, who is compensated by the riverboat gaming operation in excess of $100 per patron per trip for identifying and recruiting patrons. Key Persons of owner-licensees must submit Trust Identification Forms for trusts, excluding land trusts, for which they are a grantor, trustee or beneficiary each time such a trust relationship is established, amended or terminated. Applicants for and holders of an owner's license are required to obtain formal approval from the Illinois Board for changes in the following areas: . Key Persons; . type of entity; . equity and debt capitalization of the entity; . investors and/or debt holders; . source of funds; . applicant's economic development plan; . riverboat capacity or significant design change; . gaming positions; . anticipated economic impact; or . agreements, oral or written, relating to the acquisition or disposition of property (real or personal) of a value greater than $1 million. A holder of an owner's license is allowed to make distributions to its stockholders only to the extent that the distribution would not impair the financial viability of the gaming operation. Factors to be considered by the licensee will include but not be limited to the following: . cash flow, casino cash and working capital requirements; . debt service requirements, obligations and covenants associated with financial instruments; 28 . requirements for repairs and maintenance and capital improvements; . employment or economic development requirements of the Act; and . a licensee's financial projections. The Illinois Board may waive any licensing requirement or procedure provided by rule if it determines that the waiver is in the best interests of the public and the gaming industry. Also, the Illinois Board may, from time to time, amend or change its rules. From time to time, various proposals have been introduced in the Illinois legislature that, if enacted, would affect the taxation, regulation, operation or other aspects of the gaming industry or Mandalay. Some of this legislation, if enacted, could adversely affect the gaming industry or Mandalay. No assurance can be given whether such or similar legislation will be enacted. Uncertainty exists regarding the Illinois gambling regulatory environment due to limited experience in interpreting the Illinois Act. Michigan Gaming Laws Mandalay is subject to regulation by the Michigan Gaming Control Board ("Michigan Board") pursuant to the Michigan Gaming Control and Revenue Act ("Michigan Act") as a result of ownership of 53.5% of Detroit Entertainment, L.L.C., a Michigan limited liability company, which operates MotorCity Casino. The qualification standards established by the Michigan Act and Rules are very comprehensive. A burden of proof by "clear and convincing evidence" is placed upon the applicant. The focus of these standards is suitability as to: . character; . reputation; . integrity; . business probity; . experience; . ability; . financial ability and responsibility; and . any other criteria considered appropriate by the Michigan Board. MotorCity Casino's casino license is a one-year license. The license will be renewed by the Michigan Board on an annual basis if the Michigan Board determines that MotorCity Casino continues to meet all requirements established by the Michigan Act and Rules. MotorCity Casino has timely filed its Casino License Annual Renewal Report with the Michigan Board. Action on the license renewal is currently pending before the Michigan Board. The Michigan Board staff has advised MotorCity Casino that its casino license remains in effect while the Michigan Board completes its normal and customary processing procedures for a casino license renewal. No assurances can be given regarding when the Michigan Board will act on the license renewal or what action the Michigan Board will take in connection with the license renewal. The Michigan Act permits the licensing and operation of up to three casinos in any Michigan city that meets certain requirements. At the present time, the only city in Michigan that meets these requirements is Detroit. To date, three casino licenses have been issued. 29 The Michigan Board is composed of five persons. It has the authority to: . enforce the provisions of the Michigan Act; . license casinos in accordance with the provisions of the Michigan Act; and . regulate all aspects of the operation of casinos licensed by the Michigan Board. The Michigan Board's jurisdiction extends to every person and business entity involved in casino gaming operations governed by the Michigan Act and Rules. The Michigan Act and Rules strictly regulate all aspects of the ownership and operation of casinos licensed under the Michigan Act. This includes regulation of: . all related buildings, facilities, bars, restaurants, hotels, cocktail lounges, retail establishments, arenas and rooms functionally or physically connected to the casino; and . any other facility located in the city of Detroit that is under the control of the casino licensee or an affiliated company. Collectively, the Michigan Act calls all of these buildings, facilities and other amenities the "Casino Enterprise." The Michigan Board, the Michigan Attorney General and the Michigan State Police have been assigned to investigate and inspect the casinos licensed under the Michigan Act. These employees have the right to inspect all facilities relating to the Casino Enterprise. The Michigan Act and Rules require that "Key Persons" meet the requirements set forth in the Michigan Act and Rules. Key Persons include: . officers, directors, trustees, partners and proprietors of a casino licensee or an affiliate or holding company of a casino licensee that has control of a casino licensee; . a person that holds a combined direct, indirect or attributed debt or equity interest of more than 5% in a person that holds a casino license; . a person that holds a combined direct, indirect or attributed equity interest of more than 5% in a person that holds a casino license; . a managerial employee of an affiliate or holding company that has control of a person that holds a casino license; and . various management level employees of the casino licensee. The Michigan Act defines "control" of a casino licensee as having greater than 15% direct or indirect pecuniary interest in the casino licensee. Mandalay has control of MotorCity Casino. Key Persons are required to timely file and update qualification information with the Michigan Board and then be approved by the Michigan Board. The Michigan Act and Rules require compliance with qualification standards for obtaining and retaining a direct or indirect ownership interest in a casino and for transferring an ownership interest in a casino. Owners are required to timely file and update information required to be submitted to the Michigan Board. The Michigan Board can require compliance with the qualification and approval standards whenever the Michigan Board determines that it is in the best interests of the Michigan casino regulatory process to do so regardless of the amount of direct or indirect beneficial ownership interest involved or the nature of the ownership interest. The Michigan Act and Rules distinguish between shareholders of a privately owned company and shareholders of a publicly traded company for qualification purposes. Shareholders of a privately owned 30 company who directly or indirectly beneficially own 1% or more of a casino licensee or casino license applicant must submit qualification information to the Michigan Board and be approved by the Michigan Board. Shareholders that own more than 5% of a publicly traded company that owns 1% or more of one of the Detroit casinos must submit and update qualification information to the Michigan Board. Mandalay owns more than 1% of MotorCity Casino and, therefore, each shareholder that owns more than 5% of the shares of Mandalay is subject to the qualification requirements established by the Michigan Act and Rules. There are special rules for an "institutional investor" that has invested in a publicly traded company that owns 1% or more of a Detroit casino or a Michigan casino license applicant. The Michigan Board is currently taking the position that an institutional investor that individually or, in association with others, directly or indirectly holds or acquires beneficial ownership of more than 5% of Mandalay must notify the Michigan Board of its interest in Mandalay within 10 business days after the institutional investor acquires more than a 5% interest in Mandalay or files a Form 13-D or 13-G with the SEC. The institutional investor may be required by the Michigan Board to supply additional information to the Michigan Board. The Michigan Board may require the institutional investor to be found suitable. An institutional investor that individually or, in association with others, directly or indirectly holds or acquires beneficial ownership of more than a 5% interest but less than a 10% interest in Mandalay may request from the Michigan Board a waiver of the eligibility and suitability requirements if the institutional investor purchased the interest in Mandalay for investment purposes only and not for the purpose of influencing or affecting the affairs of Mandalay, MotorCity Casino or its affiliates. In order to obtain the waiver, the institutional investor must complete and file with the Michigan Board a Michigan Institutional Investor Waiver Form 206C. An institutional investor that individually or, in association with others, directly or indirectly holds or acquires beneficial ownership of more than a 10% interest but not more than a 15% interest in Mandalay may request from the Michigan Board a waiver of the eligibility and suitability requirements if the institutional investor purchased the interest in Mandalay for investment purposes only and not for the purpose of influencing or affecting the affairs of Mandalay, MotorCity Casino or its affiliates. In order to obtain the waiver, the institutional investor must complete and file with the Michigan Board a Michigan Institutional Investor Waiver Form NON 206C. The Michigan Rules require that an institutional investor within these ownership parameters must disclose detailed information concerning the institutional investor. An institutional investor that individually or, in association with others, directly or indirectly holds or acquires beneficial ownership of more than a 15% interest in Mandalay is required to file qualification information with the Michigan Board within 45 days after acquiring the interest and is required to meet qualification and approval standards. The Michigan Act and Rules regulate an institutional investor owning debt securities of a casino licensee's affiliates. An institutional investor may be required to meet the Michigan Act's qualification standards if the institutional investor: . owns or acquires beneficial ownership of 10% or more of debt securities of a casino licensee's affiliate or affiliated company which are related in any way to the financing of the casino licensee; or . owns or acquires beneficial ownership of more than 50% of any issue of the outstanding debt of the casino licensee's affiliate or affiliated company. An institutional investor that owns or acquires beneficial ownership of more than 5% but less than 10% of debt securities of a casino licensee's affiliate or affiliated company which are in any way related to the financing of the casino licensee may be granted a waiver of the eligibility and suitability requirements of the Michigan Act and Michigan Rules if: . the debt securities do not represent more than 20% of the outstanding debt of the casino licensee's affiliate or affiliated company; or 31 . the debt securities represent not more than 50% of any issue of the outstanding debt of the casino licensee's affiliate or affiliated company; and . the debt securities are those of a publicly traded corporation and were purchased for investment purposes only. The Michigan Act and Rules regulate the transfer of a direct or indirect interest in a casino licensee. The Michigan Board must be notified in advance of any proposed transfer of a direct or indirect interest. If the proposed transfer involves more than a 1% direct or indirect interest, the proposed transfer may not be consummated until the transfer has been approved by the Michigan Board. In all events, the parties proposing to engage in the transfer action should determine the applicable requirements of the Michigan Act and Rules before completing the transfer transaction. Formal notice of certain events must be given to and approval obtained from the Michigan Board by the casino licensee or applicant and any of their affiliates or holding companies whenever any of the following events occur: . change of a Key Person; . a change in entity; . a change in equity or debt capitalization of the entity; . a change in investors subject to the Michigan Act and Michigan Rules; . a change in debt holders subject to the Michigan Act and Michigan Rules; . a change in source of funds; or . related party transactions exceeding $250,000 in a 12-month period. The Michigan Act declares that a person or entity that is required to meet the Michigan Act's suitability standards will not be eligible if any of the following circumstances exist: . the applicant has been convicted of a felony anywhere in the United States; . the applicant has been convicted of a misdemeanor involving gambling, theft, fraud or dishonesty; . the applicant has submitted an application that contains false information; . the applicant or affiliate owns more than a 10% ownership interest in any entity holding a casino license issued under the Michigan Act; . the applicant holds any elective office in the United States (with certain minor exceptions), is an employee of any gaming regulatory body in the United States or is employed by a governmental unit of the State of Michigan; . the Michigan Board concludes that the applicant lacks the requisite suitability as to integrity, moral character and reputation, personal and business probity, financial ability and experience, responsibility or means to develop, construct, operate or maintain the casino; or . the applicant fails to meet other criteria considered appropriate by the Michigan Board that are not arbitrary, capricious or contrary to the provisions of the Michigan Act. The Michigan Act prohibits casino licensees and applicants and certain related persons from making contributions to candidates for state or local office in the State of Michigan and to committees supporting any such candidates during various periods, including periods prior to licensure. The political contribution restriction applies to casino license applicants, casino licensees and all of the following persons and entities: . any person or entity that holds at least a 1% interest in the casino licensee or Casino Enterprise; . any person who is an officer or managerial employee of the casino licensee or Casino Enterprise; 32 . any person who is an officer of the person who holds at least a 1% interest in the casino licensee or Casino Enterprise; and . any person that is an independent committee of the casino licensee or Casino Enterprise. The Michigan Act also applies this restriction to spouses, parents, children and spouses of children of persons holding an interest in the casino licensee or Casino Enterprise. However, the portion of the political contribution restriction relating to spouses, parents, children and spouses of children has been declared unconstitutional by Attorney General Frank Kelley in Attorney General Opinion No. 7002 issued on December 17, 1998 in those instances where the contribution is not a willful attempt to evade the political contribution restrictions contained in the Michigan Act. The penalties for violation of the political contribution restriction includes fines, imprisonment or both. If a shareholder who is required to submit qualification information to the Michigan Board is not approved by the Michigan Board, the shareholder must promptly dispose of all ownership interest in the shares. If a person who seeks to acquire shares is a person who is required to submit qualification information to the Michigan Board and the person does not obtain approval for the acquisition from the Michigan Board, the person may not acquire the shares and must promptly dispose of all interest in the shares. If a Key Person who is required to submit qualification information to the Michigan Board is not approved by the Michigan Board, the Key Person must promptly cease all involvement in the Michigan Casino Enterprise. As required under the Michigan Act, MotorCity Casino has a Development Agreement with the City of Detroit. The Development Agreement is currently in effect. MotorCity Casino has constructed a temporary casino in accordance with the terms of the Development Agreement. This temporary casino opened on December 14, 1999. Under a plan agreed to by the City of Detroit development authorities but not yet approved by the Detroit City Council, we would expand our temporary facility into a permanent facility by adding approximately 800 hotel rooms, expanding our gaming areas, adding additional restaurants, retail space, convention space and other amenities. The estimated cost of these additional facilities is under review. There can be no assurance that the Detroit City Council will approve the proposed plan, in which event the existing agreement to build a permanent casino at a different location would remain in effect. The Development Agreement entered into between the City of Detroit and Detroit Entertainment, L.L.C. has numerous terms and conditions relating to the following: . the construction of the temporary and permanent casino; . the employment of Detroit residents, minorities and women to staff the operation of the temporary and permanent casinos; and . the use of Detroit based, minority and woman owned vendors and suppliers. MotorCity Casino has agreed to exercise its reasonable best efforts to comply with vendor and supplier use and hiring goals. Failure to comply with the terms of the Development Agreement could adversely affect its casino license. 33 Michigan law requires that any person who holds a "Casino Interest" must file a registration form with the Michigan Secretary of State not later than 5 days after obtaining the Casino Interest. A person who violates this registration requirement for more than 30 days is subject to being charged with a misdemeanor and a fine of not more than $1,000. The Casino Interest registration requirement is completely separate and apart from the eligibility and qualification requirements established by the Michigan Act and Michigan Rules. A person holding a Casino Interest includes: . a person who holds at least a 1% interest in a casino licensee or a Casino Enterprise; . a person who is a partner, officer or key or managerial employee of the casino licensee or Casino Enterprise; and . a person who is an officer of the person who holds at least a 1% interest in the casino licensee or Casino Enterprise. A "person" includes any individual and legal entity. Michigan law also applies the "Casino Interest" registration requirement to the spouse and children of persons holding a Casino Interest. However, the Michigan Secretary of State has ruled that the "Casino Interest" registration requirement does not apply to spouses and children based upon Michigan Attorney General Opinion No. 7053 issued on May 3, 2000. Michigan Attorney General Opinion No. 7053 was issued based upon Michigan Attorney General Opinion No. 7002 issued on December 17, 1998, which declared the portion of the Michigan Act's political contribution restrictions unconstitutional as to spouses and children (among others) where the political contribution is not a willful attempt to evade the political contribution restrictions contained in the Michigan Act. The Casino Interest Registration Form may be obtained from the Michigan Secretary of State in Lansing, Michigan. The Michigan Act and Rules establish extensive requirements and procedures relating to all of the following: . operation of casino games; . ownership records; . reporting of transactions; . handling of money; . extending credit; . accounting and editing; . internal control systems; and . compliance reporting. The Michigan Act and Rules do not limit the maximum bet or per person loss. No person under the age of 21 years is permitted to wager in a casino licensed under the Michigan Act. MotorCity Casino may operate 24 hours a day, 7 days a week. MotorCity Casino is subject to regulation by the Michigan Liquor Control Commission. The Michigan Act subjects MotorCity Casino to five forms of gaming taxes and fees: . a nonrefundable license application fee of $50,000; . a $25,000 casino license fee, which is payable annually; . a wagering tax equal to 18% of adjusted gross receipts; 34 . a municipal services fee in an amount equal to the greater of 1.25% of adjusted gross receipts or $4,000,000; and . the payment of all regulatory and enforcement costs, including compulsive gaming programs, casino related programs and activities, casino related services provided by the Michigan Attorney General and casino related expenses of the Michigan State Police up to a combined total annual maximum charge of $25,000,000 in the first year of casino operations for all casinos licensed under the Michigan Act. This maximum amount is adjusted annually by the Detroit Consumer Price Index. No casino licensed under the Michigan Act is liable for the payment of more than 1/3 of the total annual assessment. This fee is placed into a services fee fund. This service fee fund is prohibited from exceeding $65,000,000. If this service fee fund exceeds $65,000,000, any amount in excess of $65,000,000 must be credited towards the annual payments the casinos licensed under the Michigan Act are required to make to the service fee fund. The five forms of fees and taxes listed above are in addition to the taxes, fees and assessments customarily paid by business entities in the State of Michigan and the City of Detroit. The holder of a casino license issued under the Michigan Act is subject to a variety of penalties for violation of the Michigan Act or Rules. The penalties include, but are not necessarily limited to, the following: . monetary fines; . suspension of the casino license; . revocation of the casino license; . civil penalties of up to $10,000 or the amount of daily gross receipts derived from wagering on gaming on the day of the violation, whichever is greater; . criminal penalties; . seizure and/or destruction of gaming equipment; . seizure and/or sale of gaming operations; . imposition of a conservatorship; and . imposition of restrictions or conditions on gaming operations by the Michigan Board. The Michigan Board is required to comply with the Michigan Act, the Michigan Rules, the Michigan Administrative Procedures Act and other applicable laws and regulations. The Michigan Board may suspend a casino operator's license, without notice or hearing, upon a determination that: . the safety or health of patrons or employees would be threatened by the continued operation of the casino; or . the action is necessary for the immediate preservation of the integrity of casino gaming, public peace, health, safety, morals, good order or general welfare. The Michigan Board may waive any licensing requirement or procedures provided by the Michigan Rules provided that the waiver does not violate the Michigan Act. Any such waiver must be based upon a determination by the Michigan Board that the waiver is in the best interests of the public and the gaming industry. The Michigan Board may amend or change the Michigan Rules provided that the amendment or change complies with the Michigan Act and other applicable Michigan law. Uncertainty exists regarding the Michigan gaming regulatory environment due to the limited experience in interpreting the Michigan Act and the Michigan Rules. The Michigan Act and Michigan Rules are evolving 35 pursuant to an ongoing regulatory, legislative and judicial process. Therefore, the Michigan Act and Michigan Rules are subject to and, in all probability will, change with the maturation of casino gaming regulated by the Michigan Act. Various regulatory proposals have been and, in all likelihood, will continue to be discussed by the Detroit City Council concerning the regulation of casinos in the City of Detroit. Legislation proposed to or by the Detroit City Council, if enacted, could adversely affect the gaming industry, Detroit Entertainment, L.L.C. or Mandalay. No assurance can be given whether additional ordinances will be enacted and what effect such ordinances could have on the operation of casinos in the City of Detroit. From time to time various proposals have been introduced in the Michigan legislature which relate to casino gaming in Detroit. Some of the proposals, if enacted, would affect the taxation, regulation, operation or other aspects of the gaming industry, Detroit Entertainment, L.L.C. or Mandalay. No assurance can be given whether additional legislation will be enacted and what effect such legislation could have on the operation of casinos in the City of Detroit. The constitutionality of the Detroit Casino Competitive Selection Process Ordinance and the Michigan Act has been challenged in federal court proceedings initiated by the Lac Vieux Band of Lake Superior Chippewa Indians. If it is subsequently determined that either the Detroit Casino Competitive Selection Process Ordinance or the Michigan Act is defective and this determination is upheld, this may impact the validity of the Development Agreement entered into between Detroit Entertainment, L.L.C. and the City of Detroit or the casino license issued to Detroit Entertainment, L.L.C., which could have an adverse impact upon us. No assurance can be given regarding the probable result of either proceeding. If it is ultimately determined that either the Michigan Act or the Detroit ordinance is defective, this could result in the termination of the license to operate our temporary casino or otherwise adversely impact our ability to continue to operate that facility and could prevent or otherwise adversely impact our ability to construct, open or operate our proposed permanent hotel- casino in downtown Detroit. This may have an impact upon the validity of the Development Agreement entered into between the City of Detroit and Detroit Entertainment, L.L.C., and the casino license issued to Detroit Entertainment, L.L.C. Litigation challenging the condemnation of real property by the City of Detroit for the permanent casino construction site near the Detroit Riverfront has been initiated. As a result of this litigation, 47 pending land condemnations initiated by the City of Detroit have been dismissed. The litigation surrounding the condemnation of land near the Detroit Riverfront for use in construction of the permanent casinos in the City of Detroit could substantially delay the construction of the permanent casino by Detroit Entertainment, L.L.C. The Mayor of Detroit has entered into negotiations with the three casino licensees, including MotorCity Casino, regarding placement of the permanent casinos. The Mayor of Detroit has proposed that MotorCity Casino be permitted to develop its permanent casino at or near the site of MotorCity Casino's temporary casino. This proposal is currently pending before the Detroit City Council. No assurance can be given regarding what action, if any, the Detroit City Council will take regarding the Mayor of Detroit's proposal. In addition, no assurance can be given regarding the location of the MotorCity Casino permanent casino, the final cost for construction of the MotorCity Casino permanent casino or when the MotorCity Casino permanent casino will constructed. Other Gaming Jurisdictions We may expand our operations in the future to include gaming operations in jurisdictions other than those in which our activities and those of the joint ventures in which we participate are currently conducted. As a result, we and/or one or more joint ventures in which we participate may become subject to comprehensive gaming and other regulations in additional jurisdictions. Such regulations may be similar to, and could be more restrictive than, those currently applicable to us, our joint ventures and our officers, directors, employees and persons associated with us. 36 Other Laws And Regulations Each of the casino hotels and the riverboat and dockside casinos described in this report is subject to extensive state and local regulations and, on a periodic basis, must obtain various licenses and permits, including those required to sell alcoholic beverages. We believe that we and the joint ventures in which we participate have obtained all required licenses and permits and our businesses, including those of our joint ventures, are conducted in substantial compliance with applicable laws. The National Gambling Impact Study Commission's Recommendations A National Gambling Impact Study Commission was established by the United States Congress to conduct a comprehensive study of the social and economic impact of gaming in the United States. On April 28, 1999, the National Commission voted to recommend that the expansion of gambling be curtailed. In June 1999, the National Commission issued a final report of its findings and conclusions, together with recommendations for legislative and administrative actions. Below are highlights of some of those recommendations: . Legal gaming should be restricted to those at least 21 years of age; . Betting on college and amateur sports should be banned; . The introduction of casino-style gambling at pari-mutual racing facilities for the primary purpose of saving the pari-mutual facility financially should be prohibited; . Internet gaming should be banned within the United States; . The types of gaming activities allowed by Indian tribes within a given state should not be inconsistent with the gaming activities allowed to other persons in that state; and . State, local and tribal governments should recognize that casino gaming provides economic development, particularly for economically depressed areas. The National Commission differentiated casino gaming from stand- alone slot machines (e.g., in convenience stores), Internet gaming and lotteries which the commission stated do not provide the same economic development. Any additional regulation of the gaming industry which may result from the National Commission's report may have an adverse affect on the gaming industry, including Mandalay. Internal Revenue Service Regulations The Internal Revenue Service requires operators of casinos located in the United States to file information returns for U.S. citizens, including names and addresses of winners, for keno and slot machine winnings in excess of stipulated amounts. The Internal Revenue Service also requires operators to withhold taxes on some keno, bingo and slot machine winnings of nonresident aliens. We are unable to predict the extent, to which these requirements, if extended, might impede or otherwise adversely affect operations of, and/or income from, the other games. Regulations adopted by the Financial Crimes Enforcement Network of the Treasury Department and the gaming regulatory authorities in some of the jurisdictions in which we operate casinos, or in which we may apply for licensing to operate a casino, require the reporting of currency transactions in excess of $10,000 occurring within a gaming day, including identification of the patron by name and social security number. This reporting obligation began in May 1985 and may have resulted in the loss of gaming revenues to jurisdictions outside the United States which are exempt from the ambit of these regulations. Employees and Labor Relations At March 31, 2001, we and the joint ventures in which we participate employed approximately 35,000 persons. Approximately 41% of our employees at January 31, 2001 were employed pursuant to the terms 37 of collective bargaining agreements. We currently have contracts with our major unions that have remaining terms ranging from one to four years. We consider our labor relations to be satisfactory. A work stoppage has not been experienced at a property we or a joint venture in which we participate own since an industry-wide strike in 1975. Certain states in which gaming has been legalized have established community commitment and similar laws or requirements which require that a specified percentage of employees of gaming ventures be residents of the community or state in which the gaming venture is located or meet certain other criteria. These laws could affect our ability to attract and retain qualified employees for gaming operations we or joint ventures in which we participate conduct outside Nevada. Factors that May Affect Our Future Results (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995) Certain information included in this report and other materials filed or to be filed by Mandalay with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us, including our 2001 Annual Report to Stockholders) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including: . statements relating to our business strategy; . our current and future development plans; and . statements that include the words "may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "plan" or similar expressions. Such statements include information relating to plans for future expansion and other business development activities as well as capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition. From time to time, oral or written forward- looking statements are also included in Mandalay's periodic reports on Forms 10-Q and 8-K, press releases and other materials released to the public. Any or all of the forward-looking statements in this report, in Mandalay's Annual Report to Stockholders for fiscal 2001 and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this report, such as government regulation and the competitive environment, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in Mandalay's subsequent reports to the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K should be consulted. The following discussion of risks, uncertainties and possible inaccurate assumptions relevant to our business includes factors we believe could cause our actual results to differ materially from expected and historical results. Other factors beyond those listed below could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. . As described under "Competition," we and the joint ventures in which we participate operate in a very competitive environment, particularly in Las Vegas. To the extent that hotel and/or casino capacity is expanded by others in a market where we or one of our joint ventures operate, competition will increase 38 and the increased competition could adversely impact our future operations. The growth in the number of guest rooms and casino capacity in Las Vegas, which increased sharply in recent years, and the spread of legalized gaming in other states and countries may negatively affect our operating results. Legalization of gaming in any additional jurisdiction located near Detroit, Michigan or Elgin, Illinois, or the establishment of new large-scale gaming operations on nearby Native American reservations, could adversely affect the operations of our joint venture properties in Detroit or Elgin. . On March 7, 2000, California voters approved an amendment to the California constitution that gave Native American tribes in California the right to conduct gaming operations offering a limited number of slot machines and a range of house-banked card games. At this time, we cannot determine the impact Native American gaming in California will have on our Nevada operations and those of our Nevada joint ventures. . As discussed under "Regulation and Licensing," our gaming operations and the gaming operations of the joint ventures in which we participate are highly regulated by governmental authorities in Nevada, Mississippi, Illinois and Michigan. We will also become subject to regulation in any other jurisdiction where we or any joint venture in which we participate conduct gaming in the future. Any regulation in other jurisdictions may or may not be similar to that in Nevada, Mississippi, Illinois and Michigan. . In Mississippi, in three separate instances, referenda were proposed which, if approved, would have amended the Mississippi constitution to ban gaming in Mississippi and would have required all currently legal gaming entities to cease operations within two years of the ban. All three of the proposed referenda have been ruled illegal by Mississippi state trial court judges. The proponents of the most recent referendum filed a notice of appeal of the trial court ruling with the Mississippi Supreme Court. The Mississippi Supreme Court affirmed the trial court ruling. Any such referendum must be approved by the Mississippi Secretary of State and signatures of approximately 91,700 registered voters must be gathered and certified in order for such a proposal to be included on a statewide ballot for consideration by the voters. An affirmative vote representing both a majority of the votes cast with respect to the initiative and at least 40% of the voters casting votes on any matter in the election is required to pass any Mississippi initiative. The next election for which the proponents could attempt to place such a proposal on the ballot would be in November 2002. While it is too early in the process for us to make any predictions with respect to whether such a referendum will appear on a ballot or the likelihood of such a referendum being approved by the voters, if such a referendum were passed and gaming were prohibited in Mississippi, it would have a material adverse effect on our Mississippi gaming operations. . Changes in applicable laws or regulations could have a significant effect on our operations and those of the gaming joint ventures in which we participate. As a result of federal legislation passed in 1996, the National Gambling Impact Study Commission conducted a two-year study of the gaming industry in the United States and reported its findings and recommendations to Congress in June 1999. It is possible that this report may result in additional regulation and taxation of the gaming industry. . Our operations and those of the joint ventures in which we participate are affected by changes in local and national general economic and market conditions in the locations where those operations are conducted and where customers live. . Our Nevada properties and those of the two Nevada joint ventures in which we participate are affected by economic conditions in California. Our operations at Mandalay Bay may also be susceptible to the effects of economic conditions in the Far East, from where a majority of our high-end players originate. . During the past year, utility costs in California and Nevada have risen significantly and areas of California have experienced mandated periods without electrical power, commonly referred to as "blackouts," necessitated by power shortages. Elimination of the power shortages which have caused the recent rate increases and blackouts require longer-term solutions which will be complicated by continued population growth in the southwestern United States, including California and Nevada. Further rate increases and/or blackouts, should they occur in California and/or Nevada, could have a material negative effect on our operations and the operations of the Nevada joint ventures in which we participate. 39 . We and the joint ventures in which we participate are large consumers of electricity and other energy. Accordingly, the substantial increases in energy costs which have recently occurred at our Nevada properties and that we expect to continue will have a negative impact on our operating results. Additionally, higher energy and gasoline prices which affect our customers may adversely impact the number of customers who visit our properties and those of our joint ventures and adversely impact our revenues. . The interstate highway between southern California, where a large number of our customers reside, and Las Vegas has experienced long traffic delays during peak periods. Such delays may affect the number of customers who visit our properties in southern Nevada. . Any future construction, including the proposed permanent facility in Detroit and the planned convention center adjacent to Mandalay Bay, can be affected by a number of factors, including time delays in obtaining necessary governmental permits and approvals and legal challenges. Changes may be made in the scope of a project, budgets and schedules for competitive, aesthetic or other reasons, and these changes may also result from circumstances beyond our control. These circumstances include weather interference, shortages of materials and labor, work stoppages, labor disputes, unforeseen engineering, environmental or geological problems and unanticipated cost increases. Any of these circumstances could give rise to delays in the completion of any project we or any joint venture in which we participate may undertake and/or cost overruns. . The gaming industry represents a significant source of tax revenues to the state, county and local jurisdictions in which gaming is conducted. From time to time, various state and federal legislators and officials have proposed changes in tax laws, or in the administration of the laws, affecting the gaming industry. Proposals in recent years that have not been enacted included a federal gaming tax and increases in state or local taxes. . We believe that our recorded tax balances are adequate. However, it is not possible to determine with certainty the likelihood of possible changes in the tax laws or their administration. These changes, if adopted, could have a material negative effect on our operating results and the operating results of joint ventures in which we participate. . Our debt has increased in the past several years. The interest rate on a portion of our long-term debt is subject to fluctuation based on changes in short-term interest rates and the ratings which national rating agencies assign to outstanding debt securities. Interest expense could increase as a result of these factors. . Claims have been brought against us in various legal proceedings, and additional legal and tax claims may arise from time to time. While we believe that the ultimate disposition of current matters will not have a material impact on our financial condition or results of operations, it is possible that our cash flows and results of operations could be affected from time to time by the resolution of one or more of these contingencies. See the further discussion under "Legal Proceedings" in Item 3 of this report. . There is intense competition to attract and retain management and key employees in the gaming industry. Our business or the business of the joint ventures in which we participate could be adversely affected in the event of the inability to recruit or retain key personnel. . While Mandalay from time to time communicates with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential business information. It should not be assumed that we agree with any statement or report issued by any analyst, irrespective of the content of the statement or report. Furthermore, we have a policy against publicly issuing financial forecasts or projections or confirming forecasts or projections issued by others. Hence, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, those reports are not our responsibility. 40 ITEM 2. PROPERTIES. Mandalay Bay. We own approximately 60 acres of land, with approximately 1,300 feet of frontage, on the Las Vegas Strip and Mandalay Bay which is situated on the site. For additional information concerning Mandalay Bay, see "Overview" and "Property Descriptions--Las Vegas, Nevada--Mandalay Bay" in Item 1 of this report. Luxor and Excalibur. We own a 117-acre parcel on the southwest corner of the intersection of the Las Vegas Strip and Tropicana Avenue, with approximately 2,400 feet of frontage on the Las Vegas Strip, that includes, Excalibur, which is situated on the northern portion of the parcel, and Luxor, which is situated on such site to the south of Excalibur. For additional information concerning Luxor and Excalibur, see "Overview" and "Property Descriptions--Las Vegas, Nevada--Luxor" and --Excalibur" in Item 1 of this report. Circus Circus-Las Vegas. We own approximately 69 acres of land, with approximately 375 feet of frontage on the Las Vegas Strip, and Circus Circus- Las Vegas which is situated on the site. For additional information concerning Circus Circus-Las Vegas, see "Overview" and "Property Descriptions--Las Vegas, Nevada--Circus Circus-Las Vegas" in Item 1 of this report. Circus Circus-Reno. Circus Circus-Reno is situated on a three-block area in downtown Reno, of which approximately 90% is owned by us and the remainder is held under two separate leases, which expire in 2032 and 2033, respectively. For additional information concerning Circus Circus-Reno, see "Overview" and "Property Descriptions--Reno, Nevada--Circus Circus-Reno" in Item 1 of this report. Colorado Belle. We own approximately 22 acres on the bank of the Colorado River in Laughlin, Nevada and the Colorado Belle which is situated on the site. For additional information concerning the Colorado Belle Hotel and Casino, see "Overview" and "Property Descriptions--Laughlin, Nevada--Colorado Belle" in Item 1 of this report. Edgewater. Adjacent to the site of the Colorado Belle, we own approximately 16 acres on the bank of the Colorado River in Laughlin, Nevada, and the Edgewater Hotel and Casino which is situated on the site. For additional information concerning the Edgewater Hotel and Casino, see "Overview" and "Property Descriptions--Laughlin, Nevada--Edgewater" in Item 1 of this report. Gold Strike. We own approximately 51 acres and the Gold Strike Hotel & Gambling Hall, which is situated on the site, located on the east side of I-15 in Jean, Nevada, approximately 12 miles from the California/Nevada border and 25 miles from Las Vegas. For additional information concerning Gold Strike, see "Overview" and "Property Descriptions--Jean, Nevada--Gold Strike-Jean" in Item 1 of this report. Nevada Landing. We own approximately 55 acres and the Nevada Landing Hotel & Casino, which is situated on the site, located on the west side of I-15 in Jean, Nevada. For additional information concerning Nevada Landing, see "Overview" and "Property Descriptions--Jean, Nevada--Nevada Landing" in Item 1 of this report. Railroad Pass. We own approximately 56 acres and the Railroad Pass Hotel & Casino, which is situated on the site, located on US-93 in Henderson, Nevada. For additional information concerning Railroad Pass, see "Overview" and "Property Descriptions--Henderson, Nevada--Railroad Pass" in Item 1 of this report. Gold Strike-Tunica. We own approximately 24 acres in Tunica County, Mississippi and Gold Strike-Tunica, which is situated on the site. We also own an undivided 50% interest in an additional 388-acre site which is owned jointly with another unaffiliated gaming company. For additional information concerning Gold Strike-Tunica, see "Overview" and "Property Descriptions-- Tunica County, Mississippi--Gold Strike-Tunica" in Item 1 of this report. Other Real Property. Slots-A-Fun is situated on a 30,000-square-foot parcel that we own and has approximately 100 feet of frontage on the Las Vegas Strip. 41 We own approximately 60 acres of unimproved land located immediately south of Mandalay Bay and approximately 15 acres of land on the Las Vegas Strip across from Luxor. We own 60 acres of land in Jean, Nevada to the north of Gold Strike and approximately 89 acres of land in Sloan, Nevada off of I-15. Sloan is located between Jean and Las Vegas. We also own or lease, or have options and/or agreements to purchase or lease, certain other improved and unimproved properties which are not deemed to be material to us. As of January 31, 2001, none of the aforementioned properties we own was subject to any encumbrance securing the repayment of indebtedness. Joint Venture Interests. Mandalay, either directly or through wholly owned subsidiaries, owns: . a 50% interest in the Elgin joint venture entity which owns and operates Grand Victoria, a riverboat casino and land-based entertainment complex in Elgin, Illinois; . a 50% interest in the joint venture entity which owns and operates Monte Carlo, a hotel-casino complex on the Las Vegas Strip; . a 50% interest in the joint venture entity which owns and operates Silver Legacy, a hotel-casino in Reno, Nevada; and . a 53.5% interest in the joint venture entity which owns and operates MotorCity Casino, a temporary casino in Detroit, Michigan. Reference is made to the information concerning these joint venture properties appearing under the captions "Overview" and "Property Descriptions" in Item 1 of this report, which information is hereby incorporated in this Item 2 by this reference. The following table set forth for each of our joint venture properties the principal amount of indebtedness secured by encumbrances on that property as of January 31, 2001.
Property Amount -------- ------------- (in millions) Silver Legacy................................................ $161.5 MotorCity Casino............................................. 127.0 Monte Carlo.................................................. 87.0 Grand Victoria............................................... --
ITEM 3. LEGAL PROCEEDINGS. Slot Machine Litigation On April 26, 1994, William H. Poulos brought a class action in the U.S. District Court for the Middle District of Florida, Orlando Division captioned William H. Poulos, et al. v. Caesars World, Inc. et al., against 41 manufacturers, distributors and casino operators of video poker and electronic slot machines, including Mandalay. On May 10, 1994, another plaintiff filed a class action complaint in the United States District Court for the Middle District of Florida in William Ahearn, et al. v. Caesars World, Inc. et al. alleging substantially the same allegations against 48 defendants, including Mandalay. On September 26, 1995, a third action was filed against 45 defendants, including Mandalay, in the U.S. District Court for the District of Nevada in Larry Schreier, et al. v. Caesars World, Inc. et al. The court consolidated the three cases in the U.S. District Court for the District of Nevada under the case captioned William H. Poulos, et al. v. Caesars World, Inc. et al. The consolidated complaints allege that the defendants are involved in a scheme to induce people to play electronic video poker and slot machines based on false beliefs regarding how such machines operate and the 42 extent to which a player is likely to win on any given play. The actions included claims under the Federal Racketeering Influenced and Corrupt Organizations Act, as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seek unspecified compensatory and punitive damages. A motion for class certification was filed in March 1998. The plaintiffs have filed supplemental authorities in support of the motion for class certification and defendants have responded to those authorities. Plaintiffs are scheduled to file their reply supplemental authorities on or before April 13, 2001. Thereafter, the parties anticipate that the court will rule on the motion for class certification. Discovery on the merits has been stayed pending a ruling on the motion for class certification. Detroit Litigation In Lac Vieux Desert Band of Lake Superior Chippewa Indians v. The Michigan Gaming Control Board et al., the Lac Vieux Band of Lake Superior Chippewa Indians has sought to challenge the validity of the Michigan Gaming Control and Revenue Act (the "Michigan Act") and the City of Detroit's Casino Development Competitive Selection Process ordinance (the "Detroit ordinance"). On October 31, 1997, the United States District Court for the Western District of Michigan issued an opinion holding that the Lac Vieux Band lacked standing to challenge the Michigan Act and the Detroit ordinance on First Amendment and Equal Protection grounds. In a decision issued on April 12, 1999, the United States Court of Appeals for the Sixth Circuit affirmed the District Court's determination that the Lac Vieux Band lacked standing to challenge the Michigan Act. However, the Sixth Circuit reversed the District Court's determination that (i) the Lac Vieux Band lacked standing to challenge the Detroit ordinance, (ii) the First Amendment is not implicated in the Detroit ordinance, and (iii) a rational basis review rather than a strict scrutiny review should be applied in determining the merits of the Lac Vieux equal protection claim regarding the Detroit ordinance. The Sixth Circuit remanded the case to the District Court for further proceedings consistent with the Sixth Circuit's decision. No assurance can be given regarding the probable result of this litigation. On July 17, 2000, the District Court found in favor of the Defendants as to all matters remanded by the Sixth Circuit Court of Appeals. The Lac Vieux Band appealed the District Court's decision to the United States Court of Appeals for the Sixth District, where the case is currently pending. We are defendants in various other pending lawsuits. In management's opinion, the ultimate outcome of such lawsuits will not have a material adverse effect on our results of operations or our financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of Mandalay's security holders during the fourth quarter of the fiscal year ended January 31, 2001. 43 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Price Range of Common Stock. Mandalay's common stock is listed on the New York Stock Exchange and on the Pacific Exchange and traded under the symbol MBG. The following table sets forth, for the fiscal quarters shown, the low and high sale prices for the common stock on the New York Stock Exchange Composite Tape.
Fiscal 2001 Low High ----------- ------ ------ First Quarter.................................................. $12.88 $19.44 Second Quarter................................................. $18.50 $24.94 Third Quarter.................................................. $19.00 $28.38 Fourth Quarter................................................. $18.00 $22.44
Fiscal 2000 Low High ----------- ------ ------ First Quarter.................................................. $12.69 $21.88 Second Quarter................................................. $16.38 $26.31 Third Quarter.................................................. $16.75 $24.00 Fourth Quarter................................................. $15.00 $24.38
On April 20, 2001 there were 3,200 holders of record of Mandalay's common stock. Dividend Policy. Mandalay does not currently pay a cash dividend, nor is one contemplated in the foreseeable future. We believe that currently our stockholders are best served by reinvestment in new, high-return projects and/or share repurchase. Mandalay has a policy of periodic share repurchase, as cash flows, borrowing capacity and market conditions warrant. For information concerning our recent share repurchase activity and our current share repurchase authorization, reference is made to "Liquidity" in Item 7 of this report. ITEM 6. SELECTED FINANCIAL DATA.
Year ended January 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (amounts in thousands, except per share amounts) Operating Results:(1) Net revenues............ $2,524,224 $2,050,898 $1,479,780 $1,354,487 $1,334,250 Income from operations.. 431,534 273,736 242,779 236,500 222,169 Pretax income........... 194,392 103,116 140,815 147,922 163,863 Net income.............. 119,700 42,163 85,198 89,908 100,733 Basic earnings per share.................. $ 1.53 $ .47 $ .90 $ .95 $ .99 Diluted earnings per share.................. $ 1.50 $ .46 $ .90 $ .94 $ .97 Balance Sheet Data: Total assets............ $4,248,266 $4,329,476 $3,869,707 $3,263,548 $2,729,111 Long-term debt.......... 2,623,597 2,691,292 2,259,149 1,788,818 1,405,897 Stockholders' equity.... 1,068,940 1,187,780 1,157,628 1,123,749 971,791
- -------- (1) The Hacienda was closed on December 1, 1996. Mandalay Bay opened on March 2, 1999 and MotorCity Casino opened on December 14, 1999. Silver City, a small casino on the Las Vegas Strip, was operated under a lease which expired October 31, 1999. 44 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Fiscal 2001 Compared With Fiscal 2000 Results of Operations For the year ended January 31, 2001, we reported net income of $119.7 million, or $1.50 per diluted share, versus $42.2 million, or $.46 per diluted share, for the year ended January 31, 2000. The increase in earnings was due mostly to strong operating performances at our Las Vegas Strip properties and at Grand Victoria in Elgin, Illinois. MotorCity Casino, our 53.5%-owned joint venture in Detroit, Michigan, was also a factor, comparing a full year of operations in fiscal 2001 against less than two months of operations in fiscal 2000, when it opened December 14, 1999. Higher interest expense, stemming from higher average debt outstanding and higher average interest rates, offset some of the operating gains. See the discussion under "Interest Expense" for additional details. Share repurchase also benefitted earnings per share comparisons, as average diluted shares outstanding decreased to 79.7 million from 91.9 million in the prior year. NOTE: Results for fiscal 2001 include preopening expenses of $1.8 million ($.01 per diluted share) related to our new saltwater aquarium attraction, the Shark Reef at Mandalay Bay, which opened June 20, 2000. Results for fiscal 2001 also include $3.6 million ($.03 per diluted share) in income related to reducing a liability assumed when the Mandalay Bay site was acquired in 1995. Results for the year ended January 31, 2000 include preopening expenses of $83.0 million ($.58 per diluted share) related primarily to Mandalay Bay and MotorCity Casino (including the write-off of $33.8 million of previously capitalized preopening costs) and the write-off of $5.4 million ($.04 per diluted share) related to a timeshare project we decided not to pursue. Revenues Revenues for fiscal 2001 increased $473.3 million, or 23%, from the prior year. The increase was attributable primarily to MotorCity Casino, which generated revenues of $337.1 million in fiscal 2001 versus $39.0 million in fiscal 2000. Mandalay Bay, which was open an additional month in fiscal 2001, also contributed in a significant fashion, with its revenues rising $99.3 million, or 22%. Casino Revenues Casino revenues rose $298.5 million, or 31%, during fiscal 2001 due primarily to a full year of operations at MotorCity Casino. Casino revenues at that property rose to $315.9 million from $36.1 million last year. Meanwhile, casino revenues at our Las Vegas Strip properties rose a combined 4%, led by Mandalay Bay whose casino revenues grew $19.7 million, or 11%, driven by the additional month of operations and increases in high-budget play. 45 Hotel Revenues Hotel revenues in fiscal 2001 rose $77.2 million, or 14%. The growth came principally from our Las Vegas Strip properties, whose revenue per available room ("REVPAR") increased $9 over the prior year. Mandalay Bay again led the way, with an average room rate of $154 compared to $128 in the prior year. The growth in REVPAR was driven by increased demand stemming from a continued rise in the number of visitors to Las Vegas (up 6% for calendar year 2000). The following table compares average room rates, occupancy and REVPAR at our major wholly owned properties:
FYE 1/31/2001 FYE 1/31/2000 ----------------- ----------------- Avg. Avg. Rate Occ.% REVPAR Rate Occ.% REVPAR ---- ----- ------ ---- ----- ------ Mandalay Bay.............................. $154 86% $133 $128 84% $108 Luxor..................................... $ 98 93% $ 92 $ 90 92% $ 82 Excalibur................................. $ 70 94% $ 66 $ 67 92% $ 62 Circus Circus-Las Vegas................... $ 57 95% $ 54 $ 56 96% $ 54 Circus Circus-Reno........................ $ 53 82% $ 43 $ 49 84% $ 41 Colorado Belle............................ $ 30 84% $ 25 $ 29 85% $ 24 Edgewater................................. $ 27 85% $ 23 $ 27 83% $ 23 Gold Strike-Tunica........................ $ 69 76% $ 52 $ 69 72% $ 50 Weighted average all wholly owned properties............................... $ 79 89% $ 70 $ 71 88% $ 63 Weighted average wholly owned Las Vegas Strip properties......................... $ 93 92% $ 85 $ 83 91% $ 76
Food and Beverage Revenues Food and beverage revenues increased $71.4 million, or 21%, from the previous year. This increase was driven largely by a full year of operations at MotorCity Casino, where food and beverage revenues increased $41.5 million over the prior year. Also stimulating food and beverage revenues were selective price increases at our Las Vegas Strip properties. Other Revenues Other revenues rose $48.2 million, or 19%, in fiscal 2001. Other revenues come principally from amusements, retail stores and entertainment. Most of the increase was attributable to Luxor, where these revenues rose $19.6 million due primarily to the success of Blue Man Group, our unique off-Broadway production which debuted in March 2000. The Shark Reef at Mandalay Bay, another instant success, opened June 2000 and contributed to a $14.4 million increase in other revenues at the property. Earnings of Unconsolidated Affiliates We record our share of the operating income of our unconsolidated joint ventures (Grand Victoria, Monte Carlo and Silver Legacy) as revenue under "Earnings of Unconsolidated Affiliates." (Results of MotorCity Casino are consolidated for financial reporting purposes.) Earnings of unconsolidated affiliates increased $16.0 million in fiscal 2001, with most of the increase attributable to the 50%-owned Grand Victoria. The contribution from this property increased $10.7 million, or 23%, from fiscal 2000. This property benefitted from more profitable dockside gaming operations throughout all of fiscal 2001, whereas it was limited to cruising operations in the first half of fiscal 2000. 46 Income from Operations For the year ended January 31, 2001, income from operations rose $157.8 million, or 58%, from the previous year. The composite operating margin was 17.1% versus 13.3% in fiscal 2000. Our Las Vegas Strip properties, along with MotorCity Casino and Grand Victoria, were the principal drivers of this growth. The table below summarizes operating results by property and is followed by a discussion of operating results by market.
FYE 1/31/2001 FYE 1/31/2000 -------------------------------- -------------------------------- Operating Operating Income(1) Depreciation EBITDA(2) Income(1) Depreciation EBITDA(2) --------- ------------ --------- --------- ------------ --------- (in millions) Mandalay Bay............ $ 38.4 $ 40.8 $ 79.2 $ (4.7) $ 33.9 $ 29.2 Luxor................... 85.9 37.3 123.2 67.3 36.8 104.1 Excalibur............... 79.0 16.9 95.9 67.2 16.6 83.8 Circus Circus-Las Vegas(3)............... 47.7 23.6 71.3 38.7 24.0 62.7 Gold Strike-Tunica...... 19.4 12.8 32.2 21.2 13.4 34.6 Colorado Belle/Edgewater........ 13.6 11.3 24.9 18.7 10.7 29.4 Circus Circus-Reno...... 18.9 9.8 28.7 14.9 10.8 25.7 Gold Strike properties(4).......... 7.7 10.4 18.1 12.2 10.4 22.6 MotorCity Casino(5)..... 49.3 37.5 86.8 1.8 5.9 7.7 Unconsolidated joint ventures(6)............ 108.5 6.5 115.0 92.5 6.5 99.0 Other................... (4.9) 0.2 (4.7) (24.6) 0.2 (24.4) ------ ------ ------ ------ ------ ------ Subtotal.............. 463.5 207.1 670.6 305.2 169.2 474.4 Corporate expense....... (32.0) 10.9 (21.1) (31.5) 9.1 (22.4) ------ ------ ------ ------ ------ ------ Total................. $431.5 $218.0 $649.5 $273.7 $178.3 $452.0 ====== ====== ====== ====== ====== ======
- -------- (1) Operating income was negatively affected by preopening expenses of $1.8 million in fiscal 2001 (related to the Shark Reef at Mandalay Bay) and $49.1 million in fiscal 2000 (of which $31.1 million related to Mandalay Bay, $16.4 million related to MotorCity Casino and $1.6 million related to other). Fiscal 2000 operating income was also negatively affected by the write-off of $5.4 million of costs associated with our abandoned timeshare project. (2) Earnings before interest, taxes, depreciation and amortization ("EBITDA"). EBITDA is not an accepted measure of performance under Generally Accepted Accounting Principles ("GAAP") and should not be considered an alternative to GAAP measures of performance. (3) Includes Circus Circus-Las Vegas, Slots-A-Fun and Silver City Casino (which ceased operations October 31, 1999). (4) Includes Gold Strike, Nevada Landing and Railroad Pass. (5) MotorCity Casino is 53.5% owned and its operations are consolidated for financial reporting purposes. (6) Includes Monte Carlo, Grand Victoria and Silver Legacy, each of which is 50%-owned. 47 Las Vegas Our Las Vegas properties (including our 50% share of Monte Carlo) posted an overall increase in operating income of $90.3 million, or 46%, during fiscal 2001. This increase was driven by an uptrend in the number of visitors to the Las Vegas Strip, as discussed previously. At Mandalay Bay, operating income rose $43.1 million in fiscal 2001 versus the prior year. Mandalay Bay benefitted from an extra month of operations in fiscal 2001 compared to the prior year (when it opened March 2, 1999). Mandalay Bay's fiscal 2000 operating income was also affected by preopening expenses (see note below). At Luxor, operating income rose $18.6 million, or 28%. Meanwhile, operating income at Excalibur rose $11.8 million, or 17%; while at Circus Circus-Las Vegas it rose $9.0 million, or 23%. The contribution from Monte Carlo also rose, up $7.8 million, or 26%, compared with the prior year. NOTE: Operating income at our Las Vegas properties was negatively affected by preopening expenses of $1.8 million in fiscal 2001 (related to the Shark Reef at Mandalay Bay) and $31.1 million in fiscal 2000 (related to Mandalay Bay). Reno Circus Circus posted an increase in operating income of $4.0 million, or 27%. Meanwhile, our share of operating income from Silver Legacy declined $2.5 million from a year ago (see note below). Fiscal 2001 results were boosted by a national bowling tournament which Reno hosts two out of every three years. The city hosted the women's national tournament from March through July 2000, but did not host any tournament in the prior year. This contributed to modest increases in casino revenues and REVPAR at both properties. However, in the fourth quarter of fiscal 2001, casino revenues decreased 3% at Circus Circus and 6% at Silver Legacy. We believe the Reno market has begun to encounter increased competition from Native American casinos in northern California. In the latter half of fiscal 2001, following the passage of Proposition 5, these Native American casinos began adding more and newer (i.e., more competitive) slot machines. We anticipate these competitive challenges to continue, which will pressure results in Nevada's drive-in, ancillary markets such as Reno and Laughlin. NOTE: In fiscal 2000, we recorded approximately two-thirds of Silver Legacy's operating income as a priority return on our investment. In fiscal 2001, we recorded our normal 50% share of Silver Legacy's operating income. Had we recorded 50% of Silver Legacy's operating income in fiscal 2000 instead of two-thirds, our share of operating income from Silver Legacy would have increased by $2.0 million instead of declining by $2.5 million. Laughlin Our two Laughlin properties, Colorado Belle and Edgewater, together posted a decrease in operating income of $5.1 million, or 27%, for fiscal 2001. While REVPAR was essentially flat for the year, casino revenues were down 2%. Like the Reno market, Laughlin is facing better competition from Native American casinos in its primary feeder markets in Arizona and southern California. Furthermore, a lack of health care options in this small community contributed to a 20% rise in health care costs. We have recently made changes to our health care plan which we hope will alleviate this situation in the future. Other Markets In Detroit, Michigan, MotorCity Casino delivered operating income of $49.3 million in fiscal 2001 compared to $1.8 million in fiscal 2000. This comparison reflects a full twelve months of operation in fiscal 2001 as against one and one-half months in fiscal 2000. See "Financial Position and Capital Resources" for additional details regarding our Detroit operation. In Tunica County, Mississippi, operating income at Gold Strike decreased $1.8 million, or 9%, during fiscal 2001. Growth in this market appears to be slowing, which has led to a flattening of results, as competition for business heightens. 48 Our share of income from operations at Grand Victoria (a 50%-owned riverboat casino in Elgin, Illinois) exhibited a decided increase of $10.7 million, or 25%. This property benefitted from more profitable dockside gaming operations throughout all of fiscal 2001, whereas it was limited to cruising operations in the first half of fiscal 2000. Depreciation and Amortization In fiscal 2001, depreciation and amortization expense rose $39.7 million, to $218.0 million. This increase derived primarily from the addition of MotorCity Casino. For fiscal 2002, we estimate that our depreciation and amortization expense will be approximately $225 million, including $40 million in depreciation from MotorCity (consolidated for financial reporting purposes) and $12 million of goodwill amortization. Interest Expense In fiscal 2001, interest expense (excluding interest expense of unconsolidated joint ventures and without reduction for capitalized interest) climbed $47.5 million. The increase was due partially to higher average borrowings (approximately $2.8 billion in fiscal 2001 against approximately $2.5 billion last year), in part related to the purchase of approximately 14.5 million shares of our common stock during fiscal 2001. Average borrowings also increased due to borrowings associated with MotorCity Casino. Interest expense also reflected higher interest rates on our credit line borrowings, as well as the effect of the issuance of $500 million principal amount of 10 1/4% Senior Subordinated Notes in July 2000 and the issuance of $200 million principal amount of 9 1/2% Senior Notes in August 2000. The proceeds from these two offerings were used to pay down borrowings outstanding under our credit facility. At January 31, 2001, long-term debt (including current portion) stood at $2.7 billion (including $127.0 million of debt related to MotorCity Casino) compared to $2.7 billion at January 31, 2000 (including $150.0 million of debt related to MotorCity Casino). Capitalized interest was $1.6 million in fiscal 2001 compared to $11.0 million in fiscal 2000. Capitalized interest was higher in the prior year due to one month of capitalized interest on Mandalay Bay, which opened March 2, 1999. We also recorded interest expense related to unconsolidated joint ventures of $11.3 million in fiscal 2001 compared with $11.1 million in the previous year. These amounts reflect our 50% share of the interest expense of Silver Legacy and Monte Carlo. Income Taxes The effective tax rates for fiscal 2001 and fiscal 2000 were 38.4% and 39.1%. These rates reflect the corporate statutory rate of 35% plus the effect of various nondeductible expenses, primarily the amortization of goodwill. For fiscal 2002, we estimate our effective tax rate will be approximately 37%. Fiscal 2000 Compared With Fiscal 1999 Results of Operations For the year ended January 31, 2000, we reported net income of $42.2 million, or $.46 per diluted share, compared to $85.2 million, or $.90 per diluted share, in the prior year. The decrease in earnings was due primarily to the impact of preopening expenses related to Mandalay Bay and MotorCity Casino, as discussed more fully in the note below. Ignoring preopening expenses, earnings increased due to the openings of Mandalay Bay and MotorCity Casino, as well as significantly improved results at Grand Victoria. NOTE: Results for fiscal 2000 include $83.0 million ($.58 per diluted share) in preopening expenses associated with Mandalay Bay, which opened March 2, 1999, and MotorCity Casino, which opened 49 December 14, 1999. Fiscal 2000 results also include $5.4 million ($.04 per diluted share) in write-offs related to a proposed timeshare resort in Las Vegas which we decided not to pursue. Fiscal 1999 results include $6.5 million ($.04 per diluted share) of political campaign costs associated with Proposition 5, a voter initiative to approve gaming on Native American lands in California. Revenues Revenues for fiscal 2000 increased $571.1 million, or 39%, from the prior year. All of our wholly owned and joint venture properties posted increases in revenues, with the overall increase attributable primarily to Mandalay Bay. This property produced revenues of $456.2 million in its first 11 months of operation. MotorCity Casino was another significant contributor, generating revenues of $39.0 million in its initial one and a half months of operation. At Gold Strike Casino Resort in Tunica County, Mississippi, revenues rose $20.6 million, or 19%, due to the addition of 1,100 hotel rooms in early 1998. Grand Victoria generated an increase of $13.4 million, or 40%, in its contribution to our revenues. Legislation permitting dockside gaming was passed in June 1999 and was a significant factor in this increase. Meanwhile, revenues at Excalibur rose $10.9 million, or 4%, driven by higher room and occupancy rates. Casino revenues increased $241.6 million, or 34%, during fiscal 2000, due principally to the openings of Mandalay Bay and MotorCity Casino. Hotel revenues rose $178.5 million, or 50%, due to the opening of Mandalay Bay combined with higher room and occupancy rates at our other Las Vegas properties. Revenues in our other revenue centers (principally food, beverage, amusements, retail and entertainment) rose $180.8 million, or 43%. This increase was due primarily to Mandalay Bay and to increased visitor counts at our other properties. NOTE: On October 31, 1999, the lease pursuant to which Mandalay operated the Silver City Casino expired and we ceased operation of that facility. Total revenues for Silver City for the nine months it was open in fiscal 2000 accounted for less than one-half of one percent of our consolidated revenues for that period. Income from Operations Income from operations for fiscal 2000 increased $31.0 million, or 13%, from the prior year. The composite operating margin was 13.3%, compared to 16.4% in fiscal 1999. With the exception of Edgewater, all of our wholly owned properties reported double-digit increases in operating income for the year. Mandalay Bay posted a slight operating loss in its initial 11 months of operation; however, this was after deducting one-time preopening expenses of $31.1 million. At Luxor, operating income increased $11.5 million, or 21%, while it rose $8.1 million, or 14%, at Excalibur. Both properties benefitted from higher room and occupancy rates. Luxor also benefitted from lower advertising and marketing expenses. At Gold Strike, in Tunica County, Mississippi, operating income rose $9.1 million, or 76%, during fiscal 2000. The increase was the result of the addition of an 1,100-room hotel tower and extensive remodeling of the property completed during the first quarter of fiscal 1999. Meanwhile, the 50%-owned Grand Victoria's contribution to operating income grew by $13.8 million in fiscal 2000 due to the introduction of dockside gaming in June 1999. NOTE: Income from operations in fiscal 2000 was negatively affected by preopening expenses of $49.1 million and the write-off of $5.4 million of costs associated with the abandoned timeshare project. In fiscal 1999, income from operations was negatively impacted by $6.5 million of political campaign costs associated with Proposition 5, a voter initiative to approve gaming on Native American lands in California. Depreciation and Amortization In fiscal 2000, depreciation and amortization expense rose $36.2 million, to $178.3 million. This increase derived primarily from the addition of Mandalay Bay and MotorCity Casino. 50 Interest Expense In fiscal 2000, interest expense (excluding interest expense of unconsolidated joint ventures and without reduction for capitalized interest) rose $35.6 million to $176.7 million. We had higher average debt outstanding ($2.5 billion versus $2.0 billion in fiscal 1999) that was related principally to the completion of construction of Mandalay Bay and the core components of Mandalay Mile. See discussion under "New Projects" for further details regarding Mandalay Mile. Capitalized interest was $11.0 million in fiscal 2000 versus $45.5 million in the prior year, with the decrease attributable to the completion of Mandalay Bay. We recorded interest expense from unconsolidated affiliates of $11.1 million in fiscal 2000 versus $12.3 million in fiscal 1999. These amounts represent our 50% share of Silver Legacy's and Monte Carlo's interest expense. Financial Position and Capital Resources Operating Activities Net cash provided by operating activities was $435.6 million in fiscal 2001 versus $225.0 million in fiscal 2000. The increase was driven primarily by improved operating results, as discussed previously. Mandalay had cash and cash equivalents of $105.9 million at January 31, 2001, sufficient for normal daily operating requirements. EBITDA was $649.5 million for fiscal 2001 compared with $452.0 million for the prior year. EBITDA is included because, as in other entertainment industries, many investors consider it a key benchmark, since it factors out the impact of depreciation and goodwill amortization, the principal noncash expenses affecting our income. EBITDA is not an accepted measure of performance under Generally Accepted Accounting Principles and should not be considered an alternative to GAAP measures of performance. NOTE: EBITDA for fiscal 2001 was reduced by preopening expenses of $1.8 million. EBITDA for fiscal 2000 was reduced by preopening expenses of $49.1 million and the write-off of $5.4 million in costs related to the abandoned timeshare project. Investing Activities Net cash used in investing activities was $153.8 million in fiscal 2001 compared with $464.6 million in fiscal 2000. Capital spending accounted for the majority of these amounts. Capital expenditures for fiscal 2001 were $110.2 million, of which $24.7 million related to the Shark Reef at Mandalay Bay, our new saltwater aquarium attraction which opened June 20, 2000 and $15.6 million related to the renovation of a portion of the pyramid rooms at Luxor. For fiscal 2000, capital expenditures were $352.1 million, of which $213.5 million related to completion of construction of Mandalay Bay and other core components of Mandalay Mile, and $23.6 million related to the Shark Reef. Financing Activities For fiscal 2001, financing activities used net cash of $292.4 million, related primarily to the purchase of 14.5 million shares of our common stock at a cost of $247.1 million. See "Liquidity" for further discussion of our share repurchase activity. For fiscal 2000, financing activities provided net cash of $274.9 million, stemming from an increase in net borrowings. On July 24, 2000, the Company issued $500 million principal amount of 10 1/4% Senior Subordinated Notes due August 2007. On August 16, 2000, the Company issued $200 million principal amount of 9 1/2% Senior Notes due August 2008. These notes are not subject to any sinking fund requirements. The net proceeds from these offerings were used to repay a portion of the borrowings under our credit facility. 51 New Projects Shark Reef at Mandalay Bay On March 2, 1999, we opened Mandalay Bay, a 43-story hotel/casino resort in Las Vegas, Nevada. Mandalay Bay is part of Mandalay Mile, our development property with approximately one mile of frontage on the Las Vegas Strip. This property is also the site of our Luxor and Excalibur resorts. Our development plan for Mandalay Mile includes various core components conceived for cross- marketing to guests at our existing and future gaming resorts within this linked complex. These core components include an aquarium exhibit, the Shark Reef at Mandalay Bay, which opened June 20, 2000. The cost of the aquarium (excluding land, capitalized interest and preopening expenses) was approximately $50 million. We intend to add other core components to Mandalay Mile in the future. Mandalay Bay Convention Center In late April 2001, we announced a proposal to build a three-level, 1.8 million square-foot convention center complex, subject to receipt of appropriate permits and approvals. The facility will be located on 16.5 acres adjacent to the existing Mandalay Bay Conference Center and will include more than 1 million square feet of exhibit space. Upon completion of the project, Mandalay Bay will offer a total of almost 2 million gross square feet of conference and exhibit space. The project is expected to break ground in June 2001 and open in Summer 2002. Specific details regarding the cost of the proposed project are not yet available. Detroit We have 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. We had an initial 45% ownership interest in the joint venture. In December 1999, we acquired an additional 8.5% interest at a cost of $38.4 million, thus increasing our total ownership interest to 53.5%. Pending the development of a permanent hotel/casino, the joint venture constructed a temporary casino (MotorCity Casino) in downtown Detroit, which opened December 14, 1999. The cost of the temporary casino, including land and capitalized interest but excluding preopening expenses, was approximately $150 million. This cost was financed pursuant to the joint venture's $150 million credit facility, which is secured by the assets associated with the temporary casino. Mandalay has guaranteed this credit facility. The joint venture's operation of the temporary casino is subject to ongoing regulatory oversight, and its ability to proceed with a permanent resort project is contingent upon the receipt of all necessary gaming approvals and satisfaction of other conditions. Under a plan agreed to by the City of Detroit development authorities, but not yet approved by the Detroit City Council, we would expand our temporary facility into a permanent facility by adding approximately 800 hotel rooms, expanded casino space, convention space, retail space and additional dining and entertainment facilities. We have committed to contribute 20% of the cost of the permanent facility in the form of equity, and the joint venture will seek project-specific funding for the balance of the cost. The permanent facility's cost is being evaluated in light of the decision to utilize the site of the temporary casino for the permanent facility. The development agreement provides that we will guarantee completion of the permanent facility and will enter into a keep-well guarantee with the city, pursuant to which we 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. Mandalay has issued letters of credit totaling $50 million for the benefit of Bank of America in order to back letters of credit issued by Bank of America for the same total amount. The Bank of America letters of credit were issued to secure payments of principal and interest on bonds issued by the Economic Development Corporation of the City of Detroit. The proceeds of the bonds are to be used to finance costs associated with activities (including acquisition) relating to land located along the Detroit Riverfront (including the site where our permanent facility originally was to be located). 52 Various lawsuits have been filed in the state and federal courts challenging the constitutionality of the Detroit Casino Competitive Selection Process and the Michigan Gaming Control and Revenue Act, and seeking to appeal the issuance of a certificate of suitability to MotorCity Casino. No assurance can be given regarding the timing and outcome of these proceedings. An adverse ruling in any of these lawsuits could adversely impact our joint venture's operation of the temporary facility, as well as its ability to obtain a certificate of suitability and a casino license for its permanent facility. Mississippi Gulf Coast Some time ago, we announced plans to develop a casino resort on the Bay of St. Louis, along the Mississippi Gulf Coast. In August 2000, the United States District Court for the District of Columbia issued an opinion which had the effect of revoking one of the permits issued for this project and requiring the Army Corps of Engineers to have an environmental impact statement completed prior to issuing new permits for the development of casinos in this area. In light of the estimated time to complete the environmental impact statement and the potential legal challenges that may result therefrom, we have decided not to pursue this development along the Mississippi Gulf Coast at this time. Liquidity Based on our operating cash flows, credit facility and ability to raise additional funds through debt or equity markets, we believe we have sufficient capital resources to meet all of our existing cash obligations, fund our capital commitments on projects under- way and strategically purchase shares of our common stock. As of January 31, 2001, under our most restrictive loan covenant, we could issue additional debt of approximately $490 million. Our borrowing capacity under this covenant can fluctuate substantially from quarter to quarter depending upon our operating cash flow. In May 2000, our Board of Directors authorized the purchase of up to 15% (or approximately 11.7 million) of our then outstanding shares of common stock, as market conditions and other factors warrant. As of January 31, 2001, we had purchased 1.8 million shares pursuant to this authorization at a cost of $39.1 million. To facilitate our purchase of shares pursuant to this authorization, we entered into agreements with Bank of America providing for the purchase, in accordance with the volume and other limitations of Rule 10b- 18 under the Securities Exchange Act of 1934, of up to $100 million of our outstanding common stock by Bank of America. In March 2001, we amended these agreements to provide for the acquisition of an additional $25 million of our common stock, up to a total of $125 million. The agreements provide that on March 29, 2002, we will purchase from Bank of America, at cost (plus accrued fees), the shares acquired pursuant to the agreements. At our option, we may acquire all or a portion of the shares at an earlier date, or we may become obligated to acquire all or a portion of the shares at an earlier date under certain circumstances specified in the agreements, including the obligation to settle with respect to a minimum of $25 million of our obligation on September 17, 2001, unless Bank of America agrees this early settlement is not required and we pay an additional facility fee. Although our current intention is to purchase the shares in accordance with the terms of the agreements, we could elect to net settle our obligation in cash or shares (i.e., pay cash or deliver additional shares or receive cash or shares). As of January 31, 2001, Bank of America had purchased 4.9 million shares pursuant to the agreements at a cost of $100 million, excluding commissions. Subsequent to that date, Bank of America purchased an additional 1.2 million shares at a cost of $25 million, thus fully utilizing the capacity under these agreements. Any shares we purchase from Bank of America pursuant to these agreements will reduce, by that number, the shares we may purchase pursuant to the May 2000 share purchase authorization. Market Risk and Derivative Financial Instruments Mandalay is exposed to market risk in the form of fluctuations in interest rates and their potential impact upon our variable-rate debt. We manage this market risk by utilizing derivative financial instruments in accordance with established policies and procedures. We evaluate our exposure to market risk by monitoring interest rates in the marketplace. We do not utilize derivative financial instruments for trading purposes. There 53 were no material quantitative changes in our market risk exposure, or in how such risks were managed, during fiscal 2001. Our derivative financial instruments consist exclusively of interest rate swap agreements. Interest differentials resulting from these agreements are recorded on an accrual basis as an adjustment to interest expense. Interest rate swaps related to debt are matched either with specific fixed-rate debt obligations or with levels of variable-rate borrowings. To manage our exposure to counterparty credit risk in interest rate swaps, we enter into agreements with highly rated institutions that can be expected to fully perform under the terms of such agreements. Frequently, these institutions are also members of the bank group providing our credit facility, which management believes further minimizes the risk of nonperformance. The following table provides information about our financial instruments (both interest rate swaps and debt obligations) that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted- average interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. Weighted-average variable rates are based on implied forward rates in the yield curve. Implied forward rates should not be considered a predictor of actual future interest rates.
Year ending January 31, -------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter Total ----- ------ ------ ---- ------ ---------- -------- (in millions) Long-term debt (including current portion) Fixed-rate............ $ 0.3 $ 0.3 $150.3 $0.3 $275.3 $1,352.4 $1,778.9 Average interest rate................. 6.6% 6.7% 6.7% 6.7% 9.2% 8.5% 8.5% Variable-rate......... $42.0 $820.0 $ 25.0 -- -- -- $ 887.0 Average interest rate................. 4.7% 5.1% 5.6% -- -- -- 5.1% Interest rate swaps Pay fixed............. -- $350.0 $200.0 -- -- -- $ 550.0 Average payable rate.. -- 6.4% 6.4% -- -- -- 6.4% Average receivable rate................. -- 5.3% 5.7% -- -- -- 5.4%
Forward-Looking Statements This report includes forward-looking statements which we have based on our current expectations about future events. They include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including statements relating to our business strategy, our current and future development plans, and statements 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) leverage and debt service (including sensitivity to fluctuations in interest rates and ratings which national rating agencies assign to our outstanding debt securities), (iv) domestic and global economic, credit and capital market conditions, (v) changes in federal or state tax laws or the administration of those laws, (vi) changes in gaming laws or regulations (including the legalization or expansion of gaming in certain jurisdictions), (vii) applications for licenses and approvals under applicable laws and regulations (including gaming laws and regulations), and (viii) regulatory or judicial proceedings. Additional information concerning 54 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 fiscal year ended January 31, 2001. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The information in Item 7 of this report under the caption "Market Risk and Derivative Financial Instruments" is incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----- Consolidated Balance Sheets as of January 31, 2001 and 2000............. 56 Consolidated Statements of Income for the three years ended January 31, 2001................................................................... 57 Consolidated Statements of Cash Flows for the three years ended January 31, 2001............................................................... 58 Consolidated Statements of Stockholders' Equity for the three years ended January 31, 2001................................................. 59 Notes to Consolidated Financial Statements.............................. 60-75 Report of Independent Public Accountants................................ 76
55 MANDALAY RESORT GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
January 31, ---------------------- 2001 2000 ---------- ---------- (in thousands, except share data) ASSETS ------ Current assets: Cash and cash equivalents............................. $ 105,941 $ 116,617 Accounts receivable................................... 78,359 53,071 Income tax receivable................................. -- 9,096 Inventories........................................... 31,180 28,499 Prepaid expenses...................................... 40,986 47,807 Deferred income tax................................... 30,164 26,449 ---------- ---------- Total current assets................................ 286,630 281,539 ---------- ---------- Property, equipment and leasehold interests, at cost, net................................................... 3,236,824 3,335,071 ---------- ---------- Other assets: Excess of purchase price over fair market value of net assets acquired, net............................. 384,261 396,433 Notes receivable...................................... 1,750 1,605 Investments in unconsolidated affiliates.............. 242,504 264,995 Deferred charges and other assets..................... 96,297 49,833 ---------- ---------- Total other assets.................................. 724,812 712,866 ---------- ---------- Total assets........................................ $4,248,266 $4,329,476 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt..................... $ 42,262 $ 13,022 Accounts and contracts payable: Trade................................................. 37,275 40,395 Construction.......................................... 3,920 33,415 Accrued liabilities: Salaries, wages and vacations......................... 51,866 46,897 Progressive jackpots.................................. 11,334 11,417 Advance room deposits................................. 14,069 11,005 Interest.............................................. 53,122 19,395 Other................................................. 82,827 69,073 ---------- ---------- Total current liabilities........................... 296,675 244,619 ---------- ---------- Long-term debt, net of current portion................. 2,623,597 2,691,292 ---------- ---------- Other liabilities: Deferred income tax................................... 235,763 210,689 Other long-term liabilities........................... 41,966 20,192 ---------- ---------- Total other liabilities............................. 277,729 230,881 ---------- ---------- Total liabilities................................... 3,198,001 3,166,792 ---------- ---------- Commitments and contingent liabilities ---------- ---------- Minority interest...................................... (18,675) (25,096) ---------- ---------- Stockholders' equity: Common stock $.01 2/3 par value Authorized-- 450,000,000 shares Issued--113,634,013 shares........................... 1,894 1,894 Preferred stock $.01 par value Authorized--75,000,000 shares............................................... -- -- Additional paid-in capital............................ 569,802 565,925 Retained earnings..................................... 1,321,332 1,201,632 Accumulated other comprehensive loss.................. (6,804) -- Treasury stock (37,357,777 and 23,764,216 shares), at cost................................................. (817,284) (581,671) ---------- ---------- Total stockholders' equity.......................... 1,068,940 1,187,780 ---------- ---------- Total liabilities and stockholders' equity.......... $4,248,266 $4,329,476 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 56 MANDALAY RESORT GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year ended January 31, ---------------------------------- 2001 2000 1999 ---------- ---------- ---------- (in thousands, except share data) Revenues: Casino................................... $1,250,035 $ 951,492 $ 709,909 Rooms.................................... 611,352 534,132 355,635 Food and beverage........................ 418,081 346,647 246,622 Other.................................... 299,753 251,509 170,701 Earnings of unconsolidated affiliates.... 114,645 98,627 83,967 ---------- ---------- ---------- 2,693,866 2,182,407 1,566,834 Less-complimentary allowances............ (169,642) (131,509) (87,054) ---------- ---------- ---------- 2,524,224 2,050,898 1,479,780 ---------- ---------- ---------- Costs and expenses: Casino................................... 688,868 510,794 367,449 Rooms.................................... 203,352 189,419 128,622 Food and beverage........................ 299,726 276,261 207,663 Other.................................... 210,051 179,907 113,864 General and administrative............... 409,603 339,455 253,138 Corporate general and administrative..... 31,990 31,539 32,464 Depreciation and amortization............ 207,147 169,226 133,801 Operating lease rent..................... 40,121 25,994 -- Preopening expenses...................... 1,832 49,134 -- Abandonment loss......................... -- 5,433 -- ---------- ---------- ---------- 2,092,690 1,777,162 1,237,001 ---------- ---------- ---------- Income from operations..................... 431,534 273,736 242,779 ---------- ---------- ---------- Other income (expense): Interest, dividends and other income..... 10,889 3,652 2,730 Interest income and guarantee fees from unconsolidated affiliate................ 2,498 2,775 3,122 Interest expense......................... (222,490) (165,670) (95,541) Interest expense from unconsolidated affiliates.............................. (11,293) (11,085) (12,275) ---------- ---------- ---------- (220,396) (170,328) (101,964) ---------- ---------- ---------- Minority interest.......................... (16,746) (292) -- ---------- ---------- ---------- Income before provision for income taxes... 194,392 103,116 140,815 Provision for income taxes................. 74,692 38,959 55,617 ---------- ---------- ---------- Income before cumulative effect of change in accounting principle................... 119,700 64,157 85,198 Cumulative effect of change in accounting for preopening expenses, net of tax benefit of $11,843........................ -- (21,994) -- ---------- ---------- ---------- Net income................................. $ 119,700 $ 42,163 $ 85,198 ========== ========== ========== Basic earnings per share: Income before cumulative effect of change in accounting principle................. $ 1.53 $ .71 $ .90 Cumulative effect of change in accounting principle............................... -- (.24) -- ---------- ---------- ---------- Net income............................... $ 1.53 $ .47 $ .90 ========== ========== ========== Diluted earnings per share: Income before cumulative effect of change in accounting principle................. $ 1.50 $ .70 $ .90 Cumulative effect of change in accounting principle............................... -- (.24) -- ---------- ---------- ---------- Net income............................... $ 1.50 $ .46 $ .90 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 57 MANDALAY RESORT GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended January 31, ------------------------------- 2001 2000 1999 --------- --------- --------- (in thousands) Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income................................... $ 119,700 $ 42,163 $ 85,198 --------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 217,984 178,301 142,141 Increase (decrease) in deferred income tax....................................... 25,023 (8,104) 24,281 Increase in allowance for doubtful accounts.................................. (19,514) (7,765) (2,491) Increase (decrease) in interest payable.... 33,727 (8,372) 9,939 Increase in accrued pension cost........... 4,363 2,888 -- (Gain) loss on sale of fixed assets........ 290 2,903 (1,641) (Increase) decrease in other current assets.................................... 7,462 (46,032) 6,995 Increase in other current liabilities...... 18,584 42,930 19,906 (Increase) decrease in other noncurrent assets.................................... (551) 32,556 (28,707) Decrease in other noncurrent liabilities... -- (49) (65) Unconsolidated affiliates' distributions in excess of earnings (earnings in excess of distributions)............................ 22,077 (6,419) (10,863) Minority interest in earnings, net of distributions............................. 6,421 -- -- --------- --------- --------- Total adjustments........................ 315,866 182,837 159,495 --------- --------- --------- Net cash provided by operating activities.............................. 435,566 225,000 244,693 --------- --------- --------- Cash flows from investing activities: Capital expenditures......................... (110,220) (352,133) (671,547) Increase (decrease) in construction payable..................................... (29,495) (63,474) 34,360 Increase in investments...................... (16,755) (10,267) -- (Increase) decrease in investments in unconsolidated affiliates................... -- 10,728 (5,865) Net cash paid for additional ownership interest in joint venture................... -- (25,225) -- Increase in notes receivable................. (145) (24,952) (9,820) Proceeds from sale of equipment and other assets...................................... 2,408 697 5,788 Other........................................ 370 -- -- --------- --------- --------- Net cash used in investing activities.... (153,837) (464,626) (647,084) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of senior and senior subordinated notes.......................... 700,000 -- 275,000 Net effect on cash of issuances and payments of debt with initial maturities of three months or less.............................. (715,576) 294,990 502,528 Issuance of debt with initial maturities in excess of three months...................... -- -- 337,334 Principal payments of debt with initial maturities in excess of three months........ (23,000) (3,425) (644,241) Debt issuance costs.......................... (16,325) (1,072) (7,110) Exercise of stock options.................... 17,797 17,616 310 Purchases of treasury stock.................. (247,128) (29,627) (51,634) Other........................................ (8,173) (3,628) 12,962 --------- --------- --------- Net cash provided by (used in) financing activities.................................. (292,405) 274,854 425,149 --------- --------- --------- Net increase (decrease) in cash and cash equivalents.................................. (10,676) 35,228 22,758 Cash and cash equivalents at beginning of year......................................... 116,617 81,389 58,631 --------- --------- --------- Cash and cash equivalents at end of year...... $ 105,941 $ 116,617 $ 81,389 ========= ========= ========= Supplemental cash flow disclosures: Cash paid for interest (net of amount capitalized)................................ $ 183,638 $ 170,272 $ 82,879 Cash paid for income taxes................... $ 38,731 $ 42,551 $ 18,770
Acquisition of additional ownership interest in joint venture: Cash paid.............................................. $ -- $(38,386) $-- Current assets, other than cash........................ -- (13,462) -- Property and equipment................................. -- (152,037) -- Other assets........................................... -- (14,092) -- Current liabilities.................................... -- 33,693 -- Long-term debt......................................... -- 179,180 -- Stockholders' equity................................... -- (20,121) -- ----- -------- ---- Net cash paid for acquisition........................ $ -- $(25,225) $-- ===== ======== ====
The accompanying notes are an integral part of these consolidated financial statements. 58 MANDALAY RESORT GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Accumulated Stock Issued Additional Other Total -------------- Paid-in Retained Comprehensive Treasury Stockholders' Shares Amount Capital Earnings Loss Stock Equity ------- ------ ---------- ---------- ------------- --------- ------------- (in thousands) Balance, January 31, 1998................... 113,609 $1,893 $558,658 $1,074,271 $ -- $(511,073) $1,123,749 Net income............ -- -- -- 85,198 -- -- 85,198 Exercise of stock options.............. 14 1 272 -- -- 37 310 Treasury stock acquired (4,466 shares), at cost..... -- -- -- -- -- (51,634) (51,634) Other................. -- -- 5 -- -- -- 5 ------- ------ -------- ---------- ------- --------- ---------- Balance, January 31, 1999................... 113,623 1,894 558,935 1,159,469 -- (562,670) 1,157,628 Net income............ -- -- -- 42,163 -- -- 42,163 Exercise of stock options.............. 11 -- 6,990 -- -- 10,626 17,616 Treasury stock acquired (1,672 shares), at cost..... -- -- -- -- -- (29,627) (29,627) ------- ------ -------- ---------- ------- --------- ---------- Balance, January 31, 2000................... 113,634 1,894 565,925 1,201,632 -- (581,671) 1,187,780 Net income............ -- -- -- 119,700 -- -- 119,700 Minimum pension liability adjustment........... -- -- -- -- (6,804) -- (6,804) ---------- Total comprehensive income.............. 112,896 Exercise of stock options.............. -- -- 6,282 -- -- 11,515 17,797 Treasury stock acquired (14,534 shares), at cost..... -- -- -- -- -- (247,128) (247,128) Other................. -- -- (2,405) -- -- -- (2,405) ------- ------ -------- ---------- ------- --------- ---------- Balance, January 31, 2001................... 113,634 $1,894 $569,802 $1,321,332 $(6,804) $(817,284) $1,068,940 ======= ====== ======== ========== ======= ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation Mandalay Resort Group (the "Company"), which changed its name from Circus Circus Enterprises, Inc. effective June 18, 1999, was incorporated February 27, 1974. The Company owns and operates hotel and casino facilities in Las Vegas, Reno, Laughlin, Jean and Henderson, Nevada and a hotel and dockside casino in Tunica County, Mississippi. In Detroit, Michigan, the Company is the majority investor in a temporary casino which opened December 14, 1999. It is also an investor in several unconsolidated affiliates, with operations that include a riverboat casino in Elgin, Illinois, a hotel/casino in Reno, Nevada and a hotel/casino on the Las Vegas Strip. (See Note 10--Investments in Unconsolidated Affiliates.) The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and the Detroit joint venture, which is required to be consolidated. Material intercompany accounts and transactions have been eliminated. Investments in 50% or less owned affiliated companies are accounted for under the equity method. Cash Equivalents At January 31, 2001 and 2000, cash equivalents (consisting principally of money market funds and instruments with initial maturities of three months or less) had a cost approximately equal to market value. Accounts Receivable Accounts receivable consists primarily of casino and hotel receivables. Casino receivables represent credit extended to approved casino customers. Hotel receivables represent charges for hotel guests and receivables related to conventions and other group business. Accounts receivable for the years ended January 31, 2001 and 2000 are shown net of an allowance for doubtful accounts of $33.3 million and $13.8 million, respectively, related primarily to casino receivables. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out and the average cost methods. Depreciation and Amortization Depreciation and amortization of property, equipment and leasehold interests are provided using the straight-line method over the following estimated useful lives: Buildings and improvements................................... 15-45 years Equipment, furniture and fixtures............................ 3-15 years Leasehold interests and improvements......................... 5-16 years
Accumulated amortization of the excess of the purchase price over the fair market value of the net assets of businesses acquired was $63.5 million and $51.7 million, as of January 31, 2001 and 2000, respectively. Capitalized Interest The Company capitalizes interest costs associated with debt incurred in connection with major construction projects. When debt is not specifically identified as being incurred in connection with a construction project, the Company capitalizes interest on amounts expended on the project at the Company's average cost of borrowed 60 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) money. The amounts capitalized during the years ended January 31, 2001, 2000 and 1999, were $1.6 million, $11.0 million and $45.5 million, respectively. Goodwill On December 14, 1999, the Company purchased an additional ownership interest in a joint venture which operates MotorCity Casino, a temporary casino in Detroit, Michigan, bringing its total ownership interest to 53.5%. On June 1, 1995, the Company completed its acquisition of Gold Strike Resorts, in which it acquired two hotel/casino facilities in Jean, Nevada, one in Henderson, Nevada, a 50% interest in a joint venture which owns Grand Victoria, a riverboat casino and land-based entertainment complex in Elgin, Illinois, and a 50% interest in a joint venture which owns the Monte Carlo, a major hotel/casino on the Las Vegas Strip. On February 1, 1983, the Company purchased the Edgewater Hotel and Casino in Laughlin, Nevada and on November 1, 1979, the Company purchased the Slots-A-Fun Casino in Las Vegas. The excess of the purchase price over the fair market value of the net assets acquired amounted to $38.4 million for the purchase of the additional ownership interest in MotorCity Casino, $394.5 million for the purchase of Gold Strike Resorts, $9.7 million for the purchase of the Edgewater and $4.2 million for the purchase of Slots-A-Fun, and each is being amortized over a period of 40 years with the exception of the MotorCity Casino interest which is being amortized over a period of 25 years. Long-lived Assets Long-lived assets are comprised of intangible assets and property, plant and equipment. Long-lived assets, including certain identifiable intangibles and goodwill related to those assets to be held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists, pursuant to the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." If an asset is determined to be impaired based on expected future cash flows, a loss, measured using a fair-value based model, is recognized in the consolidated statements of income. Interest Rate Swaps The Company, from time to time, uses interest rate swaps and similar financial instruments to assist in managing interest incurred on its long-term debt. The difference between amounts received and amounts paid under such agreements, as well as any costs or fees, is recorded as a reduction of, or addition to, interest expense as incurred over the life of the swap or similar financial instrument. Revenues and Expenses Casino revenues are the net difference between the sums received as winnings and the sums paid as losses. Incentives, such as discounts to induce casino play, are deducted from gross revenues. Revenues include the retail value of rooms, food and beverage furnished gratuitously to customers. Such amounts are then deducted as complimentary allowances. The costs of such rooms, food and beverage were included as casino expenses as follows: $102.1 million, $86.5 million and $63.2 million for the fiscal years ended January 31, 2001, 2000 and 1999, respectively. For the three years, approximately 75- 85% of such costs were for food and beverage with the balance for rooms. 61 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Preopening Expenses Preopening expenses consist principally of direct incremental personnel costs and advertising and marketing expenses. In accordance with the American Institute of Certified Public Accountants' Statement of Position 98-5, preopening expenses incurred prior to January 31, 1999 ($33.8 million), on projects opening after that date, 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 consolidated statements of income. Preopening expenses incurred after January 31, 1999 are expensed as incurred. Previously, these costs were capitalized prior to the opening of the specific project and were charged to expense at the commencement of operations. For the year ended January 31, 2001, preopening expenses of $1.8 million relate to the Shark Reef at Mandalay Bay, which opened June 20, 2000. For the year ended January 31, 2000, preopening expenses of $83.0 million (including the write-off of $33.8 million of previously capitalized preopening expenses) related primarily to Mandalay Bay, the Four Seasons at Mandalay Bay, and the Company's joint venture in Detroit. Abandonment Loss During fiscal 2000, the Company wrote off $5.4 million related to a proposed timeshare resort in Las Vegas which the Company decided not to pursue. Use of Estimates The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and affect the disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications The financial statements for prior years reflect certain reclassifications, which have no effect on net income, to conform with classifications adopted in the current year. 62 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 2. Property, Equipment and Leasehold Interests Property, equipment and leasehold interests are stated at cost. Additions, including maintenance projects which extend the life of an asset, are capitalized. Normal repairs and maintenance are expensed as incurred.
January 31, ----------------------- 2001 2000 ----------- ---------- (in thousands) Land and land leases................................... $ 382,793 $ 364,781 Buildings and improvements............................. 3,088,717 2,872,900 Equipment, furniture and fixtures...................... 809,616 896,435 Leasehold interests and improvements................... 8,664 11,305 ----------- ---------- 4,289,790 4,145,421 Less--accumulated depreciation and amortization........ (1,077,322) (893,776) ----------- ---------- 3,212,468 3,251,645 Construction in progress............................... 24,356 83,426 ----------- ---------- $ 3,236,824 $3,335,071 =========== ==========
Note 3. Long-term Debt Long-term debt consists of the following:
January 31, ---------------------- 2001 2000 ---------- ---------- (in thousands) Amounts due under bank credit agreements at floating interest rates, weighted average of 6.9% and 6.8%.. $ 760,000 $1,425,000 Amounts due under corporate debt program at floating interest rates, weighted average of 6.2%........... -- 50,000 Amounts due under majority-owned joint venture revolving credit facility at floating interest rates, weighted average of 7.1%.................... 127,000 150,000 6 3/4% Senior Subordinated Notes due 2003 (net of unamortized discount of $39 and $55)............... 149,961 149,945 9 1/4% Senior Subordinated Notes due 2005........... 275,000 275,000 6.45% Senior Notes due 2006 (net of unamortized discount of $220 and $264)......................... 199,780 199,736 10 1/4% Senior Subordinated Notes due 2007.......... 500,000 -- 9 1/2% Senior Notes due 2008........................ 200,000 -- 7 5/8% Senior Subordinated Debentures due 2013...... 150,000 150,000 7.0% Debentures due 2036 (net of unamortized discount of $106 and $119)......................... 149,894 149,881 6.70% Debentures due 2096 (net of unamortized discount of $135 and $183)......................... 149,865 149,817 Other notes......................................... 4,359 4,935 ---------- ---------- 2,665,859 2,704,314 Less--current portion............................... (42,262) (13,022) ---------- ---------- $2,623,597 $2,691,292 ========== ==========
63 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has established a corporate debt program whereby it can issue commercial paper or similar forms of short-term debt. Although the debt instruments issued under this program are short term in tenor, they are classified as long-term debt because (i) they are backed by long-term debt facilities (see below) and (ii) it is management's intention to continue to replace such borrowings on a rolling basis as various instruments come due and to have such borrowings outstanding for longer than one year. To the extent that the Company incurs debt under this program, it maintains an equivalent amount of credit available under its bank credit facility, discussed more fully below. The Company maintains a $1.8 billion unsecured credit facility which matures on July 31, 2002 (the "Facility"). See Note 4--Leasing Arrangements, for permanent reductions in the availability under the credit facility due to certain operating lease transactions. The maturity date may be extended for an unlimited number of one-year periods with the consent of the bank group. The Facility contains financial covenants regarding total debt and investments. The Facility is for general corporate purposes. The Company incurs commitment fees (currently 25.0 basis points) on the unused portion of the Facility. The fair value of the debt issued under the Facility and the corporate debt program approximates the carrying amount of the debt due to the short-term maturities of the individual components of the debt. On December 14, 1999, the Company acquired an additional 8.5% ownership interest in the joint venture that owns and operates MotorCity Casino in Detroit, Michigan bringing the total ownership interest to 53.5%. Therefore, long-term debt of that joint venture is reflected as an obligation of the Company. In June 1999, the joint venture entered into a $150 million reducing revolving credit facility (the "Detroit Facility") which matures on June 30, 2003. The Detroit Facility reduces by fixed amounts quarterly, which began on December 31, 2000, and contains financial covenants regarding total debt, capital expenditures and investments. The Detroit Facility was used primarily to develop and construct the temporary casino facility. The Detroit Facility is guaranteed by the Company. The fair value of the debt issued under the Detroit Facility approximates the carrying amount of the debt. On July 24, 2000, the Company issued $500 million principal amount of 10 1/4% Senior Subordinated Notes due August 2007 (the "10 1/4% Notes"), with interest payable each February and August. The 10 1/4% Notes are redeemable prior to maturity at the option of the Company, in whole, at 100% of the principal amount plus a make-whole premium. A portion of the 10 1/4% Notes are also redeemable at the option of the Company prior to August 1, 2003 with the proceeds of a public offering of equity securities. The 10 1/4% Notes are not subject to any sinking fund requirements. The net proceeds from this offering were used to repay borrowings under the Company's credit facility. As of January 31, 2001, the estimated fair value of the 10 1/4% Notes was $513.1 million, based on their trading price. On August 16, 2000, the Company issued $200 million principal amount of 9 1/2% Senior Notes due August 2008 (the "9 1/2% Notes"), with interest payable each February and August. The 9 1/2% Notes are redeemable prior to maturity at the option of the Company, in whole, at 100% of the principal amount plus a make-whole premium. The 9 1/2% Notes are not subject to any sinking fund requirements. The net proceeds from this offering were used to repay borrowings under the Company's credit facility. As of January 31, 2001, the estimated fair value of the 9 1/2% Notes was $207.0 million, based on their trading price. In November 1998, the Company issued $275 million principal amount of 9 1/4% Senior Subordinated Notes due December 2005 (the "9 1/4% Notes"), with interest payable each June and December. The 9 1/4% Notes are redeemable at the option of the Company, in whole, at 100% of the principal amount plus a make-whole premium at any time prior to December 1, 2002. The 9 1/4% Notes are also redeemable at the option of the Company, in whole or in part, beginning December 1, 2002 at prices declining annually to 100% on or after December 1, 2004. The Company may also use the net proceeds of a public offering of equity securities to redeem up to 35% 64 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) of the 9 1/4% Notes prior to December 1, 2001. The 9 1/4% Notes are not subject to any sinking fund requirements. As of January 31, 2001, the estimated fair value of the 9 1/4% Notes was $276.0 million, based on their trading price. In November 1996, the Company issued $150 million principal amount of 7.0% Debentures due November 2036 (the "7.0% Debentures"). The 7.0% Debentures may be redeemed at the option of the holder in November 2008. Also, in November 1996, the Company issued $150 million principal amount of 6.70% Debentures due November 2096 (the "6.70% Debentures"). The 6.70% Debentures may be redeemed at the option of the holder in November 2003. Both the 7.0% Debentures, which were discounted to $149.8 million, and the 6.70% Debentures, which were discounted to $149.7 million, have interest payable each May and November, are not redeemable by the Company prior to maturity and are not subject to any sinking fund requirements. As of January 31, 2001, the estimated fair value of the 7.0% Debentures was $133.5 million and the estimated fair value of the 6.70% Debentures was $142.5 million, based on their trading prices. In February 1996, the Company issued $200 million principal amount of 6.45% Senior Notes due February 1, 2006 (the "6.45% Notes"), with interest payable each February and August. The 6.45% Notes, which were discounted to $199.6 million, are not redeemable prior to maturity and are not subject to any sinking fund requirements. As of January 31, 2001, the estimated fair value of the 6.45% Notes was $181.5 million, based on their trading price. In July 1993, the Company issued $150 million principal amount of 6 3/4% Senior Subordinated Notes (the "6 3/4% Notes") due July 2003 and $150 million principal amount of 7 5/8% Senior Subordinated Debentures (the "7 5/8% Debentures") due July 2013, with interest payable each July and January. The 6 3/4% Notes, which were discounted to $149.8 million, and the 7 5/8% Debentures are not redeemable prior to maturity and are not subject to any sinking fund requirements. As of January 31, 2001, the estimated fair value of the 6 3/4% Notes was $142.9 million and the estimated fair value of the 7 5/8% Debentures was $121.5 million, based on their trading prices. 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, and the instruments qualify for hedge accounting, 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 6.4%) and receives a variable interest rate (weighted average of approximately 6.5% at January 31, 2001) on $550 million notional amount of "initial" swaps. The net effect of all such swaps resulted in a reduction of interest expense of $1.2 million for the year. Three of the swaps with a combined notional amount of $350 million terminate in fiscal 2003. The remaining swap of $200 million notional amount terminates in fiscal 2004. 65 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company considers the risk of nonperformance by the counterparties to be minimal because the parties to the swaps are predominantly members of the Company's bank group. If the Company had terminated all swaps as of January 31, 2001, the Company would have had to pay a net amount of $14.3 million based on quoted market values from the various financial institutions holding the swaps. As of January 31, 2001, under the Company's most restrictive loan covenant, the Company was restricted from issuing additional debt in excess of approximately $490 million. Required annual principal payments as of January 31, 2001 are as follows:
Year Ending January 31, ----------- -------------- (in thousands) 2002......................................................... $ 42,262 2003......................................................... 820,313 2004......................................................... 175,274 2005......................................................... 312 2006......................................................... 275,312 Thereafter................................................. 1,352,386 ---------- $2,665,859 ==========
Note 4. Leasing Arrangements 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, pursuant to the terms of the lease, 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. The lease agreement provides that the lease term will automatically renew for an additional one-year term (with a maximum of two successive one-year renewal terms) unless the Company makes prior election to terminate the lease. As of January 31, 2001, the lease term had been automatically extended to June 30, 2002. The rent expense related to this lease facility is reported separately on the consolidated statements of income as operating lease rent. The Company also leases various storage facilities and equipment and has various air space under operating leases expiring individually through 2032. A portion of the Circus Circus facility in Reno is built on leased land with various operating leases expiring through 2033. The following is a schedule of future minimum rental payments required as of January 31, 2001 under those operating leases that have lease terms in excess of one year:
Year ending January 31, ----------- -------------- (in thousands) 2002......................................................... $35,573 2003......................................................... 13,837 2004......................................................... 1,488 2005......................................................... 644 2006......................................................... 623 Thereafter................................................. 5,823 ------- $57,988 =======
66 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Rent expense for all leases accounted for as operating leases was as follows:
Year ended January 31, ---------------------- 2001 2000 1999 ------- ------- ------ (in thousands) Operating rent expense.................................. $43,222 $27,988 $3,454 ======= ======= ======
Note 5. Income Taxes The Company accounts for income taxes according to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the recognition of deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences. The standard requires recognition of a future tax benefit to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied. At January 31, 2001, the Company believes that its deferred tax assets are fully realizable because of the future reversal of existing taxable temporary differences and future projected taxable income. Accordingly, there is no valuation allowance at January 31, 2001. The components of the provision for income taxes are as follows:
Year ended January 31, ------------------------- 2001 2000 1999 ------- -------- ------- (in thousands) Current Federal............................................. $53,588 $ 38,069 $34,810 State............................................... 1,545 734 510 ------- -------- ------- 55,133 38,803 35,320 ------- -------- ------- Deferred (see below) Federal............................................. 19,559 (11,687) 20,297 ------- -------- ------- $74,692 $ 27,116 $55,617 ======= ======== =======
The Company has recognized a tax benefit of $2.7 million, $1.7 million and $38,000 related to the exercise of stock options for the fiscal years ended January 31, 2001, 2000 and 1999, respectively. Such amounts reduce the current portion of taxes payable. The components of deferred income tax expense are as follows:
Year ended January 31, --------------------------- 2001 2000 1999 ------- --------- ------- (in thousands) Additional depreciation resulting from the use of accelerated methods for tax purposes............. $20,956 $ 10,723 $11,811 Effect of writing off preopening expenses for financial statement purposes and amortizing over five years for tax purposes...................... 4,409 (16,932) 1,062 Book reserve for bad debts not currently deductible for tax purposes...................... (6,643) (2,715) (872) Difference between book and tax basis of investments in unconsolidated affiliates......... (1,822) (2,294) 3,392 Capitalized interest.............................. 101 431 2,993 Other, net........................................ 2,558 (900) 1,911 ------- --------- ------- $19,559 $(11,687) $20,297 ======= ========= =======
67 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The reconciliation of the difference between the federal statutory tax rate and the Company's effective tax rate is as follows:
Year ended January 31, ---------------- 2001 2000 1999 ---- ---- ---- Federal statutory tax rate.................................... 35.0% 35.0% 35.0% Nondeductible goodwill........................................ 1.8 5.3 2.5 Nondeductible political contributions......................... .2 .8 2.0 Other, net.................................................... 1.4 (2.0) -- ---- ---- ---- Effective tax rate............................................ 38.4% 39.1% 39.5% ==== ==== ====
The income tax effects of temporary differences between financial and income tax reporting that gave rise to deferred income tax assets and liabilities at January 31, 2001 and 2000, are as follows:
Year ended January 31, --------------------- 2001 2000 -------- -------- (in thousands) Deferred tax liabilities Property and equipment.................................. $218,456 $192,898 Investments in unconsolidated affiliates................ 12,873 17,310 Other................................................... 15,376 9,647 -------- -------- Gross deferred tax liabilities........................ 246,705 219,855 -------- -------- Deferred tax assets Accrued vacation benefits............................... 7,259 6,471 Bad debt reserve........................................ 11,475 4,832 Preopening expenses, net of amortization................ 13,276 17,451 Other................................................... 9,096 6,861 -------- -------- Gross deferred tax assets............................. 41,106 35,615 -------- -------- Net deferred tax liabilities.......................... $205,599 $184,240 ======== ========
Note 6. Employee Retirement Plans Approximately 41% of the Company's employees are covered by union- sponsored, collectively bargained, multi-employer defined benefit pension plans. The Company contributed $13.2 million, $12.8 million and $10.2 million during the years ended January 31, 2001, 2000 and 1999, respectively, for such plans. These contributions are determined in accordance with the provisions of negotiated labor contracts and generally are based on the number of hours worked. The Company also has a profit sharing and investment plan covering primarily nonunion employees who are at least 21 years of age and have at least one year of service. The plan is a voluntary defined contribution plan and is subject to the provisions of the Employee Retirement Income Security Act of 1974. The plan allows for investments in the Company's common stock as one of the investment alternatives. The Company's contributions to this plan are determined based on employees' years of service and matching of employees' contributions, and were approximately $5.4 million, $4.7 million and $4.5 million in the years ended January 31, 2001, 2000 and 1999. Contributions are funded with cash. 68 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On June 18, 1998, the Company adopted a Supplemental Executive Retirement Plan ("SERP"). The SERP is a defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key employees upon retirement based upon the employees' years of service, compensation and SERP tier. The following information summarizes activity in the SERP:
Year ended January 31, ------------------ 2001 2000 -------- -------- (in thousands) Changes in Projected Benefit Obligation: Projected benefit obligation at beginning of year........ $ 20,763 $ 12,978 Service cost............................................. 1,783 1,395 Interest cost............................................ 1,713 1,070 New participant liability................................ 1,100 -- Actuarial losses......................................... 6,436 5,330 Benefits paid............................................ (247) (10) -------- -------- Projected benefit obligation at end of year.............. $ 31,548 $ 20,763 ======== ======== Fair Value of Plan Assets(1)............................... $ -- $ -- ======== ======== Reconciliation of Funded Status: Funded status(1)......................................... $(31,548) $(20,763) Unrecognized actuarial loss.............................. 11,585 5,330 Unrecognized prior service cost.......................... 12,712 12,545 -------- -------- Accrued net periodic pension cost........................ $ (7,251) $ (2,888) ======== ======== Amounts Recognized in the Consolidated Balance Sheets: Accrued net periodic pension cost........................ $ (7,251) $ (2,888) Additional minimum liability............................. (23,179) -- Intangible asset......................................... 12,712 -- Accumulated other comprehensive loss(2).................. 10,467 -- -------- -------- Net amount recognized.................................... $ (7,251) $ (2,888) ======== ======== Components of Net Periodic Pension Cost: Current period service cost.............................. $ 1,783 $ 1,395 Interest cost............................................ 1,713 1,070 Amortization of prior service cost....................... 933 433 Recognized net actuarial loss............................ 181 -- -------- -------- Net expense(3)........................................... $ 4,610 $ 2,898 ======== ======== Weighted Average Assumptions: Discount rate............................................ 8.0% 8.0% Rate of compensation increase............................ 3.0% 3.0%
- -------- (1) While the SERP is an unfunded plan, the Company is informally funding the plan through life insurance contracts on the participants. The life insurance contracts had cash surrender values of $20.9 million and $10.3 million at January 31, 2001 and 2000. (2) Amount recorded in the Consolidated Statement of Stockholders' Equity is net of income tax of $3.7 million. (3) The periodic pension expense is included in departmental expenses. 69 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 7. 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, performance shares and restricted stock awards relating to the Company's common stock. The stock options are generally exercisable in one or more installments beginning not less than six months after the grant date. Summarized information for stock option plans is as follows:
Year ended January 31, ---------------------------------------------------------- 2001 2000 1999 ------------------ ------------------ -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------- -------- --------- -------- ----------- -------- Outstanding at beginning of year................ 6,029,959 $13.70 3,872,674 $14.72 5,143,505 $23.94 Granted................. 655,500 15.99 3,377,166 14.20 3,188,335 12.51 Exercised............... (940,061) 16.06 (878,914) 18.08 (16,500) 13.29 Canceled................ (128,458) 18.36 (340,967) 19.05 (4,442,666) 23.81 --------- --------- ----------- Outstanding at end of year................... 5,616,940 $13.46 6,029,959 $13.70 3,872,674 $14.72 ========= ========= =========== Options exercisable at end of year............ 2,422,600 $12.52 1,937,662 $13.71 1,314,005 $21.19 Options available for grant at end of year... 4,884,990 1,912,032 3,973,231
The following table summarizes information about stock options outstanding at January 31, 2001:
Options Outstanding Options Exercisable - ----------------------------------------------------------- -------------------- Weighted Average Weighted Weighted Remaining Average Average Number Contractual Exercise Number Exercise Range of Exercise Prices Outstanding Life (yrs) Price Exercisable Price - ------------------------ ----------- ----------- -------- ----------- -------- $11.25 to $11.25......... 1,638,440 4.79 $11.25 1,322,404 $11.25 13.00 to 13.00......... 3,228,167 8.16 13.00 927,497 13.00 14.50 to 25.94......... 750,333 8.48 20.29 172,699 19.65 --------- ---- ------ --------- ------ 5,616,940 7.22 $13.46 2,422,600 $12.52 ========= ==== ====== ========= ======
In December 1998, replacement options to purchase an aggregate of approximately 2.6 million shares of the Company's common stock were awarded at an exercise price of $11.25 per share, subject to the surrender for cancellation of 3.9 million options with an average exercise price of $24.29. Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123") provides, among other things, that companies may elect to account for employee stock options using a fair value method or continue to apply the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"). Under SFAS 123, all employee stock option grants are considered compensatory. Compensation cost is measured at the date of grant based on the estimated fair value of the options determined using an option pricing model. The model takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the stock, expected dividends on the stock and the risk-free interest rate over the expected life of the option. Under APB 25, generally only stock options that have an intrinsic value at the date of grant 70 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) are considered compensatory. Intrinsic value represents the excess, if any, of the market price of the stock at the grant date over the exercise price of the options. Under both methods, compensation cost is charged to earnings over the period the options become exercisable. The Company has elected to continue to account for employee stock options under APB 25. Accordingly, no compensation cost has been recognized. The following table discloses the Company's pro forma net income and net income per share assuming compensation cost for employee stock options had been determined consistent with SFAS 123. The table also discloses the weighted average assumptions used in estimating the fair value of each option grant on the date of grant using the Black-Scholes option pricing model, and the estimated weighted average fair value of the options granted. The model assumes no expected future dividend payments on the Company's common stock.
Year ended January 31, -------------------------- 2001 2000 1999 -------- ------- ------- (in thousands, except share data) Net income: As reported.................................... $119,700 $42,163 $85,198 Pro forma...................................... 114,480 31,527 79,722 Net income per share (basic): As reported.................................... $ 1.53 $ .47 $ .90 Pro forma...................................... 1.46 .35 .84 Net income per share (diluted): As reported.................................... $ 1.50 $ .46 $ .90 Pro forma...................................... 1.44 .34 .84 Weighted average assumptions: Expected stock price volatility................ 45.1% 45.1% 43.6% Risk-free interest rate........................ 4.6% 6.4% 5.0% Expected option lives (years).................. 3.0 2.7 2.1 Estimated fair value of options granted........ $ 5.79 $ 4.79 $ 3.50
Note 8. Stock Related Matters On July 14, 1994, the Company declared a dividend of one common stock purchase right (the "Rights") for each share of common stock outstanding at the close of business on August 15, 1994. Each Right entitles the holder to purchase from the Company one share of common stock at an exercise price of $125, subject to certain antidilution adjustments. The Rights become exercisable ten days after the earlier of an announcement that an individual or group has acquired 15% or more of the Company's outstanding common stock or the announcement of commencement of a tender offer for 15% or more of the Company's common stock. In the event the Rights become exercisable, each Right (except the Rights beneficially owned by the acquiring individual or group, which become void) would entitle the holder to purchase, for the exercise price, a number of shares of the Company's common stock having an aggregate current market value equal to two times the exercise price. The Rights expire August 15, 2004, and may be redeemed by the Company at a price of $.01 per Right any time prior to their expiration or the acquisition of 15% or more of the Company's common stock. The Rights should not interfere with any merger or other business combination approved by the Company's Board of Directors and are intended to cause substantial dilution to a person or group that attempts to acquire control of the Company on terms not approved by the Board of Directors. 71 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During the year ended January 31, 2001, the Company repurchased 14.5 million shares of its common stock at a cost of $247.1 million. In the fiscal years ended 2000 and 1999, the Company repurchased 1.7 million shares of its common stock at a cost of $29.6 million and 4.5 million shares of its common stock at a cost of $51.6 million, respectively. See also Note 11--Commitments and Contingent Liabilities for information regarding the Company's agreement to purchase shares from Bank of America. The Company is authorized to issue up to 75 million shares of $.01 par value preferred stock in one or more series having such respective terms, rights and preferences as are designated by the Board of Directors. No preferred stock has yet been issued. Note 9. Earnings Per Share Earnings per share is computed and presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period, while diluted earnings per share reflects the impact of additional dilution for all potentially dilutive securities, such as stock options. The table below reconciles weighted average shares outstanding used to calculate basic earnings per share with the weighted average shares outstanding used to calculate diluted earnings per share. There were no reconciling items for net income.
Year ended January 31, ------------------------ 2001 2000 1999 -------- ------- ------- (in thousands, except per share data) Net income........................................... $119,700 $42,163 $85,198 ======== ======= ======= Weighted average shares outstanding (basic earnings per share).......................................... 78,335 90,607 94,601 Stock options........................................ 1,366 1,289 70 -------- ------- ------- Weighted average shares outstanding (diluted earnings per share).......................................... 79,701 91,896 94,671 ======== ======= ======= Basic earnings per share............................. $ 1.53 $ .47 $ .90 ======== ======= ======= Diluted earnings per share........................... $ 1.50 $ .46 $ .90 ======== ======= =======
72 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 10. Investments in Unconsolidated Affiliates The Company has investments in unconsolidated affiliates that are accounted for under the equity method. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of earnings, losses and distributions of these companies. The investment balance also includes interest capitalized during construction. Investments in unconsolidated affiliates consist of the following:
January 31, ----------------- 2001 2000 -------- -------- (in thousands) Circus and Eldorado Joint Venture (50%)................... $ 72,222 $ 87,150 (Silver Legacy, Reno, Nevada) Elgin Riverboat Resort (50%).............................. 39,156 40,780 (Grand Victoria, Elgin, Illinois) Victoria Partners (50%)................................... 131,126 137,065 (Monte Carlo, Las Vegas, Nevada) -------- -------- $242,504 $264,995 ======== ========
The Company's unconsolidated affiliates operate with fiscal years ending on December 31. Summarized balance sheet information of the unconsolidated affiliates as of December 31, 2000 and 1999 is as follows:
2000 1999 -------- -------- (in thousands) Current assets............................................ $108,868 $ 95,602 Property and other assets, net............................ 670,347 698,982 Current liabilities....................................... 94,131 71,712 Long-term debt and other liabilities...................... 244,006 261,006 Equity.................................................... 441,078 461,866
Summarized results of operations of the unconsolidated affiliates for the years ended December 31, 2000 and 1999 are as follows:
2000 1999 -------- -------- (in thousands) Revenues................................................... $852,654 $764,664 Expenses................................................... 620,987 577,193 Operating income........................................... 231,667 187,471 Net income................................................. 211,712 166,816
Note 11. Commitments and Contingent Liabilities In July 1995, Silver Legacy, a 50/50 joint venture with the Eldorado Hotel/Casino, opened in downtown Reno, Nevada. As a condition to the joint venture's $230 million bank credit agreement, Mandalay 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). 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. Mandalay had an initial 45% ownership interest in the joint venture. 73 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Effective December 14, 1999, the Company acquired an additional 8.5% interest at a cost of $38.4 million, thus increasing its total ownership interest to 53.5%. Pending the development of a permanent hotel/casino, the joint venture constructed a temporary casino (MotorCity Casino) in downtown Detroit, which opened December 14, 1999. The cost of the temporary casino, including land and capitalized interest but excluding preopening expenses, was approximately $150 million. This cost was financed pursuant to the joint venture's $150 million credit facility, which is secured by the assets associated with the temporary casino. Mandalay has guaranteed this credit facility. 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 conditions. Under a plan agreed to by the City of Detroit development authorities, but not yet approved by the Detroit City Council, the Company would expand its temporary facility into a permanent facility by adding approximately 800 hotel rooms, expanded casino space, convention space, retail space and additional dining and entertainment facilities. The Company has committed to contribute 20% of the cost of the permanent facility in the form of equity, and the joint venture will seek project-specific funding for the balance of the cost. The permanent facility's cost is being evaluated in light of the decision to utilize the site of the temporary casino for the permanent facility. 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 it 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. Mandalay has issued letters of credit totaling $50 million for the benefit of Bank of America in order to back letters of credit issued by Bank of America for the same total amount. The Bank of America letters of credit were issued to secure payments of principal and interest on bonds issued by the Economic Development Corporation of the City of Detroit. The proceeds of the bonds are to be used to finance costs associated with activities (including acquisition) relating to land located along the Detroit Riverfront (including the site where the joint venture's permanent facility originally was to be located). Various lawsuits have been filed in the state and federal courts challenging the constitutionality of the Detroit Casino Competitive Selection Process and the Michigan Gaming Control and Revenue Act, and seeking to appeal the issuance of a certificate of suitability to MotorCity Casino. No assurance can be given regarding the timing and outcome of these proceedings. An adverse ruling in any of these lawsuits could adversely impact the status of the joint venture's operation of the temporary facility, as well as its ability to obtain a certificate of suitability and a casino license for its permanent facility. In May 2000, the Company's Board of Directors authorized the purchase of up to 15% (or approximately 11.7 million) of the then outstanding shares of common stock, as market conditions and other factors warrant. As of January 31, 2001, the Company had purchased 1.8 million shares pursuant to this authorization at a cost of $39.1 million. To facilitate the Company's purchase of shares pursuant to this authorization, the Company entered into agreements with Bank of America providing for the purchase, in accordance with the volume and other limitations of Rule 10b-18 under the Securities Exchange Act of 1934, of up to $100 million of the Company's outstanding common stock by Bank of America. The agreements provide that the Company will purchase from Bank of America at its cost (plus accrued fees) the shares acquired pursuant to the agreements one year following completion of Bank of America's acquisition of the stock. At the Company's option, it may acquire all or a portion of the shares at an earlier date, or it may become obligated to acquire all or a portion of the shares at an earlier date under certain circumstances specified in the agreements. Although the Company's current intention is to purchase the shares in accordance with the terms of the agreements, the Company may elect to net settle the obligation in cash or shares (i.e., pay cash or deliver additional shares or receive cash or shares). As of January 31, 2001, Bank of America had purchased 4.9 million shares pursuant to this agreement at a cost of 74 MANDALAY RESORT GROUP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $100 million, excluding commissions. Any shares the Company purchases from Bank of America pursuant to these agreements will reduce, by that number, the shares the Company may purchase pursuant to the May 2000 share purchase authorization. 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. Note 12. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which the Company will adopt in the first quarter of fiscal 2002. This statement establishes accounting and reporting standards for derivative financial instruments. The provisions of SFAS 133 require that a company recognize derivatives as either assets or liabilities on its balance sheet and that the instrument be recorded 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. The Company will recognize the value of its interest rate swaps ($14.3 million expense at January 31, 2001) as a cumulative effect of a change in accounting principle. In November 2000, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF 00-14, "Accounting for Certain Sales Incentives." EITF 00-14 requires that discounts which result in a reduction in or refund of the selling price of a product or service in a single exchange transaction be recorded as a reduction of revenues. The Company's accounting policy related to free or discounted rooms, food and beverage and other services already complies with EITF 00-14, and those free or discounted services are deducted from gross revenues as "complimentary allowances." The Company's accounting policy related to discounts to induce casino play also complies with EITF 00- 14, as such incentives are netted against gross casino revenues. In February 2001, the EITF reached a partial consensus on EITF 00-22, "Accounting for "Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future." The consensus requires that vendors recognize the cash rebate or refund obligation associated with time- or volume-based cash rebates as a reduction of revenue. The liability for such obligations should be based on the estimated amount of rebates or refunds to be ultimately earned, including an estimation of "breakage" if it can be reasonably estimated. The consensus is applicable beginning in the first quarter of fiscal 2002. The Company's players' clubs allow customers to earn certain complimentary services and/or cash rebates based on the volume of the customers' gaming activity. The Company accounts for its players' clubs in accordance with EITF 00-22, except that it records the charge for progress towards the complimentary services/cash rebates as a casino department expense instead of a reduction of revenue. The Company will change the classification for these charges in the first quarter of fiscal 2002, including reclassifying prior period amounts. 75 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Mandalay Resort Group: We have audited the accompanying consolidated balance sheets of Mandalay Resort Group (a Nevada corporation) and subsidiaries as of January 31, 2001 and 2000 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mandalay Resort Group and subsidiaries as of January 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2001, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Las Vegas, Nevada February 28, 2001 76 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS The Company is responsible for preparing the consolidated financial statements and related information appearing in this report. Management believes that the financial statements present fairly the Company's financial position, results of operations and cash flows in conformity with Generally Accepted Accounting Principles. In preparing its financial statements, the Company is required to include amounts based on estimates and judgments which management believes are reasonable under the circumstances. The Company maintains accounting and other control systems designed to provide reasonable assurance that financial records are reliable for purposes of preparing financial statements and that assets are properly accounted for and safeguarded. Compliance with these systems and controls is reviewed through a program of audits by an internal audit staff. The Board of Directors fulfills its responsibility for the Company's financial statements through its audit committee, which is composed solely of directors who are not Company officers or employees. The audit committee meets from time to time with the independent public accountants, management and the internal auditors. The independent public accountants have direct access to the audit committee, with or without the presence of management representatives. 77 SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended January 31, 2001 ----------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- ---------- (in thousands, except per share amounts) Revenue......................... $639,616 $647,400 $638,457 $598,751 $2,524,224 Income from operations.......... 130,915 119,950 114,081 66,588 431,534 Income before income tax........ 78,245 60,801 47,231 8,115 194,392 Net income...................... 48,858 38,052 29,371 3,419 119,700 Basic earnings per share........ $ .58 $ .49 $ .39 $ .04 $ 1.53 Diluted earnings per share...... $ .58 $ .48 $ .38 $ .04 $ 1.50
Year Ended January 31, 2000 ------------------------------------ 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- ---------- (in thousands, except per share amounts) Revenue...................... $471,259 $516,181 $545,202 $518,256 $2,050,898 Income from operations....... 62,499 79,130 89,856 42,251 273,736 Income (loss) before income tax......................... 27,427 36,261 46,171 (6,743) 103,116 Net income (loss)............ (4,855) 23,631 28,757 (5,370) 42,163 Basic earnings (loss) per share....................... $ (.05) $ .26 $ .32 $ (.06) $ .47 Diluted earnings (loss) per share....................... $ (.05) $ .26 $ .31 $ (.06) $ .46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 78 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information beginning with the question "What is the background of this year's nominees?" under the caption "Item I--Election of Directors and Nominee Biographies" to, but not including, the caption "Compensation of Directors" in the proxy statement to be filed by Mandalay Resort Group with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended January 31, 2001 and forwarded to stockholders prior to the 2001 Annual Meeting of Stockholders (the "2001 Proxy Statement"), is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION. The information in the 2001 Proxy Statement beginning immediately following the caption "Compensation of Directors" to, but not including, the caption "Board Committees and Meeting Attendance" and the additional information in the 2001 Proxy Statement beginning immediately following the caption "Executive Compensation" to, but not including, the caption "Certain Transactions" is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information in the 2001 Proxy Statement beginning immediately following the caption "Stock Ownership of Certain Beneficial Owners and Management" to, but not including, the caption "General" is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information in the 2001 Proxy Statement beginning immediately following the caption "Certain Transactions" to, but not including, the caption "Report of the Board of Directors and the Compensation Committee on Executive Compensation" is incorporated herein by this reference. 79 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Consolidated Financial Statements: MANDALAY RESORT GROUP AND SUBSIDIARIES
Page ----- Consolidated Balance Sheets as of January 31, 2001 and 2000............. 56 Consolidated Statements of Income for the three years ended January 31, 2001................................................................... 57 Consolidated Statements of Cash Flows for the three years ended January 31, 2001............................................................... 58 Consolidated Statements of Stockholders' Equity for the three years ended January 31, 2001................................................. 59 Notes to Consolidated Financial Statements.............................. 60-75 Report of Independent Public Accountants................................ 76
(a)(2) Supplemental Financial Statement Schedules: None. (a)(3) Exhibits: The following exhibits are filed as a part of this report or incorporated herein by reference: 3(i)(a). Restated Articles of Incorporation of the Registrant as of July 15, 1988 and Certificate of Amendment thereto, dated June 29, 1989. (Incorporated by reference to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1991.) 3(i)(b). Certificate of Division of Shares into Smaller Denominations, dated June 20, 1991. (Incorporated by reference to Exhibit 3(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1992.) 3(i)(c). Certificate of Division of Shares into Smaller Denominations, dated June 22, 1993. (Incorporated by reference to Exhibit 3(i) to the Registrant's Current Report on Form 8-K dated July 21, 1993.) 3(i)(d). Certificate of Amendment of Restated Articles of Incorporation of the Registrant, filed with the Office of the Secretary of State of Nevada on June 18, 1999. (Incorporated by reference to Exhibit 3(i) to the Registrant's Current Report on Form 8-K dated June 18, 1999.) 3(ii). Restated Bylaws of the Registrant dated April 30, 1999. (Incorporated by reference to Exhibit 3(ii) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1999.) 4(a). Rights Agreement dated as of July 14, 1994, between the Registrant and First Chicago Trust Company of New York. (Incorporated by reference to Exhibit 4 to the Registrant's Current Report on Form 8-K dated August 15, 1994.) 4(b). Amendment to Rights Agreement effective as of April 16, 1996, between the Registrant and First Chicago Trust Company of New York. (Incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1996.) 4(c). Amended and Restated Loan Agreement, dated as of May 23, 1997, by and among the Registrant, the Banks named therein and Bank of America, N.A., as administrative agent for the Banks, and the related Subsidiary Guarantee dated May 23, 1997, of the Registrant's subsidiaries named therein. (Incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 1997.)
80 4(d). Amendment No. 1 to Amended and Restated Loan Agreement, by and among the Registrant, the Banks named therein and Bank of America, N.A., as administrative agent for the Banks. (Incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report for the quarterly period ended October 31, 1997.) 4(e). Amendment No. 2 to the Loan Agreement, by and among the Registrant, the Banks named therein and Bank of America N.A., as administrative agent for the Banks. (Incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 1998.) 4(f). Amendment No. 3, dated as of June 22, 1999, to the Amended and Restated Loan Agreement dated as of May 23, 1997, by and among the Registrant, the Banks named therein and Bank of America N.A., as administrative agent for the Banks. (Incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1999.) 4(g). Rate Swap Master Agreement, dated as of October 24, 1986, and Rate Swap Supplements One through Four, by and between the Registrant and Bank of America, N.A. (Incorporated by reference to Exhibit 4(j) to the Registrant's Current Report on Form 8-K dated December 29, 1986.) 4(h). Interest Rate Swap Agreement, dated as of September 27, 1999, by and between the Registrant and Bank of America, N.A. (Incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1999.) 4(i). Interest Rate Swap Agreement, dated as of September 27, 1999, by and between the Registrant and Bank of America, N.A. (Incorporated by reference to Exhibit 4(b) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1999.) 4(j). Interest Rate Swap Agreement, dated as of October 13, 1999, by and between the Registrant and Bank of America, N.A. (Incorporated by reference to Exhibit 4(c) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1999.) 4(k). Interest Rate Cap Agreement, dated October 20, 1997, between the Registrant and Morgan Guaranty Trust Company of New York. (Incorporated by reference to Exhibit 4(f) to the Registrant's Quarterly Report for the quarterly period ended October 31, 1997.) 4(l). Interest Rate Cap Agreement, dated January 13, 1998, between the Registrant and Morgan Guaranty Trust Company of New York. (Incorporated by reference to Exhibit 4(h) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 4(m). Interest Rate Cap Agreement dated June 14, 2000, between the Registrant and Morgan Guaranty Trust Company of New York. (Incorporated by reference to Exhibit 4(e) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2000.) 4(n). Interest Rate Cap Agreement dated June 29, 2000, between the Registrant and Morgan Guaranty Trust Company of New York. (Incorporated by reference to Exhibit 4(f) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2000.) 4(o). Grid Promissory Note, dated October 17, 1997, between the Registrant and Lyon Short Term Funding Corp. (Incorporated by reference to Exhibit 4(g) to the Registrant's Quarterly Report for the quarterly period ended October 31, 1997.) 4(p). Commercial Paper Dealer Agreement, dated October 9, 1997, between the Registrant and Merrill Lynch Money Markets Inc. (Incorporated by reference to Exhibit 4(b) to the Registrant's Quarterly Report for the quarterly period ended October 31, 1997.) 4(q). Commercial Paper Dealer Agreement, dated October 9, 1997, between the Registrant and BancAmerica Robertson Stephens. (Incorporated by reference to Exhibit 4(c) to the Registrant's Quarterly Report for the quarterly period ended October 31, 1997.) 4(r). Commercial Paper Dealer Agreement, dated October 9, 1997, between the Registrant and Credit Suisse First Boston Corporation. (Incorporated by reference to Exhibit 4(d) to the Registrant's Quarterly Report for the quarterly period ended October 31, 1997.)
81 4(s). Issuing and Paying Agency Agreement, dated October 9, 1997, between the Registrant and The Chase Manhattan Bank. (Incorporated by reference to Exhibit 4(e) to the Registrant's Quarterly Report for the quarterly period ended October 31, 1997.) 4(t). Indenture by and between the Registrant and First Interstate Bank of Nevada, N.A., as Trustee with respect to the Registrant's 6 3/4% Senior Subordinated Notes due 2003 and its 7 5/8% Senior Subordinated Debentures due 2013. (Incorporated by reference to Exhibit 4(a) to the Registrant's Current Report on Form 8-K dated July 21, 1993.) 4(u). Indenture, dated February 1, 1996, by and between the Registrant and First Interstate Bank of Nevada, N.A., as Trustee. (Incorporated by reference to Exhibit 4(b) to the Registrant's Current Report on Form 8-K dated January 29, 1996.) 4(v). Supplemental Indenture, dated February 1, 1996, by and between the Registrant and First Interstate Bank of Nevada, N.A., as Trustee, with respect to the Registrant's 6.45% Senior Notes due February 1, 2006. (Incorporated by reference to Exhibit 4(c) to the Registrant's Current Report on Form 8-K dated January 29, 1996.) 4(w). 6.45% Senior Notes due February 1, 2006 in the principal amount of $200,000,000. (Incorporated by reference to Exhibit 4(d) to the Registrant's Current Report on Form 8-K dated January 29, 1996.) 4(x). Supplemental Indenture, dated as of November 15, 1996, to an indenture dated February 1, 1996, by and between the Registrant and Wells Fargo Bank (Colorado), N.A., as Trustee, with respect to the Registrant's 6.70% Senior Notes due November 15, 2096. (Incorporated by reference to Exhibit 4(c) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1996.) 4(y). 6.70% Senior Notes due February 15, 2096 in the principal amount of $150,000,000. (Incorporated by reference to Exhibit 4(d) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1996.) 4(z). Indenture, dated November 15, 1996, by and between the Registrant and Wells Fargo Bank (Colorado), N.A., as Trustee. (Incorporated by reference to Exhibit 4(e) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1996.) 4(aa). Supplemental Indenture, dated as of November 15, 1996, to an indenture dated November 15, 1996, by and between the Registrant and Wells Fargo Bank (Colorado), N.A., as Trustee, with respect to the Registrant's 7.0% Senior Notes due November 15, 2036. (Incorporated by reference to Exhibit 4(f) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1996.) 4(bb). 7.0% Senior Notes due February 15, 2036, in the principal amount of $150,000,000. (Incorporated by reference to Exhibit 4(g) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1996.) 4(cc). Instrument of Joinder, dated May 31, 1998, by Mandalay Corp., pursuant to the Subsidiary Guaranty dated as of May 23, 1997, with respect to the Amended and Restated Loan Agreement, in favor of Bank of America, N.A., as administrative agent for the Banks. (Incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1998.) 4(dd). Indenture dated November 20, 1998, by and between the Registrant and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998.) 4(ee). Supplemental Indenture, dated November 20, 1998, by and between the Registrant and The Bank of New York, as Trustee, with respect to the Registrant's 9 1/4% Senior Subordinated Notes due December 1, 2005. (Incorporated by reference to Exhibit 4(b) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998.)
82 4(ff). 9 1/4% Senior Subordinated Notes due December 1, 2005 in the principal amount of $275,000,000. (Incorporated by reference to Exhibit 4(c) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998.) 4(gg). Indenture dated as of July 24, 2000 by and between the Company and The Bank of New York with respect to $500 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2007. (Incorporated by reference to Exhibit 4.1 to the Registrant's Form S-4 Registration Statement No. 333-44216.) 4(hh). Indenture dated as of August 16, 2000 by and between the Company and The Bank of New York, with respect to $200 million aggregate principal amount of 9 1/2% Senior Notes due 2008. (Incorporated by reference to Exhibit 4.1 to the Company's Form S-4 Registration Statement No. 333-44838.) 4(ii). Registration Rights Agreement dated as of July 24, 2000 by and among the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Donaldson, Lufkin & Jenrette Securities Corporation, Deutsche Bank Securities Inc., Commerzbank Capital Markets Corporation, Credit Suisse First Boston Corporation, Wasserstein Perella Securities, Inc., FleetBoston Robertson Stephens Inc., and SG Cowen Securities Corporation. (Incorporated by reference to Exhibit 4.2 to the Company's Form S-4 Registration Statement No. 333-44216.) 4(jj). Registration Rights Agreement dated as of August 16, 2000 by and among the Company and Banc of America Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc., Salomon Smith Barney Inc., Credit Lyonnais Securities (USA) Inc., J.P. Morgan Securities Inc. and Commerzbank Capital Markets Corporation. (Incorporated by reference to Exhibit 4.2 to the Company's Form S-4 Registration Statement No. 333-44838.) 10(a).* Amended and Restated 1989 Stock Option Plan of the Registrant. (Incorporated by reference to Exhibit 10 to the Post Effective Amendment No. 4 to the Registrant's Registration Statement (No. 33- 39215) on Form S-8.) 10(b).* Amended and Restated 1991 Stock Incentive Plan of the Registrant. (Incorporated by reference to Exhibit 10 to the Post Effective Amendment No. 3 to the Registrant's Registration Statement (No. 33- 56420) on Form S-8.) 10(c).* Amended and Restated 1993 Stock Option Plan of the Registrant. (Incorporated by reference to Exhibit 10 to the Post Effective Amendment No. 2 to the Registrant's Registration Statement (No. 33- 53303) on Form S-8.) 10(d).* 1998 Stock Option Plan. (Incorporated by reference to Exhibit 4(g) to the Registrant's Registration Statement (No.333-51073) on Form S-8.) 10(e). 1999 Non-Employee Directors Stock Option Plan. (Incorporated by reference to Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1999.) 10(f).* 2000 Stock Incentive Plan. (Incorporated by reference to Appendix B to the Registrant's definitive proxy statement dated April 28, 2000 relating to the 2000 Annual Meeting of Registrant's Stockholders.) 10(g).* Executive Compensation Insurance Plan. (Incorporated by reference to Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1992.) 10(h). Lease, dated August 3, 1977, by and between B&D Properties, Inc., as lessor, and the Registrant, as lessee; Amendment of Lease, dated May 6, 1983. (Incorporated by reference to Exhibit 10(h) to the Registrant's Registration Statement (No. 2-85794) on Form S-1.) 10(i). Thirteenth Amendment and Restatement of the Registrant's Employees' Profit Sharing and Investment Plan. (Incorporated by reference to Exhibit 4(d) to Post Effective Amendment No. 11 to the Registrant's Registration Statement (No. 33-18278 on Form S-8.) 10(j) Fourteenth Amendment, dated November 21, 2000, of the Registrant's Employees' Profit Sharing and Investment Plan.
83 10(k). Ninth Amendment and Restatement to the Registrant's Employees' Profit Sharing and Investment Trust. (Incorporated by reference to Exhibit 4(e) to Post Effective Amendment No. 11 to the Registrant's Registration Statement (No. 33-18278) on Form S-8.) 10(l). Group Annuity Contract No. GA70867 between Philadelphia Life (formerly Bankers Life Company) and Trustees of the Registrant's Employees' Profit Sharing and Investment Plan. (Incorporated by reference to Exhibit 4(c) to the Registrant's Registration Statement (No. 33-1459) on Form S-8.) 10(m). Lease by and between Robert Lewis Uccelli, guardian, as lessor, and Nevada Greens, a limited partnership, William N. Pennington, as trustee, and William G. Bennett, as trustee, and related Assignment of Lease. (Incorporated by reference to Exhibit 10(p) to the Registrant's Registration Statement (No. 33-4475) on Form S-1.) 10(n). Agreement of Purchase, dated March 15, 1985, by and between Denio Brothers Trucking Company, as seller, and the Registrant, as buyer, and related lease by and between Denio Brothers Trucking Co., as lessor, and Nevada Greens, a limited partnership, William N. Pennington, as trustee, and William G. Bennett, as trustee, and related Assignment of Lease. (Incorporated by reference to Exhibit 10(q) to the Registrant's Registration Statement (No. 33-4475) on Form S-1.) 10(o). Agreement of Joint Venture, dated as of March 1, 1994, by and among Eldorado Limited Liability Company, Galleon, Inc., and the Registrant. (Incorporated by reference to Exhibit 10(y) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1994.) 10(p). Amended and Restated Credit Agreement, dated November 24, 1997, by and among Circus and Eldorado Joint Venture, the Banks named therein and Bank of America National Trust and Savings Association as administrative agent, and the related Note, Amended and Restated Make- Well Agreement and Amended and Restated Deed of Trust. (Incorporated by reference to Exhibit 4(h) to the Registrant's Quarterly Report for the quarterly period ended October 31, 1997.) 10(q). Amendment No. 1 to the Amended and Restated Credit Agreement, by and among Circus and Eldorado Joint Venture, the Banks named therein and Bank of America, N.A., as administrative agent. (Incorporated by reference to Exhibit 10(w) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2000.) 10(r). Agreement and Plan of Merger, dated March 19, 1995, by and among the Registrant and M.S.E. Investments, Incorporated, Last Chance Investments, Incorporated, Gold Strike Investments, Incorporated, Diamond Gold, Inc., Gold Strike Aviation, Incorporated, Gold Strike Finance Company, Inc., Oasis Development Company, Inc., Michael S. Ensign, William A. Richardson, David R. Belding, Peter A. Simon II and Robert J. Verchota. (Incorporated by reference to Exhibit 10(ee) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995.) 10(s). First Amendment to Agreement and Plan of Merger, dated May 30, 1995, by and among the Registrant and M.S.E. Investments, Incorporated, Last Chance Investments, Incorporated, Goldstrike Investments, Incorporated, Diamond Gold, Inc., Gold Strike Aviation, Incorporated, Goldstrike Finance Company, Inc., Oasis Development Company, Inc., Michael S. Ensign, William A. Richardson, David R. Belding, Peter A. Simon II and Robert J. Verchota. (Incorporated by reference to Exhibit 99.2 of the Schedule 13D of Michael S. Ensign relating to the Registrant's Common Stock, filed on June 12, 1995.) 10(t). Exchange Agreement, dated March 19, 1995, by and among the Registrant and New Way, Inc., a wholly owned subsidiary of the Registrant, Glenn W. Schaeffer, Gregg H. Solomon, Antonio C. Alamo, Anthony Korfman and William Ensign. (Incorporated by reference to Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995.) 10(u). First Amendment to Exchange Agreement, dated May 30, 1995, by and among the Registrant and New Way, Inc., a wholly owned subsidiary of the Registrant, Glenn W. Schaeffer, Gregg H. Solomon, Antonio C. Alamo, Anthony Korfman and William Ensign. (Incorporated by reference to Exhibit 10(d) to the Registrant's Current Report on Form 8-K dated June 1, 1995.)
84 10(v). Registration Rights Agreement, dated as of June 1, 1995, by and among the Registrant and Michael S. Ensign, William A. Richardson, David R. Belding, Peter A. Simon II, Glenn W. Schaeffer, Gregg H. Solomon, Antonio C. Alamo, Anthony Korfman, William Ensign and Robert J. Verchota. (Incorporated by reference to Exhibit 99.5 of the Schedule 13D of Michael S. Ensign, relating to the Registrant's Common Stock, filed on June 12, 1995.) 10(w). Standstill Agreement, dated as of June 1, 1995, by and among the Registrant and Michael S. Ensign, William A. Richardson, David R. Belding, Peter A. Simon II and Glenn W. Schaeffer. (Incorporated by reference to Exhibit 99.4 of the Schedule 13D of Michael S. Ensign, relating to the Registrant's Common Stock, filed on June 12, 1995.) 10(x). Amendment No. 1 to Standstill Agreement, effective April 16, 1996, by and among the Registrant and Michael S. Ensign, William A. Richardson, David R. Belding, Peter A. Simon II and Glenn W. Schaeffer. (Incorporated by reference to Exhibit 99.7 of Amendment No. 2 to the Schedule 13D of Michael S. Ensign, relating to the Registrant's Common Stock, filed on September 5, 1996.) 10(y).* 2000 Executive Officers' Bonus Plan. (Incorporated by reference to Appendix A to the Registrant's definitive proxy statement dated April 28, 2000 relating to its 2000 Annual Meeting of Stockholders.) 10(z).* Amendment and Restatement of Employment Agreement dated November 1, 1997, by and between the Registrant and Clyde Turner. (Incorporated by reference to Exhibit 10(ee) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(aa).* Agreement and Release dated January 17, 1998, by and between the Registrant and Clyde Turner. (Incorporated by reference to Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(bb).* Amendment and Restatement of Employment Agreement dated November 1, 1997, by and between the Registrant and Michael S. Ensign. (Incorporated by reference to Exhibit 10(gg) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(cc).* Amendment and Restatement of Employment Agreement dated November 1, 1997, by and between the Registrant and Glenn W. Schaeffer. (Incorporated by reference to Exhibit 10(hh) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(dd).* Amendment and Restatement of Employment Agreement dated November 1, 1997, by and between the Registrant and William A. Richardson. (Incorporated by reference to Exhibit 10(ii) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(ee).* Amendment and Restatement of Employment Agreement dated November 1, 1997, by and between the Registrant and Antonio C. Alamo. (Incorporated by reference to Exhibit 10(kk) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(ff).* Amendment and Restatement of Employment Agreement dated November 1, 1997, by and between the Registrant and Gregg H. Solomon. (Incorporated by reference to Exhibit 10(ll) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(gg). Joint Venture Agreement, dated as of December 18, 1992, between Nevada Landing Partnership and RBG, L.P. (Incorporated by reference to Exhibit 10(g) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1995.) 10(hh). Amendment dated July 15, 1993 to the Joint Venture Agreement between Nevada Landing Partnership and RBG, L.P. (Incorporated by reference to Exhibit 10(h) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1995.) 10(ii). Amendment dated October 6, 1994 to the Joint Venture Agreement between Nevada Landing Partnership and RBG, L.P. (Incorporated by reference to Exhibit 10(i) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1995.)
85 10(jj). Amendment dated June 1, 1995 to the Joint Venture Agreement between Nevada Landing Partnership and RBG, L.P. (Incorporated by reference to Exhibit 10(j) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1995.) 10(kk). Amendment dated February 28, 1996 to the Joint Venture Agreement between Nevada Landing Partnership and RBG, L.P. (Incorporated by reference to Exhibit 10(ww) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1996.) 10(ll). Reducing Revolving Loan Agreement, dated as of December 21, 1994, among Victoria Partners, each bank party thereto, The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency, and Societe Generale, as Co-agents, and Bank of America N.A., as administrative agent (without Schedules or Exhibits) (the "Victoria Partners Loan Agreement"). (Incorporated by reference to Exhibit 99.2 to Amendment No. 1 on Form 8-K/A to the Current Report on Form 8-K dated December 9, 1994 of Mirage Resorts, Incorporated. Commission File No. 1-6697.) 10(mm). Amendment No. 1 to the Victoria Partners Loan Agreement, dated as of January 31, 1995. (Incorporated by reference to Exhibit 10(uu) to the Annual Report on Form 10-K for the year ended December 31, 1994 of Mirage Resorts, Incorporated. Commission File No. 1-6697.) 10(nn). Amendment No. 2 to the Victoria Partners Loan Agreement, dated as of June 30, 1995. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 of Mirage Resorts, Incorporated. Commission File No. 1-6697.) 10(oo). Amendment No. 3 to the Victoria Partners Loan Agreement, dated as of July 28, 1995. (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 of Mirage Resorts, Incorporated. Commission File No. 1-6697.) 10(pp). Amendment No. 4 to the Victoria Partners Loan Agreement, dated as of October 16, 1995. (Incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1995.) 10(qq). Amendment No. 5 to the Victoria Partners Loan Agreement dated as of August 1, 1996. (Incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1996.) 10(rr). Amendment No. 6 to the Victoria Partners Loan Agreement, dated as of April 12, 1997. (Incorporated by reference to Exhibit 10(ccc) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1997.) 10(ss). Amendment No. 7 to the Victoria Partners Loan Agreement, dated as of January 12, 1998. (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 of Mirage Resorts, Incorporated. Commission File No. 1- 6697.) 10(tt). Joint Venture Agreement, dated as of December 9, 1994, between MRGS Corp. and Gold Strike L.V. (without Exhibit) (the "Victoria Partners Venture Agreement"). (Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K dated December 9, 1994 of Mirage Resorts, Incorporated. Commission File No. 1-6697.) 10(uu). Amendment No. 1 to the Victoria Partners Venture Agreement dated as of April 17, 1995. (Incorporated by reference to Exhibit 10(c) to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 of Mirage Resorts, Incorporated. Commission File No. 1-6697.) 10(vv). Amendment No. 2 to the Victoria Partners Venture Agreement dated as of September 25, 1995. (Incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1995 of Mirage Resorts, Incorporated. Commission File No. 1-6697.) 10(ww). Amendment No. 3 to the Victoria Partners Venture Agreement dated as of February 28, 1996. (Incorporated by reference to Exhibit 10(fff) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1996.)
86 10(xx). Amendment No. 4 to the Victoria Partners Venture Agreement dated as of May 29, 1996. (Incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 1996.) 10(yy). Consulting Agreement, dated June 1, 1995, between Circus Circus Casinos, Inc. (a subsidiary of the Registrant) and Lakeview Company. (Incorporated by reference to Exhibit 10(ggg) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1996.) 10(zz). Operating Agreement, dated October 7, 1997, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. (Incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report for the quarterly period ended October 31, 1997.) 10(aaa). First Amendment to Operating Agreement, dated October 7, 1997, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. (Incorporated by reference to Exhibit 10(hhh) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2000.) 10(bbb). Amended First Amendment to Operating Agreement, dated October 7, 1997, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. (Incorporated by reference to Exhibit 10(iii) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2000.) 10(ccc). Second Amendment to Operating Agreement, dated October 7, 1997, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. (Incorporated by reference to Exhibit 10(jjj) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2000.) 10(ddd). Third Amendment, dated January 21, 2001 to Operating Agreement, dated October 7, 1997, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. 10(eee). Amended and Restated Development Agreement, dated as of April 9, 1998, by and among Detroit Entertainment, L.L.C., the City of Detroit and the Economic Development Corporation of the City of Detroit for the City of Detroit Casino Development Project. (Incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1998.) 10(fff). First Amendment to the Amended and Restated Development Agreement, dated as of April 9, 1998, by and among Detroit Entertainment, L.L.C., the City of Detroit and the Economic Development Corporation of the City of Detroit for the City of Detroit Casino Development Project. (Incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1998.) 10(ggg). Second Amendment, dated December 1999, to the Amended and Restated Development Agreement, dated April 9, 1998, by and among Detroit Entertainment, L.L.C., the City of Detroit and the Economic Development Corporation of the City of Detroit for the City of Detroit Casino Development Project. (Incorporated by reference to Exhibit 10(mmm) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2000.) 10(hhh). Third Amendment, dated November 2000, to the Amended and Restated Development Agreement, dated April 9, 1998, by and among Detroit Entertainment, L.L.C., the City of Detroit and the Economic Development Corporation of the City of Detroit for the City of Detroit Casino Development Project. 10(iii). Conveyance Agreement, dated April 29, 1999, by and among the City of Detroit, the Economic Development Corporation of the City of Detroit and Detroit Entertainment, L.L.C. (Incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 1999.) 10(jjj). Loan Agreement, dated as of June 30, 1999 among Detroit Entertainment, L.L.C., the Banks named therein and Bank of America National Trust and Savings Association, as administrative agent for the Banks. (Incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 1999.)
87 10(kkk). Amendment No. 1 to the Loan Agreement, dated June 30, 1999 among Detroit Entertainment, L.L.C., the Banks named therein and Bank of America, N.A., as administrative agent for the Banks. (Incorporated by reference to Exhibit 10(d) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2000.) 10(lll). Amendment No. 2, dated January 31, 2001, to the Loan Agreement, dated June 30, 1999, among Detroit Entertainment, L.L.C., the Banks named therein and Bank of America, N.A., as administrative agent for the Banks. 10(mmm). Subordination Agreement, dated January 31, 2001, by and between Circus Circus Michigan, Inc. and Detroit Entertainment, L.L.C., with respect to the Loan Agreement, dated June 30, 1999, in favor of Bank of America, N.A., as administrative agent for the lending banks. 10(nnn). Hotel Pre-opening Services Agreement, dated as of January 1, 1997, by and among the Registrant and Four Seasons Hotels Limited. (Incorporated by reference to Exhibit 10(kkk) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(ooo). Hotel Management Agreement, dated as of March 10, 1998, by and among the Registrant, Mandalay Corp. and Four Seasons Hotel Limited. (Incorporated by reference to Exhibit 10(lll) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(ppp). Hotel License Agreement, dated as of March 10, 1998, by and among Mandalay Corp. and Four Seasons Hotel Limited. (Incorporated by reference to Exhibit 10(mmm) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.) 10(qqq). Lease Intended As Security, dated October 30, 1998, among Circus Circus Leasing, Inc., as lessee; the Registrant, as guarantor; First Security Bank, National Association, as Trustee, the Banks named therein and Bank of America, N.A., as administrative agent for the Banks. (Incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998.) 10(rrr). Amendment No. 1, dated January 28, 1999, to Lease Intended As Security, dated October 30, 1998, among Circus Circus Leasing, Inc., as lessee; the Registrant, as guarantor; First Security Bank, National Association, as Trustee, the Banks named therein and Bank of America, N.A., as administrative agent for the Banks. 10(sss). Guaranty, dated October 30, 1998, by the Registrant in favor of First Security Bank, National Association, as Trustee, and the Banks named therein. (Incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998.) 10(ttt).* Supplemental Executive Retirement Plan. (Incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998.) 10(uuu). Amendment No. 1 to Supplemental Executive Retirement Plan. 10(vvv). Stock Purchase Agreement, dated as of September 8, 2000, among the Registrant, Bank of America, N.A. and MBG Trust. (Incorporated by reference to Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2000.) 10(www). First Amendment, dated as of January 2, 2001, to Stock Purchase Agreement, dated as of September 8, 2000, among the Registrant, Bank of America, N.A., and MBG Trust. 10(xxx). Second Amendment, dated as of March 21, 2001, to Stock Purchase Agreement, dated as of September 8, 2000, among the Registrant, Bank of America, N.A., and MBG Trust. 10(yyy). Collateral Agreement dated as of September 8, 2000 among the Registrant, Bank of America, N.A., MBG Trust and Banc of America Securities LLC. (Incorporated by reference to Exhibit 10(b) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2000.) 10(zzz). Amended and Restated Trust Agreement dated as of September 8, 2000 between NMS Services (Cayman), Inc. and Wilmington Trust Company. (Incorporated by reference to Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2000.)
88 21. Subsidiaries of the Registrant. 23. Consent of Arthur Andersen LLP.
- -------- * This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report. Certain instruments with respect to long-term debt have not been filed hereunder or incorporated by reference herein where the total amount of such debt thereunder does not exceed 10% of our consolidated total assets. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. (b) During the fourth quarter of the fiscal year ended January 31, 2001, Mandalay filed no Current Report on Form 8-K. (c) The exhibits required by Item 601 of Regulation S-K filed as part of this report or incorporated herein by reference are listed in Item 14(a)(3) above, and the exhibits filed herewith are listed on the Index to Exhibits which accompanies this report. (d) See Item 14(a)(2) of this report. 89 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Dated: April 30, 2001 /s/ Michael S. Ensign By: _________________________________ Michael S. Ensign, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Michael S. Ensign Chairman of the Board, Chief April 30, 2001 ____________________________________ Executive Officer and Chief Michael S. Ensign Operating Officer (Principal Executive Officer) /s/ William A. Richardson Vice Chairman of the Board April 30, 2001 ____________________________________ William A. Richardson /s/ Glenn Schaeffer President, Chief Financial April 30, 2001 ____________________________________ Officer, Treasurer and Glenn Schaeffer Director (Principal Financial Officer) /s/ Les Martin Vice President and Chief April 30, 2001 ____________________________________ Accounting Officer Les Martin (Principal Accounting Officer) /s/ William E. Bannen Director April 30, 2001 ____________________________________ William E. Bannen /s/ Arthur H. Bilger Director April 30, 2001 ____________________________________ Arthur H. Bilger /s/ Rose McKinney-James Director April 30, 2001 ____________________________________ Rose McKinney-James /s/ Michael D. McKee Director April 30, 2001 ____________________________________ Michael D. McKee /s/ Donna B. More Director April 30, 2001 ____________________________________ Donna B. More
90 INDEX TO EXHIBITS FORM 10-K Fiscal Year Ended January 31, 2001
Exhibit Number ------- 10(j). Fourteenth Amendment, dated November 21, 2000, of the Registrant's Employees' Profit Sharing and Investment Plan. 10(ddd). Third Amendment, dated January 21, 2001 to Operating Agreement, dated October 7, 1997, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. 10(hhh). Third Amendment, dated November 2000, to the Amended and Restated Development Agreement, dated April 9, 1998, by and among Detroit Entertainment, L.L.C., the City of Detroit and the Economic Development Corporation of the City of Detroit for the City of Detroit Casino Development Project. 10(lll). Amendment No. 2, dated January 31, 2001, to the Loan Agreement, dated June 30, 1999, among Detroit Entertainment, L.L.C., the Banks named therein and Bank of America, N.A., as administrative agent for the Banks. 10(mmm). Subordination Agreement, dated January 31, 2001, by and between Circus Circus Michigan, Inc. and Detroit Entertainment, L.L.C., with respect to the Loan Agreement, dated June 30, 1999, in favor of Bank of America, N.A., as administrative agent for the lending banks. 10(rrr). Amendment No. 1, dated January 28, 1999, to Lease Intended As Security, dated October 30, 1998, among Circus Circus Leasing, Inc., as lessee; the Registrant, as guarantor; First Security Bank, National Association, as Trustee, the Banks named therein and Bank of America, N.A., as administrative agent for the Banks. 10(uuu). Amendment No. 1 to Supplemental Executive Retirement Plan. 10(www). First Amendment, dated as of January 2, 2001, to Stock Purchase Agreement, dated as of September 8, 2000, among the Registrant, Bank of America, N.A., and MBG Trust. 10(xxx). Second Amendment, dated as of March 21, 2001, to Stock Purchase Agreement, dated as of September 8, 2000, among the Registrant, Bank of America, N.A., and MBG Trust. 21. Subsidiaries of the Registrant. 23. Consent of Arthur Andersen LLP.
EX-10.(J) 2 dex10j.txt 14TH AMEND. TO SHARING & INVESTMENT PLAN Exhibit 10(j) FOURTEENTH AMENDMENT TO THE MANDALAY RESORT GROUP EMPLOYEES' PROFIT SHARING AND INVESTMENT PLAN This Fourteenth Amendment to the Mandalay Resort Group Employees' Profit Sharing and Investment Plan is made and entered into this 21/st/ day of November, 2000, but is effective for all purposes as of April 1, 2001, except as may be otherwise provided herein, by Mandalay Resort Group (referred to hereinafter as the "Company"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company and the other Employers have previously adopted the Mandalay Resort Group Employees' Profit Sharing and Investment Plan, which has been amended from time to time (as amended, the "Plan"); and WHEREAS, pursuant to the terms of the Plan, the Company is authorized and empowered to further amend the Plan; and WHEREAS, the Company deems it advisable and in the best interests of the Participants to amend the Plan to provide for automatic Plan enrollment in the event a Participant does not complete a salary reduction agreement, to comply with changes in applicable law by recent Acts of Congress, and to make other desired changes. NOW, THEREFORE, the Plan is hereby amended to read as follows: I. Paragraph (aa) of Article I of the Plan is hereby amended to read as follows: (aa) "Employer" shall mean the Company, Circus Circus Casinos, Inc., -------- SlotsAFun, Inc., Edgewater Hotel Corporation, Colorado Belle Corp., New Castle Corp., Ramparts, Inc., Circus Circus Mississippi, Inc., Mandalay Development, Railroad Pass Investment Group, Jean Development Company, Jean Development West, Mandalay Corp., Circus Circus Michigan, Inc., and Ramparts International, as well as any other subsidiary, related corporation or other entity that adopts the Plan with the consent of the Company. Railroad Pass Investment Group, Jean Development Company and Jean Development West are, at times, collectively referred to herein as the "Gold Strike Entities." The term "Employer" shall also include, effective as of February 1, 2000, Go Vegas. II. Subparagraph (a)(1) of Article VI of the Plan is hereby amended to read as follows: (1) Amount Contributed. The Employer shall contribute to the ------------------ Trust, on behalf of each Participant, a Savings Contribution as specified in a written salary reduction agreement (if any) between the Participant and such Employer; provided, however, that such contribution for a Participant shall not exceed the lesser of (A) $9,500 (adjusted under such regulations as may be issued from time to time by the Secretary of the Treasury) with respect to any calendar year, or (B) 15% of the Participant's Compensation for such Plan Year. A Savings Contribution hereunder may be expressed as a fixed dollar amount per payroll period, or as a fixed percentage of pay. Notwithstanding the foregoing, with respect to a Participant in the Plan on April 1, 2001 who does not then have in effect a salary reduction agreement, and with respect to a Participant who enters the Plan on or after April 1, 2001 who does not otherwise enter into a salary reduction agreement as of the date of entry, a pre-tax savings contribution in the amount of 2% of such Participant's Compensation shall be automatically contributed to the Trust on his behalf (such contribution is hereinafter referred to as an "Automatic Savings Contribution"). A Participant for whom an Automatic Savings Contribution is made pursuant to the prior sentence shall be deemed to have completed a salary reduction agreement to reduce the amount otherwise payable to him by 2%, and all provisions of the Plan referencing a salary reduction agreement shall apply to such Automatic Savings Contributions. III. Effective January 1, 1997, section (B) of subparagraph (a)(6) of Article VI of the Plan is hereby amended to read as follows: (B) (i) The amount of such excess for the Highly Compensated Employees in the aggregate for the Plan Year shall be determined by reducing the Savings Contributions of the Highly Compensated Employee with the highest Actual Deferral Ratio to the extent required to a. enable the arrangement to satisfy the limitations set forth in paragraph (f), or b. cause such Highly Compensated Employee's Actual Deferral Ratio to equal the Actual Deferral Ratio of the Highly Compensated Employee with the next highest Actual Deferral Ratio. This process shall be repeated until the arrangement satisfies the limitations set forth in paragraph (f). (ii) The aggregate dollar amount of the excess calculated under subsection (i) shall be distributed in accordance with the following provisions of this subsection (ii): a. the Savings Contributions of the Highly Compensated Employee with the largest dollar amount of Savings Contributions shall be reduced by the amount required to cause such Highly Compensated Employee's Savings Contributions to equal the dollar amount of the Savings Contributions of the Highly Compensated Employee with the next highest dollar amount of Savings Contributions; b. the amount determined in part a. shall be distributed to the Highly Compensated Employee with the largest dollar amount of Savings Contributions, unless a lesser amount, when added to the aggregate dollar amount already distributed under this part b., would equal the aggregate dollar amount of the excess calculated under subsection (B)(i), in which event such lesser amount shall be distributed; and c. if the aggregate dollar amount distributed under part b. is then less than the aggregate dollar amount of the excess calculated under subsection (i), the steps in this subsection (ii) shall be repeated. IV. Effective January 1, 1997, section (E) of subparagraph (a)(6) of Article VI of the Plan is hereby deleted in its entirety. V. Effective January 1, 1997, section (C) of subparagraph (b)(3) of Article VI of the Plan is hereby amended to read as follows: (C) (i) The amount of such excess for the Highly Compensated Employees in the aggregate for the Plan Year shall be determined by reducing the Matching Contribution of the Highly Compensated Employee with the highest Actual Contribution Ratio to the extent required to a. enable the arrangement to satisfy the limitations set forth in paragraph (f), or b. cause such Highly Compensated Employee's Actual Contribution Ratio to equal the Actual Contribution Ratio of the Highly Compensated Employee with the next highest Actual Contribution Ratio. This process shall be repeated until the arrangement satisfies the limitations set forth in paragraph (f). (ii) The aggregate dollar amount of the excess calculated under subsection (i) shall be distributed in accordance with the following provisions of this subsection (ii): a. the Matching Contributions of the Highly Compensated Employee with the largest dollar amount of Matching Contributions shall be reduced by the amount required to cause such Highly Compensated Employee's Matching Contributions to equal the dollar amount of the Matching Contributions of the Highly Compensated Employee with the next highest dollar amount of Matching Contributions; b. the amount determined in part a. shall be distributed to the Highly Compensated Employee with the largest dollar amount of Matching Contributions, unless a lesser amount, when added to the aggregate dollar amount already distributed under this part b., would equal the aggregate dollar amount of the excess calculated under subsection (i), in which event such lesser amount shall be distributed; and c. if the aggregate dollar amount distributed under part b. is then less than the aggregate dollar amount of the excess calculated under subsection (i), the steps in this subsection (ii) shall be repeated. VI. Effective January 1, 1997, section (G) of subparagraph (b)(3) of Article VI of the Plan is hereby deleted in its entirety. VII. Effective January 1, 1995, sections (A) and (B) of subparagraph (c)(4) of Article VIII of the Plan are hereby amended to read as follows: (A) Notwithstanding any other provision of this paragraph (c), if at any time a Participant is less than 100% vested in his Matching Contribution Account, Automatic Contribution Account, ESOP Matching Contribution Account, ESOP Automatic Contribution Account and Discretionary Contribution Account and, as a result of his severance of employment, he receives his entire vested severance of employment benefit pursuant to the provisions of Article IX, and the distribution of such benefit is made not later than the close of the 5th Plan Year following the Plan Year in which such termination occurs (or such longer period as may be permitted by the Secretary of the Treasury, through regulations or otherwise), then subsequent to the occurrence of such distribution, the non-vested interest of the Participant in his Matching Contribution Account, Automatic Contribution Account, ESOP Matching Contribution Account, ESOP Automatic Contribution Account and Discretionary Contribution Account shall be forfeited at the time of such receipt. Such forfeited amount shall be held in suspense during the Plan Year in which the forfeiture occurs and allocated at the end of such Plan Year as provided in paragraphs (d)(5) and (f) of Article VII. (B) If a Participant is not vested as to any portion of his Matching Contribution Account, Automatic Contribution Account, ESOP Matching Contribution Account, ESOP Automatic Contribution Account and Discretionary Contribution Account, he will be deemed to have received a distribution upon distribution of his Savings Contribution Account, his 401(k) Employer Contribution Account and his Rollover Contribution Account, if any. If the Participant has no such accounts, he shall be deemed to have received a distribution immediately following his severance of employment. Coincident with the occurrence of such deemed distribution, the non-vested interest of the Participant in his Matching Contribution Account, Automatic Contribution Account, ESOP Matching Contribution Account, ESOP Automatic Contribution Account and Discretionary Contribution Account shall be forfeited. Such forfeited amount shall be held in suspense during the Plan Year in which the forfeiture occurs and allocated at the end of such Plan Year as provided in paragraphs (d)(5)(E) and (f) of Article VII. VIII. Effective January 1, 1997, subsection (ii) of section (a)(2)(A) of Article IX of the Plan is hereby amended to read as follows: (ii) April 1 after the end of the calendar year in which he attains age 70 1/2 or retires, whichever is later; provided, however, that an Employee who is a 5% owner (as defined in Section 416 of the Code) shall begin receiving payment of his retirement benefit no later than the April 1 after the end of the calendar year in which he attains age 70 1/2, even if he has not actually retired from the employ of his Employer at that time; provided, further, however, that any Participant who attains age 70 1/2 after December 31, 1995 shall have the option of either commencing distributions by April 1 following the attainment of age 70 1/2 or deferring such distributions until he actually retires. IN WITNESS WHEREOF, this Fourteenth Amendment has been executed as of the date first written above. ATTEST: MANDALAY RESORT GROUP (CORPORATE SEAL) YVETTE E. LANDAU By: GLENN SCHAEFFER - ----------------------------------- -------------------------------- Secretary President "COMPANY" EX-10.(DDD) 3 dex10ddd.txt THIRD AM. TO OPERATING AGREEMENT Exhibit 10(ddd) THIRD AMENDMENT TO OPERATING AGREEMENT OF DETROIT ENTERTAINMENT, L.L.C. A MICHIGAN LIMITED LIABILITY COMPANY THIS THIRD AMENDMENT TO OPERATING AGREEMENT (the "Third Amendment") is made and entered into as of the 21/st/ day of January, 2001, by and between CIRCUS CIRCUS MICHIGAN, INC., a Michigan corporation, ("Circus") and ATWATER CASINO GROUP, L.L.C., a Michigan limited liability company, ("ACG"), with reference to the following: A. Circus and ACG desire to refine the definition of Tax Distribution as set forth in Appendix A of the Detroit Entertainment, L.L.C. Operating Agreement for the purpose of giving guidance to the Management Committee of Detroit Entertainment, L.L.C. regarding the amount and timing of any Tax Distribution made under the terms and provisions of the Detroit Entertainment, L.L.C. Operating Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The definition of "Tax Distribution" set forth in Appendix A of the Detroit Entertainment, L.L.C. Operating Agreement is hereby amended in its entirety to read as follows: "Tax Distribution" when used with respect to a Member means, as to each Fiscal Year, the maximum federal, State of Michigan, and City of Detroit and/or other Michigan local municipal tax rate multiplied by such Member's estimated distributive share of Profits of the Company for such Fiscal Year, and when used with respect to the Company means with respect to each Fiscal Year an amount equal to the sum of all of the Members' Tax Distributions with respect to such Fiscal Year. Upon the request of the Management Committee of the Company, the Company's independent certified public accounting firm shall certify in writing to the Company and its Members the maximum federal, State of Michigan and City of Detroit individual and/or corporate tax rate (or other Michigan local municipal individual/or corporate tax rate as requested by the Management Committee) for the tax year specified by the Management Committee, which shall be the tax rates used for computation of the Tax Distribution for estimated distributive profits allocated to the Members for said specified tax year. Each Member shall receive the same percentage Tax Distribution based upon the Member's distributive share of the Profits of the Company. [E.g. By way of example only, if the actual estimated highest percentage of combined federal, State of Michigan and City of Detroit tax liability of any Member or of one of the members of any Member is 40%, then an amount equal to 40% of each Member's 1 distributive share of estimated Profits of the Company for the relevant quarter of the Fiscal Year shall be distributed to each Member.] Each Member shall receive such Tax Distribution on April 10, June 10, September 10 and January 10, or the next business day, if a holiday or weekend, of every Fiscal Year based on the Member's distributive share of estimated profits through the preceding month of such Fiscal Year reduced by prior Tax Distributions already received by the Member for the relevant Fiscal Year. The Members recognize and acknowledge that they may be receiving a Tax Distribution well in advance of the date their actual tax liability is due (for example, in April of 2000 for a tax payment due in April of 2001), and each Member, and the members of each Member, shall be solely responsible for reserving any early Tax Distribution for payment of its, or their, tax liability. IN WITNESS WHEREOF, the undersigned have executed this Third Amendment as of the date first set forth above. CIRCUS CIRCUS MICHIGAN, INC., a ATWATER CASINO GROUP, L.L.C., a Michigan corporation, Member Michigan limited liability company, Member By: GLENN SCHAEFFER By: Atwater Entertainment Associates, ------------------------- L.L.C., a Michigan limited liability Its: President company, Member ------------------------- By: VIVIAN CARPENTER -------------------------- Its: President -------------------------- By: Z.R.X, L.L.C., a Michigan limited liability company, Member By: Z.L.M. Corporation, a Michigan Corporation By: THOMAS CELANI --------------------- Thomas Celani, President By: MARIAN ILITCH --------------------- Marian Ilitch, Secretary and Treasurer 2 EX-10.(HHH) 4 dex10hhh.txt THIRD AM. TO THE AMNDD & RESTATED DEVELOP. AGRMNT Exhibit 10(hhh) THIRD AMENDMENT TO THE AMENDED AND RESTATED DEVELOPMENT AGREEMENT BY AND AMONG THE CITY OF DETROIT, THE ECONOMIC DEVELOPMENT CORPORATION OF THE CITY OF DETROIT AND DETROIT ENTERTAINMENT, L.L.C. THIS THIRD AMENDMENT (the "Third Amendment") to that certain Amended and Restated Development Agreement, dated as of April 9,1998, as amended by the First Amendment dated June 25, 1998 and by the Second Amendment dated December, 1999, by and among the City of Detroit (the "City"), the Economic Development Corporation of the City of Detroit (the "EDC") and Detroit Entertainment, L.L.C., a Michigan limited liability company ("Developer") for the City of Detroit Casino Development Project (the "Development Agreement") is made on this 30/th/ day of November, 2000 by and among the City, the EDC and the Developer. - ------ WHEREAS, the City, EDC and Developer have previously entered into the Development Agreement, and WHEREAS, it is the desire of the parties to enter into this Third Amendment to amend certain provisions of the Development Agreement. NOW, THEREFORE, in consideration of the foregoing premises and the covenants herein contained, the parties agree as follows: 1. All capitalized terms not otherwise defined herein shall have the same meaning as set forth in the Development Agreement. 2. Section 2.4(d) of the Development Agreement is hereby amended by deleting -------------- the reference to "December 31, 2000" in such section and substituting in its place "December 31, 2001." 3. Section 20.8 of the Development Agreement is hereby amended such that after ------------ amendment it reads as follows. "20.8 Restriction on Payments. Developer covenants and agrees that ----------------------- until the Completion Date, Developer shall not declare or pay any dividends or make any other distributions to any members of Developer or their respective Affiliates except: (a) for Permitted Affiliate Payments; or (b) provided Developer is not otherwise then restricted in making distributions under Section 7.13; ------------ 1 (1) for distributions to Atwater Casino Group, L.L.C.; and (2) for distributions to Circus Circus Michigan, Inc. made subsequent to the completion of the construction of the foundation for any Covered Component. (c) Notwithstanding and in addition to the limitations imposed by Section 20.8(b), distributions to Developer's members (other than --------------- those permitted by Sections 20.8(a) and 20.8(b)(1)) shall be ---------------- ---------- suspended during any period in which either of the following conditions exists: (i) Developer's Schematic Design Documents have not been submitted to the PM for review or approval, provided thav such distributions shall not be suspended under this Section 20.8(c)(i) during the one hundred twenty (120) day ------------------ period after the Closing Date; or (ii) construction of the Casino Complex is not at least fifty percent (50%) completed, as certified by Developer's architect, provided that such distributions shall not be suspended under this Section ------- 20.8(c)(ii) during the twenty-four (24) month period after ----------- issuance of the Building Permit. (d) For purposes of Section 20.8(b) and (c) "distributions" shall --------------- include any loans or advances made to Developer's members." 4. Except as amended by this Third Amendment, the Development Agreement is reaffirmed in all respects, and shall remains in full force and effect. 5. This Third Amendment shall become effective on the date on which all of the following have been accomplished: this Third Amendment has been executed by all parties hereto and the City Council has duly approved the last of the following, (i) this Third Amendment; and (ii) a third amendment to the amended and restated development agreements of each of the Other Land-Based Casino Developers containing substantially the same terms and conditions as sei forth in this Third Amendment. 6. This Third Amendment may be executed in counterparts, each of which shall be deemed to be an original document and together shall constitute one instrument. [signature page follows] 2 IN WITNESS WHEREOF, the parties hereto have set their hands and had their seals affixed on the dates set forth after their respective signatures. CITY OF DETROIT, a municipal corporation By: DENNIS ARCHER ------------------------------------------- Its: Mayor ------------------------------------------ THE ECONOMIC DEVELOPMENT CORPORATION OF THE CITY OF DETROIT, a Michigan public body corporate By: C. BETH DUNCOMBE ---------------------------------------------- Its: Authorized Agent -------------------------------------------- By: ART PAPAPANOS ---------------------------------------------- Its: Authorized Agent -------------------------------------------- DETROIT ENTERTAINMENT, L.L.C., a Michigan limited liability company By: Circus Circus Michigan, Inc., a Michigan corporation, one of its members By: GLENN SCHAEFFER --------------------------------------- Its: President ---------------------------------------- By: Atwater Casino Group, L.L.C., a Michigan limited liability company, one of its members By: Atwater Management Corporation, a Delaware corporation, its manager By: VIVIAN CARPENTER ----------------------------------- Its: Vice President ----------------------------------- 3 EX-10.(LLL) 5 dex10lll.txt AM. #2 TO THE LOAN AGREEMENT Exhibit 10(lll) AMENDMENT NO. 2 TO LOAN AGREEMENT --------------------------------- THIS AMENDMENT NO. 2 TO LOAN AGREEMENT (this "Amendment"), dated as of January 31, 2001, is executed with reference to the Loan Agreement dated as of June 30, 1999, among Detroit Entertainment, L.L.C., a Michigan limited liability company ("Borrower"), the Lenders named therein, and Bank of America, N.A. (formerly known as Bank of America National Trust and Savings Association), as Issuing Lender and Administrative Agent, as amended by Amendment No. 1 to Loan Agreement dated as of September 30, 2000 (as so amended, the "Loan Agreement"). RECITALS -------- A. Borrower has heretofore incurred $37,680,493 of Indebtedness (the "Intercompany Indebtedness") in favor of Circus Circus Michigan, Inc. ("CCMI"), a Michigan corporation which is a wholly-owned subsidiary of Mandalay Resort Group (the "Company"). B. While Borrower, CCMI and the Company intended that the Intercompany Indebtedness be treated as Company Subordinated Debt, they did not comply with the Loan Agreement's requirement for that treatment by failing to execute a Subordination Agreement in the form of Exhibit I to the Loan Agreement and by failing to obtain the approval of the instruments governing the Intercompany Indebtedness. C. Borrower has requested that Lenders waive such failures and amend the Loan Agreement as set forth below to revise the Maximum Total Debt Ratio restrictions set forth in Section 6.12 of the Loan Agreement. NOW, THEREFORE, the parties agree as follows: 1. Defined Terms. All initially capitalized terms used in this Amendment ------------- without definition shall have the respective meanings assigned thereto in the Loan Agreement. In addition, the definition of "Company Subordinated Debt" set forth in Section 1.1 of the Loan Agreement is hereby amended to read in full as follows [with the text added thereto being set forth herein in underscored and italicized text for the convenience of the readers]: "Company Subordinated Debt" means Indebtedness of Borrower to the ------------------------- Company or any of its wholly-owned Subsidiaries having a final maturity --------------------------------------- which is after the Maturity Date, having no payments of principal due prior ------------ to that maturity date except to the extent that the making of such payments ----------------------------------------------------- does not result in the failure of Borrower to be in pro forma compliance ------------------------------------------------------------------------ with the terms hereof, which is subject to a Subordination Agreement, and --------------------- which has representations, warranties, covenants and defaults which are no less favorable to the Company and such wholly-owned Subsidiaries than those ---------------------------------- contained herein and which are otherwise acceptable to the Administrative Agent. -1- 2. Amendment to Section 6.1. Section 6.1 of the Loan Agreement is ------------------------ amended so that clause (a) thereof is amended to read in full as follows [with the text added thereto being set forth herein in underscored and italicized text for the convenience of the readers]: "(a) Pay any principal (including sinking fund payments) or any other --------- amount (other than scheduled interest payments) with respect to any ----- ---- Subordinated Debt, or purchase or redeem any Subordinated Debt (except for ----------- payments of principal made with respect to Company Subordinated Debt on or -------------------------------------------------------------------------- following their due date, as expressly contemplated by the definition of ------------------------------------------------------------------------ "Company Subordinated Debt")" ---------------------------- 3. Waiver re Intercompany Indebtedness. The Lenders waive the failure of ----------------------------------- the Borrower, CCMI and the Company to comply with the requirements of the Loan Agreement in connection with the issuance of the Intercompany Indebtedness. This waiver constitutes a one-time waiver of only, and the Borrower and the Company shall fully comply with the requirements of the Loan Agreement as to any future Company Subordinated Debt. 4. Revised Maximum Total Debt Ratio Covenant. Section 6.12 of the Loan ----------------------------------------- Agreement is amended to read in its entirety as follows: "6.12 Maximum Total Debt Ratio. Permit the Total Debt Ratio as of ------------------------ the last day of any Fiscal Quarter described below, to exceed the ratio set forth opposite that Fiscal Quarter in the matrix below: Fiscal Quarter Ending Maximum Ratio --------------------- ------------- January 31, 2001 through January 31, 2002 2.00:1.00 April 30, 2002 through January 31, 2003 1.50:1.00 April 30, 2003 and thereafter 1.00:1.00." 5. No Release of Company Guaranty. Section 11.25 of the Loan Agreement ------------------------------ is amended to read in its entirety as follows: "11.25 No Release of Company Guaranty. Notwithstanding any other ------------------------------ provision of this Agreement, the Company shall not be entitled to a release of the Company Guaranty unless all of the Lenders (in their sole and absolute discretion) consent in writing to such a release." 6. Conforming Changes to Accommodate Amendment to Section 11.25 of the ------------------------------------------------------------------- Loan Agreement. - -------------- (a) Amendment to Section 1.1. The definition of "Company Guaranty" ------------------------ ---------------- set forth in Section 1.1 of the Loan Agreement is amended to read in its entirety as follows: -2- "Company Guaranty" means the continuing guaranty of the ---------------- Obligations to be executed and delivered by the Company on the Closing Date in favor of the Administrative Agent, in form and substance satisfactory to the Administrative Agent, in connection with this Agreement, either as originally executed or as it may from time to time be supplemented, modified, amended, extended or supplanted. (b) Amendment to Section 5.12(a)(ii). Section 5.12(a)(ii) of the -------------------------------- Loan Agreement is amended by deleting the text thereof in its entirety and substituting therefor "[Intentionally Omitted]". (c) Amendment to Section 5.12(b)(i). Section 5.12(b)(i) of the Loan ------------------------------- Agreement is amended to read in its entirety as follows: (i) at Borrower's option, either (A) any endorsements to the ALTA policy of lenders title insurance referred to in Section 8.1 as may be reasonably requested by the Administrative Agent, or (B) a new ALTA policy of lenders title insurance concerning such interest in Real Property; (d) Amendment to Section 11.2(f). Section 11.2(f) of the Loan ---------------------------- Agreement is amended to read in its entirety as follows: (f) To release the Company Guaranty or the Lease Indemnity; or (e) Amendment to Section 11.8(e)(iii). Section 11.8(e)(iii) of the --------------------------------- Loan Agreement is amended by deleting the phrase "Sections 3.7, 3.8, 11.11 and 11.25" and substituting therefor "Sections 3.7, 3.8 and 11.11". 7. Amendment to Company Guaranty. Borrower and the Lenders consent to ----------------------------- the amendment to the Company Guaranty as set forth in the Consent of Guarantor and Amendment to Guaranty attached to this Amendment and incorporated herein by this reference. 8. Conditions Precedent. The effectiveness of this Amendment is subject -------------------- to each of the following conditions: (a) Execution and Delivery of this Amendment. The Administrative ---------------------------------------- Agent shall have received this Amendment, duly executed by the Borrower. The Administrative Agent shall have received a duly executed Consent of Lender from Lenders constituting at least Requisite Lenders. (b) Execution and Delivery of Subordination Agreement. The ------------------------------------------------- Administrative Agent shall have received a Subordination Agreement with respect to the Intercompany Indebtedness, duly executed by the Borrower and CCMI, substantially in the form set forth as Exhibit I to the Loan Agreement. --------- -3- (c) Execution and Delivery of Note for Intercompany Indebtedness. ------------------------------------------------------------ The Administrative Agent shall have received a true, correct and complete copy of the note evidencing the Intercompany Indebtedness, duly executed by the Borrower in favor of CCMI, with such note containing provisions acceptable to the Administrative Agent. (d) Acknowledgment of Guarantor and Amendment to Guaranty. The ----------------------------------------------------- Company shall have confirmed the continuing validity and effectiveness of its Guaranty dated as of June 30, 1999, and shall have agreed to the certain amendments thereof, by executing and delivering to Administrative Agent its Consent of Guarantor and Amendment to Guaranty attached to this Amendment. 9. Miscellaneous. ------------- (a) Reference to Loan Agreement. The Loan Agreement, each of the --------------------------- other Loan Documents, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof, or pursuant to the terms of the Loan Agreement as amended hereby, are amended so that any reference therein to the Loan Agreement shall mean a reference to the Loan Agreement as amended hereby. (b) No Default of Event of Default. The Borrower confirms that, after ------------------------------ giving effect to this Amendment, no Event of Default or Default exists. (c) Counterparts. This Amendment may be executed in counterparts in ------------ accordance with Section 11.7 of the Loan Agreement. -4- (d) Confirmation. In all other respects, the Loan Agreement is ------------ confirmed. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first written above by their duly authorized representatives. DETROIT ENTERTAINMENT, L.L.C., a Michigan limited liability company By: Circus Circus Michigan, Inc., authorized member By: GLENN SCHAEFFER ----------------------------------- Glenn Schaeffer, President ----------------------------------- [Printed Name and Title] BANK OF AMERICA, N.A. (formerly known as Bank of America National Trust and Savings Association), as Administrative Agent By: JANICE HAMMOND ----------------------------------------- /s/ Janice Hammond, Vice President ----------------------------------------- [Printed Name and Title] -5- CONSENT OF GUARANTOR AND AMENDMENT TO GUARANTY The undersigned, Mandalay Resort Group, a Nevada corporation ("Company"), consents to the execution, delivery and performance of the foregoing Amendment No. 2 to Loan Agreement and reaffirms its Guaranty dated as of June 30, 1999. Company acknowledges and agrees that the Guaranty is hereby amended to delete the text of Section 17 thereof in its entirety and to replace such deleted text with "[Intentionally Omitted]". MANDALAY RESORT GROUP, a Nevada corporation By: GLENN SCHAEFFER ---------------------------- Glenn Schaeffer, President ----------------------------- [Printed Name and Title] -6- CONSENT OF LENDER This Consent of Lender is delivered with reference to the Loan Agreement dated as of June 30, 1999, among Detroit Entertainment, L.L.C., a Michigan limited liability company (the "Borrower"), the Lenders named therein, and Bank of America, N.A. (formerly known as Bank of America National Trust and Savings Association), as Administrative Agent (as amended, the "Loan Agreement"). Terms defined in the Loan Agreement are used herein with the same meanings. The undersigned Lender consents to the execution, delivery and performance of the proposed Amendment No. 2 to Loan Agreement by the Administrative Agent on behalf of the Lenders, substantially in the form presented to the undersigned as a draft. Dated: January 31, 2001 ----------- _______________________________________ [Typed/Printed Name of Bank] By: SCOTT FABER ------------------------------------------ Scott Faber, Managing Director ------------------------------------------ [Typed/Printed Name and Title] -7- EX-10.(MMM) 6 dex10mmm.txt SUBORDINATION AGREEMENT Exhibit 10(mmm) SUBORDINATION AGREEMENT This SUBORDINATION AGREEMENT, dated as of January 31, 2001 ("Agreement"), is made by CIRCUS CIRCUS MICHIGAN, INC., a Michigan corporation (together with its successors and assigns as holders of the Subordinated Note (as defined below) the "Intermediate Parent"), which is a wholly-owned subsidiary of MANDALAY RESORT GROUP, a Nevada corporation formerly known as Circus Circus Enterprises, Inc. (the "Company"), and DETROIT ENTERTAINMENT, L.L.C., a Michigan limited liability company ("Borrower"), in favor of BANK OF AMERICA, N.A., as Administrative Agent (in such capacity, "Administrative Agent") for the Lenders identified below. R E C I T A L S WHEREAS, Borrower entered into that certain Loan Agreement dated as of June 30, 1999 with the financial institutions from time to time party thereto (the "Lenders"), and the Administrative Agent (under its former name, Bank of America National Trust and Savings Association) (the "Loan Agreement"); and WHEREAS, the Lenders party to the Loan Agreement and the Administrative Agent referred to herein (collectively, the "Senior Creditors") have the benefit of a Guaranty dated as of June 30, 1999 made by the Company in their favor; and WHEREAS, the Intermediate Parent has loaned certain funds to Borrower in the form of Company Subordinated Debt, which is evidenced by a Subordinated Note of even date herewith made by Borrower in favor of the Company in the form attached hereto as Exhibit A; and WHEREAS, the Company Guaranty and the Loan Agreement require the Intermediate Parent to enter into this Agreement and to hereby subordinate such Company Subordinated Debt to Borrower's obligations to the Senior Creditors; and WHEREAS, capitalized terms used in this Agreement are used with the meanings set forth for those terms in the Loan Agreement. The Subordinated Note and the documents described in this recital and the immediately preceding recital as of any date, together with any other documents and instruments evidencing, securing, or pertaining to the Subordinated Note, whether now or hereafter existing, as such documents may be consolidated, renewed, replaced, extended, restated, modified, amended or supplemented from time to time through such date in accordance with the terms and conditions of this Agreement, are hereinafter collectively referred to as the "Subordinated Loan Documents;" -1- NOW, THEREFORE, in consideration of the premises and in order to induce Senior Lenders to continue to make Loans under the Loan Agreement, the parties hereto hereby agree as follows: 1. Certain Defined Terms. For purposes of this Agreement, the following --------------------- terms shall have the following meanings: a. "Bankruptcy Proceeding" means any insolvency, reorganization, readjustment of debt, arrangement of debt, receivership, liquidation or other similar proceeding against Borrower, or receivership proceedings, or assignment for the benefit of creditors, or any other marshaling of the assets of Borrower. b. "Distribution of Assets" means any distribution of assets of Borrower of any kind or character in exchange for or in payment of the Subordinated Debt, whether (a) a payment, purchase or other acquisition or retirement for cash, property or securities or (b) by way of cancellation, forgiveness or offset of the Subordinated Debt against any Indebtedness owed by the Intermediate Parent to Borrower or (c) payable or deliverable by reason of the payment of any other Indebtedness of Borrower being subordinated to the payment of the Subordinated Debt and, in any case, shall include any assets of any kind or character received by the Intermediate Parent in connection with the realization of security for the Subordinated Debt. c. "payment in full," "paid in full" and any similar terms mean payment in full in cash of the Senior Obligations, including, without limitation, all principal, interest (whether accruing before or after commencement of a Bankruptcy Proceeding or whether due under the terms of the Loan Agreement, but not accrued as a result of the commencement of any such proceeding), costs, fees and expenses (including, without limitation, reasonable legal fees and expenses) of Senior Lenders and Administrative Agent as required under the Senior Loan Documents and any advances by Senior Lenders, whether or not deemed obligatory, made (1) to protect the priority, validity or enforceability of the lien of the Senior Loan Documents, (2) to protect the value or the security of any Collateral pursuant to the Senior Loan Documents, or (3) to cure any Event of Default or Default under any of the Senior Loan Documents. For purposes of this Agreement, the Senior Obligations shall not be deemed to have been paid in full to the extent any payment thereof has been set aside as a result of any proceeding in law or equity. d. "Senior Obligations" means all Obligations as that term is defined in the Loan Agreement including, without limitation, all advances made under the Loan Agreement whenever made on or after the Closing Date, any refundings, renewals or extensions of any Indebtedness thereunder or other obligation thereunder and all expenses and attorneys' fees for which Borrower is now or hereafter becomes liable to pay to any Senior Lender. -2- e. "Subordinated Debt" means all obligations of Borrower to the Intermediate Parent now or hereafter existing (whether created directly or acquired by assignment or otherwise), with respect to all Indebtedness of Borrower pursuant to the Subordinated Note and the other Subordinated Loan Documents, and interest and premium, if any, thereon, fees, expenses, indemnity payments, all other amounts payable in respect thereof, and all other amounts due with respect to the foregoing whether arising from breach or contract, in tort or otherwise. f. "Enforcement Action" means any foreclosure proceeding, the exercise of any power of sale, the taking of a deed or assignment in lieu of foreclosure, the obtaining of a receiver, or the taking of any other enforcement action against the Collateral or any part thereof, including the taking of possession, or control of, or the collection of any rents from the Collateral or any part thereof. 2. Subordination. ------------- a. The Intermediate Parent shall not receive or accept any Distribution of Assets from Borrower in respect of principal of or interest on or any other payments in respect of the Subordinated Debt, pursuant to the Subordinated Note or the other Subordinated Loan Documents unless and until payment in full of all Senior Obligations, the termination of the Commitment, and the expiration or cancellation of all Letters of Credit; provided, however, that: ----------------- (a) the Intermediate Parent may receive and accept scheduled payments of interest with respect to the Subordinated Note for so long as no Default or Event of Default has occurred and remains continuing; and (b) the Intermediate Parent may receive and accept scheduled payments of principal with respect to the Subordinated Note for so long as no Default or Event of Default has occurred and remains continuing and provided that, giving pro forma effect to such payments as of the last day of the most recently --------- ended Fiscal Quarter for which a Compliance Certificate is then required to have been delivered pursuant to the Loan Agreement, the Borrower is in pro --- forma compliance with the covenants set forth in Sections 6.12 and 6.13 of the ----- Loan Agreement as of such date. Upon the occurrence of a Default or Event of Default, the Intermediate Parent hereby covenants to promptly pay over to the Senior Lenders all payments received by the Intermediate Parent during the 90 days preceding the occurrence of such Default or Event of Default. In no event shall the Subordinated Debt be prepaid, in whole or in part, without prior written consent of each Senior Lender. 3. Distributions Held in Trust. If the Intermediate Parent receives any --------------------------- Distribution of Assets of Borrower that the Intermediate Parent is not entitled to retain under -3- the provisions of this Agreement, such payment or assets shall be delivered forthwith by the Intermediate Parent to Administrative Agent for the benefit of the Senior Lenders for application to the Senior Obligations, in the form received except for the addition of any endorsement or assignment necessary to effect a transfer of all rights therein to Administrative Agent for the benefit of the Senior Lenders. Administrative Agent, for the benefit of the Senior Lenders, is irrevocably authorized to supply any endorsement or assignment required under this Section 3 that may have been omitted. Until so delivered any such payment or collateral shall be held by the Intermediate Parent in trust for the Senior Lenders and shall not be commingled with other funds or property of the Intermediate Parent. 4. Instruments; Collateral for Senior Obligations. If Borrower issues or ---------------------------------------------- has issued any instrument or document evidencing the Subordinated Debt (including, without limitation, the Subordinated Loan Documents), each such instrument and document shall bear a conspicuous legend that it is subordinated to the Senior Obligations. Borrower's and the Intermediate Parent's books shall be marked to evidence the subordination of all of the Subordinated Debt to the Senior Obligations. Administrative Agent for the Senior Lenders is authorized to examine such books from time to time during normal business hours and to make any notations required by this Agreement. 5. Insolvency, Dissolution, Etc. of Borrower. ----------------------------------------- a. In the event of any dissolution, winding up, liquidation, reorganization or other similar proceedings with respect to Borrower, its property or its operations (whether in a Bankruptcy Proceeding or otherwise), all Senior Obligations (including, without limitation, interest on Senior Obligations at the Default Rate from the date of filing any petition in bankruptcy to the date of payment whether or not allowed as a claim) shall first be paid in full before the Intermediate Parent shall be entitled to receive or retain any Distribution of Assets of Borrower with respect to the Subordinated Debt. In any such proceedings, any Distribution of Assets to which the Intermediate Parent would be entitled if the Subordinated Debt were not subordinated to the Senior Obligations shall be paid by the trustee or Administrative Agent or other person making such payment or distribution, or by the Intermediate Parent if received by it, directly to Administrative Agent for the benefit of the Senior Lenders to the extent necessary to make payment in full of all Senior Obligations remaining unpaid, after giving effect to any concurrent payment or distribution to or for the benefit of the Senior Lenders. b. At any time and from time to time after the occurrence and during the continuation of an Event of Default under the Senior Loan Documents until payment in full of all Senior Obligations, the termination of all Commitments, and the expiration or cancellation of all Letters of Credit, the Intermediate Parent shall duly and promptly take such action as Administrative Agent for the benefit of the Senior Lenders may reasonably request (i) to collect the Subordinated Debt for the account of the Senior Lenders and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (ii) to execute and deliver to any Senior Lenders such powers of attorney, assignments or other instruments as it may -4- reasonably request in order to enable it to enforce any and all claims with respect to, and any security interests and other liens securing payment of, the Subordinated Debt, and (iii) to collect and receive any and all payments or distributions that may be payable or deliverable upon or with respect to the Subordinated Debt. The Intermediate Parent shall have the rights provided in Section 18(b) that result from any payment to Senior Lenders under this Section 5(b). 6. Power of Attorney. ----------------- a. The Intermediate Parent hereby irrevocably authorizes and empowers Administrative Agent for the benefit of the Senior Lenders (and its representative or representatives) to demand, sue for, collect and receive all payments and distributions under the Subordinated Note and give acquittance therefor and to file and enforce claims and proofs of claims or suit and take all such other actions (including, without limitation, voting the Subordinated Debt (including in connection with any liquidation, reorganization or arrangement) or enforcing any security interest or other lien securing payment of the Subordinated Debt) in the name of the Intermediate Parent or otherwise, as the Senior Lenders determine to be necessary or appropriate at any time and from time to time after the occurrence and during the continuation of an Event of Default under the Senior Loan Documents; provided however, that if -------- Administrative Agent has failed to file a proof of claim with respect to the Subordinated Debt in any Bankruptcy Proceeding and 7 or fewer calendar days remain until the claims' bar date in such proceeding, then, in such event, the Intermediate Parent may file such proof of claim. This authorization to file and enforce claims and proofs of claims and to vote such claims (the "Authorization") includes the authorization to vote or decline to vote such claims on any matter whatsoever and specifically includes the authority to vote such claims to approve a plan of reorganization, including such plan that provides for the distribution on the Subordinated Debt of only equity in the reorganized debtor. Additionally, Administrative Agent may, pursuant to the Authorization, decline to take certain actions with respect to the Subordinated Debt, including, by way of example and not limitation, declining to request adequate protection for the Intermediate Parent's collateral or declining to object to any priming lien thereon. In the event any Governmental Authority or other Person does not recognize or accept Administrative Agent's right to act on behalf of the Intermediate Parent pursuant to this Section 6a, the Intermediate Parent agrees to take such lawful action as is directed by Administrative Agent in accordance with this Section 6a. In no event shall the Intermediate Parent waive, forgive or cancel any claim the Intermediate Parent may now or hereafter have against Borrower. The Intermediate Parent agrees that, upon the commencement of any Bankruptcy Proceeding or action or proceeding against Borrower to recover all or any part of the Subordinated Debt prior to payment in full of all Senior Obligations, the termination of all Commitments, and the expiration or cancellation of all Letters of Credit, Administrative Agent, on behalf of Senior Lenders, shall have the right to vote the rights of the Intermediate Parent in any such Bankruptcy Proceeding, or action or proceeding against Borrower to recover all or any part of the Subordinated Debt, in a manner that benefits Senior Lenders and -5- without regard to whether the Intermediate Parent is benefitted or receives more than equity interests in Borrower in exchange for its claims against Borrower. b. In no event shall any Senior Lender be liable to the Intermediate Parent for any failure to prove the Subordinated Debt, to exercise any right with respect thereto or to collect any sums payable thereon. The Intermediate Parent agrees to protect, indemnify, pay and save harmless, Administrative Agent and Senior Obligation Holders from and against any and all claims or demands, asserted by (or on behalf of) the Intermediate Parent and any and all liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel) related thereto that Administrative Agent or Senior Lender or both may incur or be subject to as a consequence, direct or indirect of any action in foreclosure under the Senior Loan Documents. 7. Agreements by the Intermediate Parent. ------------------------------------- a. The Intermediate Parent has reviewed the Loan Agreement, and the Intermediate Parent hereby consents to and approves of the provisions contained therein. The Intermediate Parent acknowledges that there are no conditions precedent to the effectiveness of this Agreement and that this Agreement is in full force and effect and is binding on the Intermediate Parent upon the Intermediate Parent's execution and delivery of this Agreement, regardless of whether the Senior Lenders obtain collateral or any guaranties from others or take any other action contemplated by the Intermediate Parent. Without affecting the rights of Senior Lenders or Borrower under the Loan Agreement, the Intermediate Parent agrees that, except to the extent that the Loan Agreement provides for the consent of or notice to the Intermediate Parent, the Senior Lenders may, at any time and from time to time, without the consent of or notice to the Intermediate Parent, without incurring responsibility to the Intermediate Parent, and without impairing or releasing the rights of any of the Senior Lenders, or any of the obligations of the Intermediate Parent hereunder: (i) change the amount, manner, place or terms of payment or change or extend the time of payment of or renew or alter Senior Obligations or amend the Loan Agreement in any manner or enter into or amend in any manner any other agreement relating to the Senior Obligations; (ii) Sell, exchange, release or otherwise deal with any property by whomever at any time pledged or mortgaged to secure, or however securing, the Senior Obligations; (iii) Release anyone (including any guarantor) liable in any manner for the payment or collection of the Senior Obligations; (iv) Exercise or refrain from exercising any rights against Borrower and others (including any guarantor or the Intermediate Parent); -6- (v) Apply any sums by whomever paid or however realized to the Senior Obligations; or (vi) Take any other action that otherwise might be deemed to impair the rights of the Intermediate Parent. The Intermediate Parent's obligations hereunder shall be performed in accordance with and to the extent required by this Agreement regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of the terms of the Notes or the Loan Agreement or any other document related thereto or the rights of the Senior Lenders with respect thereto. The obligations of the Intermediate Parent under this Agreement shall be absolute and unconditional irrespective of: (i) any lack of genuineness, legality, validity, enforceability or value of the Loan Agreement, the Notes or any other agreement or instrument relating thereto or any Collateral; (ii) any failure to pay any taxes that may be payable with respect to the issuance or transfer of the Notes; or any failure to obtain any authorization or approval from or other action by, or to notify or file with, any Governmental Authority required in connection with the issuance or transfer of the Notes; (iii) any impossibility or impracticality of performance, force majeure, any act of any government, or any other circumstance that might constitute a defense available to, or a discharge of, the Borrower in respect of the Notes or the Loan Agreement or the Intermediate Parent in respect of this Agreement or any other circumstance, event or happening whatsoever, whether foreseen or unforeseen and whether similar or dissimilar to anything referred to above in this Section; (iv) the fact that the Senior Obligations or any claim for the Senior Obligations is subordinated, avoided or disallowed, in whole or in part, under the Bankruptcy Code or other applicable law; or (v) whether any Person to whom Senior Lenders make disbursements of the proceeds of the Loans in accordance with the Loan Agreement applies such proceeds for purposes other than those provided for in the Loan Agreement and any such application shall not defeat the subordination herein in whole or in part. b. The Intermediate Parent (i) will not, without the prior written consent of the Senior Lenders, accelerate the Subordinated Debt, and (ii) agrees that until payment in full of all Senior Obligations, the termination of all Commitments, and the expiration or cancellation of all Letters of Credit, the Intermediate Parent shall neither commence nor join with any other creditor of Borrower to commence any Bankruptcy Proceeding or commence any action or proceeding against Borrower to recover all or any part of the Subordinated Debt -7- before any Governmental Authority or other entity with power to bind the parties to its decisions. c. The Intermediate Parent agrees that, until payment in full of all Senior Obligations, the termination of all Commitments, and the expiration or cancellation of all Letters of Credit, the Subordinated Loan and the lien of the Subordinated Loan Documents shall be subordinate to all leases of space in the Collateral. Senior Lenders and the Intermediate Parent hereby agree that Senior Lenders shall be entitled to seek the appointment of a receiver for the Collateral to collect rents, pursuant to the terms of Senior Loan Documents and the Subordinated Loan Documents, respectively, and this Agreement. 8. Waivers. Borrower and the Intermediate Parent each hereby waives any ------- defense based on the adequacy of a remedy at law that might be asserted as a bar to the remedy of specific performance of this Agreement in any action brought therefor by any Senior Lender. To the fullest extent permitted by law, Borrower and the Intermediate Parent each hereby further waives: promptness, diligence, presentment, demand, protest, notice of protest, notice of default or dishonor, notice of payment or nonpayment and any and all other notices and demands of any kind in connection with all negotiable instruments evidencing all or any portion of the Senior Obligations or (in respect of the Lenders) the Subordinated Debt to which Borrower or the Intermediate Parent may be a party; notice of the acceptance of this Agreement; notice of any loans made, extensions granted or other actions taken in reliance hereon; all other demands and notices of every kind in connection with this Agreement, the Senior Obligations or the Subordinated Debt; any right to require marshaling of the assets of Borrower; any defense based on any statute or rule of law that provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; any provisions of law that conflict with this Agreement and any legal or equitable discharge of the Intermediate Parent's obligations hereunder; the benefit of any statute of limitations; any rights of setoff, recoupment and counterclaim, promptness and diligence by Administrative Agent or Senior Lenders; any defenses arising from the incapacity, lack of authority or any disability or other defense of Borrower; any defense based on any Senior Lender's errors or omissions in the administration of the Obligations (other than willful misconduct); any defenses or benefits that may be derived from or afforded by law that limit or exonerate guarantors or sureties; and any right to require that the Senior Lenders exhaust any right or take any action against Borrower or any other person or entity or any collateral or pursue any other remedy in the power of Senior Lenders whatsoever. 9. Representations and Warranties. The Intermediate Parent hereby ------------------------------ represents, warrants and covenants to the Senior Lenders, which representations, warranties and covenants shall be true and correct as of the date hereof and throughout the term of this Agreement, that: a. The Intermediate Parent has not heretofore assigned or transferred any of the Subordinated Debt, any interest therein or any collateral or security pertaining thereto; the Intermediate Parent is the true and lawful holder and owner of the Subordinated Note and -8- the Subordinated Note delivered to the Senior Lenders are true and correct an have not been amended or modified in any way; and the Subordinated Note is free and clear of any defense, offset, counterclaim or other adverse claims and any liens, encumbrances or security interests. b. There are no agreements or understandings, written or oral, by the Intermediate Parent with Borrower other than as set forth in the Subordinated Note with respect to the obligations evidenced by the Subordinated Note and the Intermediate Parent has not heretofore given any subordination in respect of the Subordinated Debt. c. To the best knowledge of the Intermediate Parent, no default exists with respect to the Subordinated Note. 10. Negative Covenants. Until payment in full of all Senior Obligations, ------------------ the termination of all Commitments, and the expiration or cancellation of all Letters of Credit, without the consent of all Senior Lenders: a. Except as expressly permitted in this Agreement and the Loan Agreement, Borrower shall not, directly or indirectly, make any payment on account of or grant a security interest in, mortgage, pledge, assign or transfer any properties to satisfy or secure all or any part of the Subordinated Debt or in any way amend or modify the Subordinated Note or any other Subordinated Loan Document. b. Except as expressly permitted in this Agreement, the Intermediate Parent shall not demand or accept, directly or indirectly, from Borrower or any Affiliate of Borrower, any payment or collateral to satisfy or secure all or any part of or exercise any remedy under the Subordinated Debt nor shall the Intermediate Parent release, exchange, extend the time of payment of, compromise, set off or otherwise discharge or enforce any part of the Subordinated Debt or in any way amend or modify the Subordinated Debt, the Subordinated Loan Documents or this Agreement. c. The Intermediate Parent shall not hereafter give any subordination in respect of the Subordinated Debt, convert any or all of the Subordinated Debt to capital stock or other securities of Borrower, or transfer or assign any of the Subordinated Debt to any person other than the Senior Lenders without the consent of Senior Lenders. d. Borrower will not issue any instrument, security or other writing evidencing any part of the Subordinated Debt other than the Subordinated Note, and the Intermediate Parent shall not receive any such writing or transfer or assign any of the Subordinated Debt, except upon the prior written approval of the Senior Lenders. e. The Subordinated Debt and the Subordinated Loan Documents shall not be cross-defaulted or cross-collateralized with any other loan or any security interest encumbering any other property other than pursuant to the provisions of the Loan Agreement and the Subordinated Note (it being understood that a cross- default is a default of an obligor -9- that occurs under the terms of one agreement as a direct and express result of a default by such obligor' under the terms of another agreement). f. The Intermediate Parent shall not transfer or assign the Subordinated Debt or the Subordinated Loan Documents or any claim that the Intermediate Parent has or may have against Borrower or the Premises, without Senior Lenders' prior written consent, which may be granted or denied in Senior Lenders' sole and complete discretion. In the event that the Intermediate Parent, its nominee or designee, obtains title to the Collateral pursuant to an Enforcement Action or otherwise, the Intermediate Parent shall not thereafter transfer its interest in the Collateral without Senior Lenders' prior written consent, which may be granted or denied in Senior Lenders' sole and complete discretion. Neither Borrower nor the Intermediate Parent otherwise shall take or permit any action prejudicial to or inconsistent with the priority of the Senior Lenders over the Intermediate Parent that is created by this Agreement. 11. Financial Matters. The Intermediate Parent has established adequate ----------------- and independent means of obtaining from Borrower on a continuing basis financial and other information pertaining to the financial condition of Borrower. The Intermediate Parent agrees to keep adequately informed from such means of any facts, events or circumstances that might in any way affect the Intermediate Parent's risks hereunder, and the Intermediate Parent further agree that no Senior Lender shall have any obligation to disclose to the Intermediate Parent information or material acquired by such Senior Lender in the course of its relationship with Borrower. The Intermediate Parent understands that there may be various agreements among the Senior Lenders and Borrower evidencing and governing the Senior Obligations and the Intermediate Parent acknowledges and agrees that such agreements are not intended to confer any benefits on the Intermediate Parent and that no Senior Lender shall have any obligation to the Intermediate Parent or any other Person to exercise any rights, enforce any remedies, or take any actions that may be available to it under such agreements. 12. Reliance. The Intermediate Parent understands that in reliance upon -------- the terms and provisions of this Agreement, specific monetary and other obligations are being entered into and will be entered into by the Senior Lenders that would not be made or entered into but for reliance on this Agreement. The Intermediate Parent further understands that this Agreement constitutes a continuing offer to all persons who become holders of, or continue to hold Senior Obligations (whether such Senior Obligations was created or acquired before or after the date of this Agreement). 13. Insurance Proceeds and Condemnation Awards. In the event of a ------------------------------------------ casualty to the buildings or improvements constructed on the Premises or a condemnation or taking under a power of eminent domain of the Premises, or the buildings or improvements thereon, Senior Lenders shall have a first and prior interest in and to any payments, awards, proceeds, distributions, or consideration arising from any such event (the "Award"), provided that if the amount of the Award is in excess of all Senior Obligations, such excess Award shall be paid to or held by Senior Lenders (or any other person) for the benefit of the persons or -10- entities legally entitled thereto. Notwithstanding the foregoing, in the event of casualty or condemnation, Senior Lenders shall release the Awards from any such event to Borrower if and to the extent required by the terms and conditions of the Senior Loan Documents in order to repair and restore the Premises in accordance with the terms and provisions of the Senior Loan Documents. Awards made available to Borrower for the repair or restoration of the buildings or improvements on the Premises shall not be subject to attachment by Subordinate Creditor. 14. Amendments, Etc. No amendment, modification, termination or waiver of --------------- any provision of this Agreement, or consent to any departure by the Intermediate Parent or Borrower therefrom, shall in any event be effective without the written concurrence of Requisite Lenders under the Loan Agreement. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 15. Entire Agreement. This writing is intended by the Intermediate ---------------- Parent, Borrower and Senior Lenders as the final expression of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Agreement. There are no conditions to the full effectiveness of this Agreement, other than execution by Senior Lenders of the Loan Agreement. If there is any conflict between the terms hereof and the terms of any other documents executed in connection with the Loan Agreement, the terms of such documents shall be read together so as to provide the Senior Lenders with the broadest possible range of rights and remedies. 16. Notices. Any communications between and among Administrative Agent, ------- Senior Lenders, the Intermediate Parent and Borrower and any notices or requests provided herein to be given may be given by mailing the same, postage prepaid, or by telex, facsimile transmission or cable by 5:00 p.m. (Pacific Time) on a Business Day to each such party at its address set forth in the Loan Agreement, on the signature pages hereof or to such other addresses as each such party may in writing hereafter indicate. Any notice, request or demand to or upon Administrative Agent or Senior Lenders or the Intermediate Parent or Borrower under or relating to this Agreement shall not be effective until received. 17. Expenses. The Intermediate Parent and Borrower jointly and severally -------- agree to pay, upon demand, to Administrative Agent for the benefit of the Senior Lenders the amount of any and all reasonable expenses, including the reasonable fees and expenses of their respective counsel, that the Senior Lenders may incur in connection with the exercise or enforcement of any of their rights or interests hereunder. -11- 18. Validity of the Subordinated Debt and Senior Obligations. -------------------------------------------------------- a. The provisions of this Agreement subordinating the Subordinated Debt are solely for the purpose of defining the relative rights of the Senior Lenders and the Intermediate Parent and shall not impair, as between the Intermediate Parent and Borrower, the obligation of Borrower, which is unconditional and absolute, to pay the Subordinated Debt in accordance with its terms, nor shall any such provisions, except as otherwise set forth herein, prevent the Intermediate Parent from exercising all remedies otherwise permitted by applicable law or under any instrument or agreement evidencing the Subordinated Debt upon default thereunder, subject to the rights of the Senior Lenders hereunder to receive cash, property or securities or any other Distribution of Assets otherwise payable or deliverable to the Intermediate Parent until the payment in full of all Senior Obligations, the termination of all Commitments, and the expiration or cancellation of all Letters of Credit. This agreement shall provide no rights or remedies to any Person other than Administrative Agent, Senior Lenders and the Intermediate Parent. b. The Intermediate Parent shall be subrogated to all rights of the Senior Lenders against Borrower in respect of any amounts paid to the Senior Lenders directly or indirectly by the Intermediate Parent pursuant to the provisions of this Agreement; provided that the Intermediate Parent shall not be entitled to enforce, or to receive any payments arising out of or based upon, such right of subrogation until payment in full of all Senior Obligations (including without limitation, any Protective Advances), the termination of all Commitments and the expiration or cancellation of all Letters of Credit. c. This Agreement is effective notwithstanding any defect in the validity or enforceability of any instrument or document evidencing the Senior Obligations. 19. Termination; Preferences. In the event that following the repayment ------------------------ of the Commitment, the repayment of the Loans and all other Senior Obligations, any payment received by the Administrative Agent or the Lenders by reason of any determination that the same was a voidable preference, or otherwise, then this Agreement shall be reinstated and revived, and the Intermediate Parent shall remit to the Administrative Agent for the account of the Lenders, any payment received by the Intermediate Parent during the three-hundred sixty-seven (367) day period prior thereto, to the extent of such voidable preference or other returned payment. Neither the dissolution nor the bankruptcy or dissolution of the Intermediate Parent shall effect a termination hereof. Until payment in full of all Senior Obligations, the termination of all Commitments, and the expiration or cancellation of all Letters of Credit, any Senior Lender may, without notice to the Intermediate Parent, extend or continue credit and make other financial accommodations to or for the account of Borrower in reliance upon this Agreement. 20. Successors. This Agreement shall be binding upon the Intermediate ---------- Parent and its successors and assigns. This Agreement shall inure to the benefit of Senior Lenders, Administrative Agent, Borrower and their respective successors and assigns. The -12- Intermediate Parent shall not assign this Agreement or any of the rights or obligations of the Intermediate Parent hereunder without the prior written consent of all Senior Lenders. The Administrative Agent and the Senior Lenders may, without notice or consent, assign their interest in this Agreement in whole or in part. The terms and provisions of this Agreement shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon Senior Lenders and Administrative Agent shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 21. Counterparts. This Agreement may be executed in one or more ------------ counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. 22. DUTIES OF SENIOR LENDERS LIMITED. THE RIGHTS GRANTED TO THE SENIOR -------------------------------- LENDERS IN THIS AGREEMENT ARE SOLELY FOR THEIR PROTECTION AND NOTHING HEREIN CONTAINED (I) IMPOSES ON ANY SENIOR LENDER ANY DUTIES WITH RESPECT TO ANY PROPERTY EITHER OF BORROWER OR OF THE INTERMEDIATE PARENT HERETOFORE OR HEREAFTER RECEIVED BY ANY SENIOR LENDER NOR (II) SHALL BE DEEMED TO CONSTITUTE ANY SENIOR LENDER THE ADMINISTRATIVE AGENT OF THE INTERMEDIATE PARENT FOR ANY PURPOSE NOR CREATE ANY FIDUCIARY DUTY BETWEEN ANY SENIOR LENDER AND THE INTERMEDIATE PARENT. AS BETWEEN SENIOR LENDERS AND THE INTERMEDIATE PARENT, NO SENIOR LENDER HAS ANY DUTY TO PRESERVE RIGHTS AGAINST PRIOR PARTIES ON ANY INSTRUMENT OR CHATTEL PAPER RECEIVED FROM BORROWER OR THE INTERMEDIATE PARENT AS COLLATERAL SECURITY FOR THE SENIOR OBLIGATIONS OR ANY PORTION THEREOF. AS BETWEEN SENIOR LENDERS AND THE INTERMEDIATE PARENT, NO ACTION OR INACTION WITH RESPECT TO ANY COLLATERAL FOR THE SENIOR OBLIGATIONS; NOR ANY AMENDMENT TO ANY OF THE SENIOR LOAN DOCUMENTS OR ANY OTHER INSTRUMENT OR AGREEMENT RELATING TO, SECURING OR GUARANTEEING ANY OF THE SENIOR OBLIGATIONS; NOR ANY EXERCISE OR NON- EXERCISE OF ANY RIGHT, POWER OR REMEDY UNDER OR IN RESPECT OF ANY OF THE SENIOR OBLIGATIONS OR ANY INSTRUMENT OR AGREEMENT RELATING TO, SECURING OR GUARANTEEING ANY OF THE SENIOR OBLIGATIONS; NOR ANY WAIVER, CONSENT, RELEASE, INDULGENCE, EXTENSION, RENEWAL, MODIFICATION, DELAY OR OTHER ACTION, INACTION OR OMISSION IN RESPECT OF ANY OF THE SENIOR OBLIGATIONS OR ANY INSTRUMENT OR AGREEMENT RELATING TO, SECURING OR GUARANTEEING ANY OF THE SENIOR OBLIGATIONS SHALL IN ANY EVENT GIVE RISE TO ANY CLAIM AGAINST ANY SENIOR LENDER OR -13- ANY OFFICER, DIRECTOR, EMPLOYEE OR ADMINISTRATIVE AGENT OF SUCH SENIOR LENDER. 23. Additional Documentation. Borrower and the Intermediate Parent shall ------------------------ execute and deliver to the Administrative Agent such further instruments and shall take such further action as Administrative Agent or any Senior Lender may at any time reasonably request in order to carry out the provisions and intent of this Agreement. 24. Severability. In case any provision in or obligation under this ------------ Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 25. Waiver of Jury Trial. The Intermediate Parent, BORROWER, -------------------- ADMINISTRATIVE AGENT AND EACH SENIOR LENDER EACH HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. The Intermediate Parent, Borrower, and by their acceptance of the benefits hereof, Administrative Agent and each Senior Lender each (i) acknowledges that this waiver is a material inducement for the Intermediate Parent, Borrower, Administrative Agent and each Senior Lender Holder to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement and that each will continue to rely on the waiver in related future dealings (ii) further warrants and represents that each has reviewed this waiver with legal counsel, and that each knowingly and voluntarily waives jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 26. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ------------- ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 27. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL ---------------------------------------------- PROCEEDINGS BROUGHT AGAINST THE INTERMEDIATE PARENT ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT THE INTERMEDIATE PARENT ACCEPTS FOR ITSELF AND IN CONNECTION WITH -14- ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. The Intermediate Parent hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to the Intermediate Parent at its address provided in Section 18, such service being hereby acknowledged by the Intermediate Parent to be sufficient for personal jurisdiction in any action against the Intermediate Parent in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law. 28. All Action Required to be Lawful. No provision of this Agreement -------------------------------- shall require any party hereto to take any action or fail to take any action that would violate any Gaming Law. 29. Capacity of the Intermediate Parent. This Agreement applies to the ----------------------------------- Intermediate Parent only in its capacity as a holder of Company Subordinated Debt. IN WITNESS WHEREOF, the Intermediate Parent and Borrower have each caused this Agreement to be duly executed and delivered for the benefit of the Senior Obligations by its duly authorized officers as of the date first written above. "Borrower" DETROIT ENTERTAINMENT, L.L.C. a Michigan limited liability company By: Circus Circus Michigan, Inc. Its: authorized member By: GLENN SCHAEFFER ------------------------- Title: President ------------------------- Notice Address: -15- "INTERMEDIATE PARENT" CIRCUS CIRCUS MICHIGAN, INC., a Michigan corporation By: GLENN SCHAEFFER ------------------------------ Title: President -------------------------- -16- Accepted: Administrative Agent BANK OF AMERICA, N.A. By: JANICE HAMMOND ----------------------- Title: V.P. - Agency Specialist ----------------------- Notice Address: 555 South Flower Street, 11th Floor Los Angeles, California 90071 Attention: Janice Hammond, Vice President -17- EX-10.(RRR) 7 dex10rrr.txt AM. #1 TO LEASE INTENDED AS SECURITY Exhibit 10(rrr) [EXECUTION COPY] AMENDMENT NO. 1 TO LEASE INTENDED AS SECURITY --------------------------------------------- THIS AMENDMENT NO. 1 TO LEASE INTENDED AS SECURITY (this "Amendment No. ------------- 1"), dated as of January 28, 1999 is made by and among CIRCUS CIRCUS LEASING, INC., a Nevada corporation, as Lessee; CIRCUS CIRCUS ENTERPRISES, INC., a Nevada corporation, as Guarantor; FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not in its individual capacity, but solely as Trustee; the Persons identified in the Lease described below as Certificate Purchasers; SOCIETE GENERALE FINANCIAL CORPORATION, as Documentation Agent; PNC LEASING CORP., as Syndication Agent; THE BANK OF NOVA SCOTIA, as Managing Agent; and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, not in its individual capacity, but solely as Administrative Agent and Lead Arranger. W I T N E S S E T H: ------------------- WHEREAS, Lessee, Guarantor, Trustee, the Certificate Purchasers, the Lead Arranger and the Agents are parties to a Lease Intended as Security, dated as of October 30, 1998 (as amended or otherwise modified to the date hereof, the "Lease"); - ------ WHEREAS, Lessee has requested, among other things, (i) that the Trustee purchase Equipment from time to time for the sole purpose of leasing such Equipment to Lessee and, in connection therewith, to advance funds from time to time as initial vendor deposits and vendor progress payments to the Vendors of such Equipment or, as applicable, advance funds from time to time to Lessee to reimburse Lessee for payments made by Lessee to any such Vendors for such deposits and/or progress payments and (ii) amendments to certain provisions of the Lease to facilitate the advances described in clause (i) above; and ---------- WHEREAS, the Certificate Purchasers are willing, on the terms and subject to the conditions hereinafter set forth, to so amend the Lease and to permit Trustee to make such requested advances (and, in connection therewith, to provide Trustee the funds necessary to make such advances), but only upon the terms and conditions set forth below; NOW, THEREFORE, in consideration of the amendments and other agreements herein contained, the parties hereto agree as follows: -1- ARTICLE I DEFINITIONS Capitalized terms used herein but not otherwise defined shall have the meanings specified for such terms in the Lease (as amended hereby). ARTICLE II AMENDMENTS TO LEASE Effective on (and subject to the occurrence of) the "Amendment No. 1 Effective Date" (as defined below), the Lease is amended in accordance with this Article II. Except to the extent amended by this Amendment No. 1, the Lease is - ---------- and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. 2.1 Section 1.1. Section 1.1 of the Lease is amended as follows: ----------- (a) The following definitions contained in Section 1.1 of the Lease are amended and restated to read as follows: "Affected Equipment Value Fraction" means, with respect to any item of --------------------------------- Equipment then subject to this Lease, a fraction determined as of any Payment Date the numerator of which is the Purchase Price for such item and the denominator of which is the aggregate Purchase Price of all Equipment then subject to this Lease, including such item. Outstanding Progress Payment Advances with respect to any Equipment that is not then subject to this Lease shall be excluded from the foregoing calculations. "Casualty Amount" means, with respect to any item of Equipment or --------------- System, as the case may be, as of any date specified for payment thereof, the sum of (a) a portion of the Lease Balance equal to (i), in the case of --- -- any item of Equipment or System then accepted by Lessee and covered by a Lease Supplement, the product obtained by multiplying that portion of the outstanding Lease Balance relating to Equipment then accepted by Lessee for lease hereunder by the Affected Equipment Value Fraction of such item or System, as applicable, or (ii), in the case of any item of Equipment or System that constitutes Progress Payment Equipment, the then aggregate amount of unpaid Progress Payment Advances made by Trustee with respect to such item of Equipment or System, as the case may be, plus (b) all accrued ---- and unpaid Accrual Rent accrued on such portion of the Lease Balance to the date of payment, plus (c) all Supplemental Rent (if any) then due and ---- owing. "Delivery Date" means each of the actual dates on or prior to the last ------------- day of the Commitment Period on which the applicable transactions contemplated in Article II are completed. ---------- -2- "Equipment" means, individually, each item of equipment set forth in a --------- Delivery Date Notice (and as generally described on Schedule III of this ------------ Lease), including equipment that is acquired and accepted by Lessee as of the applicable Delivery Date as well as equipment with respect to which Trustee is requested to make one or more Progress Payment Advances as of the applicable Delivery Date, including items collectively identified as a System, and, collectively, each of the foregoing, together with any substitutions therefor, replacements thereof, and additions thereto from time to time pursuant to the Operative Documents. "Eurodollar Base Rate" means, relative to any Rent Period with respect -------------------- to the Lease Balance and each Supplement Balance and outstanding Progress Payment Advance, the average of the interest rates per annum (rounded upward, if necessary, to the next 1/16 of 1%) at which deposits in Dollars are offered by the Eurodollar Reference Banks to prime banks in the Designated Eurodollar Market at or about 11:00 a.m. local time in the Designated Eurodollar Market, two (2) Business Days before the first day of the applicable Rent Period in an aggregate amount approximately equal to the amount of the Lease Balance or the applicable Supplement Balance or outstanding Progress Payment Advance and for a period of time comparable to the number of days in the applicable Rent Period. The determination of the Eurodollar Base Rate by Trustee shall be conclusive in the absence of manifest error. "Eurodollar Rate" means, relative to any Rent Period with respect to --------------- the Lease Balance and each Supplement Balance and outstanding Progress Payment Advance, an interest rate per annum (rounded upward, if necessary, to the nearest 1/16 of one percent) determined pursuant to the following formula: Eurodollar Eurodollar Base Rate -------------------------- Rate /=/ 1.00 - Eurodollar Reserve Percentage The Eurodollar Rate shall be determined as of 11:00 a.m. local time in the Designated Eurodollar Market two (2) Business Days prior to the beginning of each Rent Period for delivery on the first day of such Rent Period, and in an amount approximately equal to the amount of the Lease Balance or the applicable Supplement Balance or outstanding Progress Payment Advance and for a period approximately equal to such Rent Period. "Eurodollar Reserve Percentage" means, relative to any Rent Period ----------------------------- with respect to the Lease Balance and each Supplement Balance and outstanding Progress Payment Advance, the maximum reserve percentage (expressed as a decimal, rounded upward to the nearest 1/100th of 1%) in effect on the date the Eurodollar Base Rate for the Lease Balance or the applicable Supplement Balance or outstanding Progress Payment Advance is determined (whether or not applicable to any Certificate Purchaser) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") having a term comparable to the applicable Rent Period. The determination by Trustee of -3- any applicable Eurodollar Reserve Percentage shall be conclusive in the absence of manifest error. "Interest Differential" means, with respect to any prepayment of all --------------------- or any portion of the Lease Balance or any Supplement Balance or outstanding Progress Payment Advance on a day prior to the last day of the applicable Rent Period pertaining thereto, (a) the per annum interest rate then applicable to payments of Rent with respect to the Lease Balance or such Supplement Balance or Progress Payment Advance (or portion thereof, as the case may be) minus (b) the Eurodollar Rate on, or as near as ----- practicable to the date of the prepayment for an amount equal to the amount so prepaid commencing on such date and ending on the last day of the applicable Rent Period for the amount so prepaid. "Interim Period" means (i) as to each Lease Supplement the period -------------- commencing on (and including) the Delivery Date set forth in Schedule I to such Lease Supplement and ending on (but excluding) June 30, 1999, (ii) as to each Progress Payment Advance the period commencing on (and including) the Delivery Date on which such Progress Payment Advance is made and ending on (but excluding) June 30, 1999, and (iii) for this Lease means the period commencing on (and including) the initial Delivery Date and ending on (but excluding) June 30, 1999. "Interim Rent" means, with respect to each Rent Period during the ------------ Interim Period, (a) for each Lease Supplement, an amount equal to Accrual Rent allocable to the Supplement Balance of such Lease Supplement during such period, (b) for each Progress Payment Advance, an amount equal to Accrual Rent allocable to such Progress Payment Advance during such period, and (c) for this Lease, the sum of the amounts described in (i) the --- -- foregoing clause (a) for all Lease Supplements subject to this Lease and ---------- (ii) the foregoing clause (b) for all Progress Payment Advances made ---------- hereunder. Interim Rent shall be due and payable on the last day of each Rent Period during the Interim Period. "Lease Balance" means, as of any date of determination, the sum of (a) ------------- --- -- the aggregate Supplement Balances of all Lease Supplements then subject to this Lease and (b) the aggregate outstanding principal balance of all Progress Payment Advances made hereunder plus costs, charges or other ---- obligations incurred by Trustee or the Certificate Purchasers in connection with any such Progress Payment Advances. "System" means any "system" or group of items of Equipment classified ------ as a System on Schedule I to a Lease Supplement or, in the case of equipment subject to a Progress Payment Advance, as shown on any schedule or annex to the applicable Delivery Date Notice. (b) Section 1.1 of the Lease is further amended by inserting the following definitions of "Progress Payment Advance" and "Progress Payment Equipment" in their appropriate alphabetical place: -4- "Progress Payment Advance" means an advance of funds for the purchase ------------------------ of an item of Equipment or a System, as the case may be, before such Equipment or System is finally accepted by Lessee for lease hereunder, but with respect to which Lessee fully expects to accept for lease hereunder at a future date. Progress Payment Advances may consist of vendor deposits and/or vendor progress payments made directly to the applicable vendor or as reimbursement to Lessee for same. "Progress Payment Equipment" is defined in Section 2.2(a). -------------------------- -------------- 2.2 Section 2.2. Section 2.2 of the Lease is amended as follows: ----------- (a) The heading for Section 2.2 of the Lease is amended and restated to read as follows: Fundings; Payment of Purchase Price/Progress Payment Advances; Failure of a --------------------------------------------------------------------------- Certificate Purchaser to Fund. ----------------------------- (b) Subsection 2.2(a) is amended and restated to read as follows: (a) Subject to the terms and conditions hereinafter set forth, and in reliance on the representations and warranties contained herein or made pursuant hereto, during the Commitment Period upon receipt of each Delivery Date Notice, each Certificate Purchaser shall transfer to Trustee (each such transfer being referred to herein as a "Funding") on the date ------- specified in such Delivery Date Notice, an amount equal to the sum of (1) --- -- the product of (x) the aggregate Purchase Price of any Equipment specified in such Delivery Date Notice to be acquired by Trustee and accepted by Lessee for lease hereunder multiplied by (y) such Certificate Purchaser's ---------- -- Commitment Percentage, plus (2) the product of (x) the aggregate Progress ---- Payment Advance specified in such Delivery Date Notice with respect to Equipment to be acquired by Trustee and leased by Lessee at a later date (such Equipment being referred to herein as "Progress Payment Equipment"), -------------------------- multiplied by (y) such Certificate Purchaser's Commitment Percentage. In ---------- -- no event shall (i) any Certificate Purchaser be required to provide funds under this Lease in an aggregate amount exceeding such Certificate Purchaser's Commitment, (ii) the aggregate amount advanced by the Certificate Purchasers exceed the Aggregate Commitment Amount, (iii) Lessee request (whether by delivery of Delivery Date Notices or otherwise) more than one Delivery Date for Equipment in any calendar month, or (iv) Lessee request any Progress Payment Advance with respect to any Equipment if (A), after giving effect to such Progress Payment Advance and all other Fundings made on or prior to the Delivery Date on which such Progress Payment Advance is to be made, the unused amount of the Commitments would be insufficient to fund the entire estimated amount remaining to be paid to acquire the Equipment with respect to which such Progress Payment Advance (or any portion thereof) is to be made or (B) the Appraised Value of any such Equipment is less than the aggregate estimated purchase price (including any Progress Payment Advances theretofore made with respect thereto) for such Equipment. (c) Subsection 2.2(c)(iv) is amended and restated to read as follows: -5- (iv) If and to the extent that the Defaulted Amount is not funded by the Non-Defaulting Certificate Purchasers, Trustee may reduce the Purchase Price and/or the Progress Payment Advance set forth in the Delivery Date Notice (in such amount(s) as Trustee may determine) so that the total Funding specified in the Delivery Date Notice as so restated equals the aggregate revised fundings to be made by the Non-Defaulting Certificate Purchasers on the applicable Delivery Date; and 2.3 Section 2.3. Section 2.3 of the Lease is amended and restated to ----------- read as follows: 2.3 Application of Funds; Sale and Lease of Equipment; Progress ----------------------------------------------------------- Payment Advances. ---------------- (a) On each Delivery Date with respect to which Trustee is to acquire legal title to any Equipment and Lessee is to accept such Equipment for lease hereunder, upon (i) receipt by Trustee of all applicable amounts to be paid by the Certificate Purchasers pursuant to Section 2.2, and (ii) ----------- satisfaction or waiver of each of the conditions set forth in Article III, ----------- (A) Trustee shall acquire legal title to, for the benefit of the Certificate Purchasers, the Equipment to be leased by Lessee on such Delivery Date, as specified in the relevant Delivery Date Notice delivered pursuant to Section 3.1, (B) in consideration therefor, Trustee, on behalf ----------- of the Certificate Purchasers, shall pay, from the funds made available by the Certificate Purchasers pursuant to Section 2.2, an amount equal to the ----------- aggregate Purchase Price of the Equipment being so sold and purchased, in each case, in immediately available funds remitted by wire transfer to the account specified by Lessee in the Delivery Date Notice to Lessee or directly to Vendors, as applicable, and (C) Trustee, on behalf of the Certificate Purchasers, shall lease to Lessee the Equipment so transferred to Trustee and Lessee shall accept delivery of and lease from Trustee such Equipment pursuant to this Lease. Delivery of the Equipment to be purchased by Trustee on behalf of the Certificate Purchasers on such Delivery Date shall be effected by the delivery by Lessee or the Vendor, as applicable, of one or more Bills of Sale or Purchase Order Assignments, as applicable, specifically identifying the Equipment delivered on such Delivery Date. Each Certificate Purchaser shall hold an undivided interest in each item of Equipment equal to such Certificate Purchaser's Commitment Percentage. (b) On each Delivery Date with respect to which Lessee requests that a Progress Payment Advance be made with respect to Progress Payment Equipment, upon (i) receipt by Trustee of all applicable amounts to be paid by the Certificate Purchasers pursuant to Section 2.2, (ii) satisfaction or ----------- waiver of each of the conditions set forth in Article III (other than ----------- Sections 3.2, 3.3 and 3.8 which shall not apply), and (iii) execution and ------------ --- --- delivery by Lessee to Trustee of a Purchase Order Assignment transferring to Trustee, on behalf of the Certificate Purchasers, all of Lessee's right, title and interest in and to any and all Purchase Contracts and/or purchase orders (and the Progress Payment Equipment covered thereby) to the extent relating to the Progress Payment Equipment, Trustee, on behalf of the Certificate Purchasers, shall pay, from the funds made available by the Certificate Purchasers pursuant to Section 2.2, an amount equal to the ----------- requested Progress Payment Advance, in each case, -6- in immediately available funds remitted by wire transfer to the account specified by Lessee in the Delivery Date Notice to Lessee or directly to Vendors, as applicable. Each Certificate Purchaser shall hold an undivided interest in such Purchase Contracts, purchase orders and Progress Payment Equipment equal to such Certificate Purchaser's Commitment Percentage. If Lessee fails to accept (and deliver and execute a Lease Supplement with respect to) any item of Progress Payment Equipment for which a Progress Payment Advance has been made under this Section 2.3(b) on or before the -------------- last day of the Commitment Period, Lessee shall on demand of Trustee purchase such item of Progress Payment Equipment from Trustee for the aggregate amount so advanced by Trustee, on behalf of the Certificate Purchasers, and any other costs or obligations incurred by Trustee or any Certificate Purchaser in connection therewith plus all accrued and unpaid ---- Interim Rent with respect to such item of Equipment. Payments by Lessee provided for in this Section 2.3(b) and in Section 4.3 shall be due and -------------- ----------- payable as provided herein and therein, notwithstanding any claim by Lessee that: (A) any Progress Payment Equipment is defective or unsatisfactory in any respect or fails to conform to any specification, representation or warranty by the Vendor; (B) any Progress Payment Equipment has not been delivered to Lessee; (C) any Progress Payment Equipment fails to conform to any regulation, rule or law imposed by any government or regulatory authority; or (D) any applicable Vendor has failed to fulfill any of the duties and obligations to Lessee, whether or not in connection with any Progress Payment Equipment. Lessee, Trustee and the Certificate Purchasers intend that, irrespective of any controversy between Lessee and any common carrier or Vendor, Lessee shall pay all amounts due under this Section ------- 2.3(b) and Section 4.3 and shall hold Trustee, the Certificate Purchasers ------ ----------- and the Agents harmless from any loss or damage resulting therefrom. 2.4 Section 2.4. Section 2.4 of the Lease is amended and restated to ----------- read as follows: 2.4 Time and Place of Delivery Dates. Each delivery of the Equipment -------------------------------- and each Progress Payment Advance shall take place on the Delivery Date set forth in the applicable Delivery Date Notice, subject to the following: (a) each Funding shall occur on the last Business Day of a calendar month on or after the date hereof and not later than the last day of the Commitment Period, it being understood that there may be a Funding without the consummation of a Delivery Date if Lessee has postponed such Delivery Date pursuant to Section 2.5, so long as such Delivery Date occurs ----------- not later than the last day of the Commitment Period; (b) each Delivery Date shall occur on the last Business Day of a calendar month (unless postponed in accordance with Section 2.5) on or ----------- after the date hereof and not later than the last day of the Commitment Period; and (c) in no event shall the aggregate amount advance by the Certificate Purchasers exceed the Aggregate Commitment Amount, nor shall the aggregate amount advance by any Certificate Purchaser exceed such Certificate Purchaser's Commitment. -7- Notwithstanding the foregoing, Lessee may at any time and from time to time on or before the last day of the Commitment Period, without the necessity of a Funding if all other applicable conditions hereunder are satisfied, accept for lease hereunder (and execute and deliver to Trustee a fully completed Lease Supplement covering) Progress Payment Equipment. 2.5 Preamble to Article III. The preamble to Article III of the Lease is ----------------------- amended and restated to read as follows: The obligation of each Certificate Purchaser to make any Funding hereunder, of Trustee, on behalf of the Certificate Purchasers, to acquire title to and lease the Equipment to, Lessee, and of Trustee, on behalf of the Certificate Purchasers, to make any Progress Payment Advance, and to cause Lessee to cause the transfer of title to any applicable Equipment to, and lease such Equipment from, Trustee, on behalf of the Certificate Purchasers, on each Delivery Date, shall be subject to the fulfillment to the satisfaction of (including, with respect to writings that do not conform to any applicable Exhibit hereto, such writings being in form and substance reasonably satisfactory to Trustee, Administrative Agent and each Certificate Purchaser, and, to the extent provided below, Lessee), or the waiver in writing by, Trustee, Administrative Agent and each Certificate Purchaser and Lessee, of the conditions precedent applicable to such party (provided that no action required to be taken by any such party or any of -------- its Affiliates shall be a condition precedent to such party's obligations) set forth in this Article III on or prior to each Delivery Date (except ----------- ------ that the obligation of any party hereto shall not be subject to the performance or compliance of such party or any of such party's affiliates). 2.6 Section 3.1. Clauses (ii) and (iii) of Section 3.1 of the Lease are ----------- amended and restated to read as follows: (ii) a description (including model, make and serial number, if available) of each item of Equipment (A) to be transferred to Trustee, on behalf of the Certificate Purchasers, and leased to Lessee on such Delivery Date and/or (B) with respect to which any requested Progress Payment Advance relates (and whether such Progress Payment Advance constitutes a direct vendor deposit or vendor progress payment (or a reimbursement to Lessee thereof, in which case the Administrative Agent and Trustee shall have received appropriate documentary evidence of Lessee's prior payment of any such deposit or payment)), (iii) the respective Purchase Prices of any Equipment to be acquired by Trustee, on behalf of the Certificate Purchasers, on such Delivery Date and/or, if applicable, the aggregate amount of Progress Payment Advances to be made on such date (together with -------- a specification of the anticipated aggregate amount remaining to be paid with respect to the Progress Payment Equipment covered by such Progress Payment Advances in order to place such Progress Payment Equipment on lease hereunder) which, for each Delivery Date other than the final Delivery ----- ---- Date, shall be in an aggregate amount of not less than $10,000,000, -8- 2.7 Section 3.4. The phrase "covering all Equipment to be transferred to ----------- Trustee, on behalf of the Certificate Purchasers, and leased to Lessee on such Delivery Date," on the fourth and fifth lines of Section 3.4 of the Lease is amended and restated in its entirety to read as follows: "covering all Equipment to be transferred to Trustee, on behalf of the Certificate Purchasers, or to which any Progress Payment Advance pertains, as the case may be, which Equipment is to be leased to Lessee on such Delivery Date or with respect to which any Progress Payment Advance is to be made on such Delivery Date, as the case may be," 2.8 Section 3.6. Section 3.6 of the Lease is amended and restated to read ----------- as follows: 3.6 No Casualty. No casualty shall have occurred with respect to any ----------- item of Equipment (a) being delivered on such Delivery Date or (b) with respect to which a Progress Payment Advance is being made on such Delivery Date, as the case may be. 2.9 Section 3.12. Section 3.12 of the Lease is amended by adding the ------------ following subparagraph at the end thereof: With respect to any Delivery Date for Progress Payment Equipment, the foregoing appraisal requirements shall apply with respect to such Progress Payment Equipment except that in connection therewith the applicable ------ parties shall assume, for these purposes, that such Progress Payment Equipment would be paid for in full as of such Delivery Date and placed on lease hereunder as of such date. 2.10 Section 4.3. The first sentence of Section 4.3 of the Lease is ----------- amended and restated to read as follows: On each Payment Date during the Interim Period and on the last day of the Interim Period, Lessee shall pay to Trustee, for the benefit of the Certificate Purchasers, an amount equal to the aggregate amount of Interim Rent accrued during the Rent Period then ended with respect to (a) all Equipment subject to each Lease Supplement and (b) all then outstanding Progress Payment Advances. In addition to the foregoing, if Lessee shall have failed to accept any Progress Payment Equipment on or before the last day of the Commitment Period, Lessee shall, on demand of Trustee, at the direction of the Certificate Purchasers, purchase each such item of Progress Payment Equipment from Trustee for the aggregate amount so advanced by Trustee, on behalf of the Certificate Purchasers, and any other costs or obligations incurred by Trustee or any Certificate Purchaser, in connection therewith. 2.11 Section 6.1. The proviso set forth in the first paragraph of Section ----------- 6.1 of the Lease is amended and restated to read as follows: provided, that (i) upon the occurrence and during the continuance of a -------- Default or Event of Default, or (ii) with respect to any Progress Payment Equipment suffering a Casualty, Lessee shall be obligated, at the option of the Required Certificate Purchasers, to make the payments -9- referred to in clause (a) above and shall not be entitled to exercise any ---------- right of replacement pursuant to clause (b). ---------- 2.12 Section 7.7(d). The words "or if funding of a requested Progress -------------- Payment Advance" is inserted between the words "Equipment" and "is" on the fourth line of Section 7.7(d) of the Lease. 2.13 Section 9.1. The last sentence of Section 9.1 of the Lease is ----------- amended and restated to read as follows: Such fee shall be due and payable (i) on the last Business Day of the third calendar month following the Closing Date and each consecutive three-month period thereafter during the Commitment Period, with each such period ending on the last Business Day of the applicable calendar month, and (ii) on the last day of the Commitment Period. 2.14 Section 12.1(j). Section 12.1(j) of the Lease is amended and --------------- restated to read as follows: (j) No Default: Casualty. No event has occurred and is continuing -------------------- that is a Default or Event of Default and no Casualty has occurred with respect to any item of Equipment to be delivered on each Delivery Date or item of Equipment to which any Progress Payment Advance pertains. 2.15 Section 12.1(s). Section 12.1(s) is amended and restated to read as --------------- follows: (s) Equipment. The Purchase Price for each item of Equipment does not --------- exceed the Appraised Value of such item of Equipment at the time of the sale to Trustee, for the benefit of the Certificate Purchasers, hereunder and the aggregate Purchase Price for all of the Equipment does not exceed the Appraised Value of all of the Equipment at the time of the sale to Trustee, for the benefit of the Certificate Purchasers, hereunder. Similarly, in connection with any Equipment for which Lessee requests one or more Progress Payment Advances, after giving effect to all expected Progress Payment Advances for such Equipment, the aggregate amount of such Progress Payment Advances with respect to such Equipment shall not exceed the Appraised Value of such Equipment. Lessee has delivered (or will, or on prior to each applicable Delivery Date, deliver) true, correct and complete copies of invoices evidencing payment in full by Lessee to the Vendors of the Equipment transferred by Lessee which is to be accepted by Lessee as of such Delivery Date. Similarly, Lessee has delivered (or will, on or prior to each applicable Delivery Date, deliver) true, correct and complete copies of invoices or other appropriate documentation evidencing payment by Lessee to the Vendors for the amount of Progress Payment Advance for which Lessee requests reimbursement as of such Delivery Date. 2.16 Section 12.2(c). Section 12.2(c) of the Lease is amended and --------------- restated to read as follows: -10- (c) Lessor Liens. The Equipment being delivered on such Delivery Date ------------ (or, if applicable, the Equipment with respect to which any Progress Payment Advance pertains) and all of the other Collateral is free and clear of all Lessor Liens attributable to such Certificate Purchaser. 2.17 Section 12.3(e). Section 12.3(e) of the Lease is amended and restated --------------- to read as follows: (e) Lessor Liens. The Equipment being delivered on such Delivery Date ------------ (or, if applicable, the Equipment with respect to which any Progress Payment Advance pertains) and all of the other Collateral is free and clear of all Lessor Liens attributable to Trustee, in its individual capacity, as Trustee or both. 2.18 Section 12.4(e). Section 12.4(e) of the Lease is amended and restated --------------- to read as follows: (e) Lessor Liens. The Equipment being delivered on such Delivery Date ------------ (or, if applicable, the Equipment with respect to which any Progress Payment Advance pertains) and all of the other Collateral is free and clear of all Lessor Liens attributable to Administrative Agent. 2.19 Section 14.2(d). Clause (D) of Section 14.2(d) of the Lease is --------------- and restated to read as follows: (D) a reduction of the Lease Balance, any Supplement Balance, any Progress Payment Advance or any amount of Rent due hereunder except pursuant to ------ Section 6.1; ----------- 2.20 Exhibit D (Form of Delivery Date Notice). Exhibit D (Form of Delivery ---------------------------------------- Date Notice) to the Lease is amended, restated and replaced by Exhibit D attached to this Amendment No. 1 as Annex I. ------- ARTICLE III CONDITIONS TO EFFECTIVENESS, REPRESENTATIONS AND WARRANTIES AND ADDITIONAL COVENANTS 3.1 Effective Date. This Amendment No. 1 shall be and become effective as -------------- of the date (the "Amendment No. 1 Effective Date") upon the prior or concurrent ------------------------------ satisfaction of each of the conditions precedent set forth in this Section 3.1. ----------- (a) Execution of Certain Documents. The Administrative Agent, Trustee ------------------------------ and Lessee shall have received counterparts of this Amendment No. 1 duly executed by Lessee, Guarantor, Trustee, Certificate Purchasers, Lead Arranger, and the Agents (or evidence thereof satisfactory to the Administrative Agent). -11- (b) Fees. All reasonable fees and expenses of Sheppard, Mullin, ---- Richter & Hampton LLP in connection with the negotiation, execution and delivery of this Amendment No. 1 and the transactions contemplated herein shall have been paid in full. (c) Accuracy of Representations and Warranties; No Default. On the ------------------------------------------------------ Amendment No. 1 Effective Date, the Administrative Agent shall have received (with copies for the Trustee and each Certificate Purchaser) certificates of a Responsible Official of Guarantor and Lessee stating that after giving effect to this Amendment No. 1, all of the representations and warranties of Lessee and Guarantor contained in the Lease shall be true and correct on and as of the Amendment No. 1 Effective Date in all material respects as though made on and as of that date and no Default has occurred and is continuing. (d) Certificate Purchasers. The first date on which the ---------------------- Administrative Agent shall have received affirmative approvals relative to this Amendment No. 1 from the Certificate Purchasers. (e) Legal Details, etc. The Administrative Agent and its counsel ------------------ shall have received (with copies for the Trustee and each Certificate Purchaser) all information, and such counterpart originals or such certified or other copies of such materials, as the Administrative Agent or its counsel may reasonably request, and all legal matters incident to the effectiveness of this Amendment No. 1 shall be satisfactory to the Administrative Agent and its counsel. All documents executed or submitted pursuant hereto or in connection herewith shall be satisfactory in form and substance to the Administrative Agent and its counsel. 3.2 Limitation. Except as expressly provided hereby, all of the ---------- representations, warranties, terms, covenants and conditions of the Lease and each other Operative Document shall remain unamended and unwaived and shall continue to be, and shall remain, in full force and effect in accordance with their respective terms. The amendments, modifications and consents set forth herein shall be limited precisely as provided for herein, and shall not be deemed to be a waiver of, amendment of, consent to or modification of any other term or provision of the Lease or of any term or provision of any other Operative Document or other instrument referred to therein or herein, or of any transaction or further or future action on the part of any of Lessee, Guarantor or any other Person which would require the consent of the Administrative Agent, Trustee or any of the Certificate Purchasers under the Lease or any such other Operative Document or instrument. ARTICLE IV MISCELLANEOUS 4.1 Cross-References. References in this Amendment No. 1 to any Article ---------------- or Section are, unless otherwise specified, to such Article or Section of this Amendment No. 1. -12- 4.2 Operative Document Pursuant to Lease. This Amendment No. 1 is an ------------------------------------ Operative Document executed pursuant to the Lease and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with the terms and provisions of the Lease. 4.3 Successors and Assigns. This Amendment No. 1 shall be binding upon ---------------------- and inure to the benefit of the parties hereto and their respective successors and assigns. 4.4 Counterparts, etc. This Amendment No. 1 may be executed by the ----------------- parties hereto in several counterparts, each of which when executed and delivered shall be deemed to be an original and all of which shall constitute together but one and the same agreement. 4.5 Governing Law. THIS AMENDMENT NO. 1 SHALL BE GOVERNED BY AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. 4.6 Guarantor Affirmation and Consent. By its signature below, Guarantor --------------------------------- hereby acknowledges and consents to this Amendment No. 1 and the amendments to the Lease provided herein, and the terms and provisions hereof. Guarantor hereby reaffirms as of the Amendment No. 1 Effective Date its covenants and agreements contained in the Guaranty and the Lease, including as such covenants and agreements may be modified by this Amendment No. 1, and further confirms that as of the Amendment No. 1 Effective Date (both before and after giving effect to theeffectiveness to this Amendment No. 1), the Guaranty is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects except that upon the effectiveness of this Amendment No. 1, all references in the Guaranty to the "Operative Documents", "Lease", "thereunder", "thereof", or words of like import shall mean the Lease, as the case may be, as in effect and amended by this Amendment No. 1. 4.7 Certificate Purchaser Confirmation. Execution and delivery to ---------------------------------- the Administrative Agent by a Certificate Purchaser of a counterpart to this Amendment No. 1 shall be deemed confirmation by such Certificate Purchaser that (i) all conditions precedent in Section 3.1 have been fulfilled to the ----------- satisfaction of such Certificate Purchaser and (ii) the decision of such Certificate Purchaser to execute and deliver to the Administrative Agent an executed counterpart to this Amendment No. 1 was made by such Certificate Purchaser independently and without reliance on the Administrative Agent, the Trustee or any other Certificate Purchaser as to the satisfaction of any condition precedent set forth in Section 3.1. ----------- [The remainder of this page is intentionally left blank.] -13- IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be executed by their respective officers hereunto duly authorized as of the day and year first above written. CIRCUS CIRCUS LEASING, INC., as Lessee By: MICHAEL S. ENSIGN ------------------------------------ Michael S. Ensign, President, Treasurer and Secretary S-1 CIRCUS CIRCUS ENTERPRISES, INC., as Guarantor By: GLENN SCHAEFFER ------------------------------------ Name: Glenn Schaeffer Title: President, Chief Financial Officer & Treasurer S-2 FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity except as expressly set forth herein, but solely as Trustee By: NANCY M. DAHL ------------------------------------- Name: Nancy M. Dahl Title: Vice President S-3 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent and Lead Arranger By: CHRISTINA LEE --------------------------------------- Name: Christina Lee Title: Vice President S-4 BA LEASING & CAPITAL CORPORATION, as Certificate Purchaser By: SONIA T. DELEN ------------------------------------- Name: Sonia T. Delen Title: Vice President S-5 PNC LEASING CORP., as Syndication Agent and a Certificate Purchaser By: ROBERT L. HEATH ------------------------------------- Name: Robert L. Heath Title: Vice President S-6 SOCIETE GENERALE FINANCIAL CORPORATION, as Documentation Agent and a Certificate Purchaser By: RICHARD W. CRANNELL, JR. ------------------------------------ Name: Richard W. Crannell, Jr. Title: Vice President S-7 THE BANK OF NOVA SCOTIA, as Managing Agent and a Certificate Purchaser By: ALAN PENDERGAST ------------------------------------ Name: Alan Pendergast Title: Relationship Manager S-8 BANK OF SCOTLAND, as a Certificate Purchaser By: ANNIE CHIN TAT ------------------------------------- Name: Annie Chin Tat Title: Senior Vice President S-9 FLEET BANK N.A., as a Certificate Purchaser By: JOHN F. CULLMAN ----------------------------------- Name: John F. Cullman Title: Senior Vice President S-10 KEYBANK NATIONAL ASSOCIATION, as a Certificate Purchaser By: THOMAS A CRANDELL ------------------------------------- Name: Thomas A. Crandell Title: Vice President S-11 CREDIT LYONNAIS LOS ANGELES BRANCH, as a Certificate Purchaser By: DIANNE M. SCOTT ------------------------------------ Name: Dianne M. Scott Title: First Vice President & Manager By: -------------------------------------- Name: Title: S-12 MICHIGAN NATIONAL BANK, as a Certificate Purchaser By: JOHN M. BEBB ------------------------------------ Name: John M. Bebb Title: Relationship Manager S-13 COMMERZBANK AKTIENGESELLSCHAFT, LOS ANGELES BRANCH, as a Certificate Purchaser By: STEVEN F. LARSEN ------------------------------------- Name: Steven F. Larsen Title: Vice President By: KARLA WIRTH ------------------------------------- Name: Karla Wirth Title: Assistant Treasurer EX-10.(UUU) 8 dex10uuu.txt AM. #1 TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Exhibit 10(uuu) Mandalay Resort Group Supplemental Executive Retirement Plan AMENDMENT NO. 1 WHEREAS, THE MANDALAY RESORT GROUP, formerly known as Circus Circus Enterprises, Inc., a Nevada corporation (the "Company') maintains the Circus Circus Enterprises, Inc. Supplemental Executive Retirement Plan (the "Plan"); and WHEREAS, the Company desires to amend the Plan in order to change formally the name of the Plan to reflect the name of the Company, to modify certain provisions so as to clarify and/or amend the circumstances in which a participant may forfeit his or her benefits otherwise payable under the Plan, and to modify the manner in which a participant's compensation is taken into account for purposes of determining the amount of benefits provided under the Plan; and WHEREAS, pursuant to the provisions of Sections 9.1 and 9.2 of the Plan, the Company is authorized to amend the Plan. NOW, THEREFORE, the Plan is hereby amended, as follows: 1. The Plan shall be referred to for all purposes as the Mandalay Resort Group Supplemental Executive Retirement Plan. 2. Effective as of June 18, 1998, Section 2.8 of the Plan is restated in its entirety to read: "2.8 Compensation. Salary and bonus received by a Participant from the Company for a calendar year (or for such other period of 12 months as may be taken into account in determining Final Compensation) for his or her service as an employee, with bonus being no more than one hundred percent (100%) of salary for Tier II and III Participants and one hundred fifty percent (150%) of salary for Tier I Participants. In any year in which a Change of Control occurs, Compensation shall be annualized and used in the calculation of Final Compensation." 3. Effective as of June 18, 1998, Section 2.15 of the Plan is restated in its entirety to read: "2.15 Final Compensation. Final Compensation for any Participant shall be the highest total annual Compensation received by the Participant during any one of the following periods: Each of the Participant's last five (5) full calendar years with respect to which the Participant is credited with a Year of Service under the Plan (or such fewer number of full calendar years if the Participant has not been employed throughout five (5) full calendar years) and the 12 month period ending on the date of the Participant's termination of employment with the Company." 4. Effective as of June 18, 1998, Section 2.25 of the Plan is restated in its entirety to read: "2.25 Years of Service. A Year of Service for vesting and Benefit accrual purposes shall mean twelve full months of service with the Company. An Eligible Employee shall be credited with a Year of Service for every twelve full months of employment with the Company. In determining Years of Service for these purposes, all Years of Service shall be taken into account except, with respect to those Participants whose participation in the Plan commenced as of the date of the adoption of the Plan, Years of Service attributable to periods prior to January 1, 1998 shall be taken into account only up to a maximum of ten (10) Years of Service, and, with respect to those Participants whose participation in the Plan commenced or commences as of any date later than the date of the adoption of the Plan, Years of Service attributable to periods prior to such date of initial participation shall be taken into account only up to a maximum of ten (10) Years of Service. In determining Years of Service, partial years may be taken into account and aggregated in such manner as the Administrative Committee determines is appropriate. The Administrative Committee, in its sold an absolute discretion, may include prior service with predecessor or acquired entities in determining Years of Service under the Plan and may make such other provisions for determining Years of Service for Participants on a case by case basis, as it determines, at its discretion, to be necessary or appropriate." 5. Effective as of June 18, 1998, Section 5.2 of the Plan is clarified by the modification of the heading thereto to read, in its entirety, as "Forfeitures" and by the addition of the following paragraph at the end of Section 5.2 as paragraph 5.2(d), to read: "(d) Notwithstanding anything set forth to the contrary in the preceding paragraphs of this Section 5.2, the Committee has the authority under this paragraph 5.2(d) and under the general provisions for the administrative discretion of the Committee, as set forth in Section 8.3, to require the forfeiture of benefits otherwise payable under the terms of the Plan to any Participant who is determined by the Committee to have been discharged for cause or who may have engaged in any act or acts of disloyalty to the Company, which acts include, but are not limited to, fraud, embezzlement, theft, commission of a felony or any other act of dishonesty in the course of his or her employment, and any such act (whether committed during or following such Participant's employment with the Company) shall be treated for purposes of the Plan in the same manner as any act that would otherwise constitute a violation of Section 5.2(a)." 6. In all other respects the Plan is hereby ratified and confirmed. EX-10.(WWW) 9 dex10www.txt FIRST AM. TO STOCK PURCHASE AGREEMENT Exhibit 10(www) FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT ------------------------------------------- FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT (this "Amendment") dated as of January 2, 2001 between Bank of America, N.A., a national banking association, MBG Trust a Delaware business trust and Mandalay Resort Group, a Nevada corporation. WHEREAS, the parties have entered into a Stock. Purchase Agreement (the "Agreement"), dated as of September 8, 2000; and WHEREAS, the parties wish to amend the Agreement subject to the terms and conditions of this Amendment; NOW THEREFORE, in consideration of the foregoing and of the mutual agreements herein contained and for other good and valuable consideration receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Amendment. The parties agree that the reference to "January 5, 2001" in Section 2.2(d) of the Agreement shall be replaced with "March 30, 2001". 2. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to choice of law principles). 3. Miscellaneous. This Amendment constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. No amendment, modification or waiver in respect of this Amendment will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties. This Amendment may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. The headings used in this Amendment are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Amendment. 4. Agreement Continuation. The Agreement, as modified herein, shall continue in full force and effect. All references to the Agreement in the Agreement or any document related thereto shall for all purposes constitute references to tho Agreement as amended hereby. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers on the date and year first above written. MANDALAY RESORT GROUP By: GLENN W. SCHAEFFER ----------------------------- Name: Glenn W. Schaeffer Title: President and Chief Financial Officer MBG TRUST By: WILMINGTON TRUST COMPANY, not in its individual capacity by solely as Trustee By: MARY KAY PUPILLO ----------------------------------------------- Name: Mary Kay Pupillo Title: Senior Financial Services Officer BANK OF AMERICA, N.A. By: WILLIAM C. CACCAMISE ------------------------------------------- Name: William C. Caccamise Title: Authorized Signatory EX-10.(XXX) 10 dex10xxx.txt SECOND AM. TO STOCK PURCHASE AGREEMENT Exhibit 10(xxx) EXECUTION COPY SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT -------------------------------------------- SECOND AMENDMENT, dated as of March 21, 2001 (this "Amendment"), to the --------- Stock Purchase Agreement, dated as of September 8, 2000, as amended by the First Amendment to Stock Purchase Agreement, dated as of January 2, 2001 (as so amended, the "Stock Purchase Agreement"), among Bank of America, N.A., a ------------------------ national banking association, as Share Seller ("Share Seller"), MBG Trust, a ------------ Delaware business trust (the "Trust"), and Mandalay Resort Group, a Nevada corporation ("Share Purchaser"). --------------- W I T N E S S E T H - - - - - - - - - - WHEREAS, the parties have entered into the Stock Purchase Agreement; and WHEREAS, the parties desire to provide for the further modification of the Stock Purchase Agreement as set forth herein. NOW THEREFORE, in consideration of their mutual covenants herein contained, the parties hereto, intending to be legally bound, hereby mutually covenant and agree as follows: 1 . Amendment. The Stock Purchase Agreement shall be amended as follows: (a) Definitions. In Section 1. 1 of the Stock Purchase Agreement, (i) in the definition of "Maximum Deliverable Shares", the number "ten million" -------------------------- shall be replaced with "12,500,000", (ii) in the definition of "Maximum Initial --------------- Amount", the number "$100 million" shall be replaced with "$125 million", (iii) - ------ in the definition of "Maximum Initial Shares", the number "7.0%" shall be ---------------------- replaced with "8.0%" and (iv) in the definition of "Maturity Date", the phrase ------------- "the date that is one year following the Trade Date" shall be replaced with "March 29, 2002". (b) Trade Date. In Section 2.2(d) of the Stock Purchase Agreement, the reference to "March 30, 2001" shall be replaced with "April 30, 2001". 2. Optional Prepayment. Unless the parties otherwise agree and Share ------------------- Purchaser makes the payment specified in Section 3(b) of this Amendment, Share Purchaser shall effect an Optional Prepayment with respect to an Optional Prepayment Amount of at least $25,000,000 and reduce any related Settlement Balance to zero by September 17, 2001. 3. Fees. (a) Share Purchaser agrees to pay Share Seller $187,500 within ---- one Business Day of the execution of this Amendment, such payment to be made by wire transfer of immediately available funds to an account designated by Share Seller. (b) If the parties agree that Share Purchaser shall not be required to effect an Optional Prepayment pursuant to Section 2 of this Amendment, Share Purchaser shall pay to Share Seller an additional $187,500 within one Business Day of the date of such agreement to extend (or such other date as the parties may agree). Such payment shall be made by wire transfer of immediately available funds to an account designated by Share Seller. 4. Adjustments. The Calculation Agent shall make appropriate ----------- adjustments, if any, to interest and other calculations under the Stock Purchase Agreement as a result of this Amendment. Notwithstanding anything to the contrary in the Stock Purchase Agreement, the Trade Date shall not be deemed to have occurred prior to the date hereof as a result of the Aggregate Forward Amount exceeding $ 100 million or the number of Initial Shares exceeding 7.0% of the outstanding Shares. 5. Effect of the Amendment. Except as amended hereby, the Stock ------------------------ Purchase Agreement is ratified and confined and continues in full force and effect. All references to the Stock Purchase Agreement in the Stock Purchase Agreement or any document related thereto shall for all purposes constitute references to the Stock Purchase Agreement as amended hereby. For the avoidance of doubt, the provisions of Section 9.10 of the Stock Purchase Agreement apply to this Amendment as if such provisions were stated in full herein. 6. Miscellaneous. This Amendment constitutes the entire agreement and -------------- understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto. No amendment, modification or waiver in respect of this Amendment will be effective unless in writing (including a writing evidenced by a facsimile transmission) and executed by each of the parties. This Amendment may be executed and delivered in counterparts (including by facsimile transmission), each of which will be deemed an original. The headings used in this Amendment are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Amendment. Capitalized terms used but not defined herein shall have the meaning set forth in the Stock Purchase Agreement. 7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ------------- ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO CHOICE OF LAW PRINCIPLES). 2 IN WITNESS WHEREOF, this Amendment has been duly executed as of the date first above written. MANDALAY RESORT GROUP, as Share Purchaser By: GLENN SCHAEFFER -------------------------------------------------- Name: Glenn Schaeffer Title: President, Chief Financial Officer and Treasurer MBG TRUST, as the Trust By: WILMINGTON TRUST COMPANY not in its individual capacity but solely as Trustee By: JEANNE M. OLLER ------------------------------------------------------ Name: Jeanne M. Oller Title: Administrative Account Manager BANK OF AMERICA, N.A., as Share Seller By: WILLIAM C. CACCAMISE ---------------------------------------------- Name: William C. Caccamise Title: Authorized Signatory 3 EX-21 11 dex21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Company Set forth below is information concerning the Company's (MRG) subsidiaries and their respective ownership. Jurisdiction Percentage Name and Form of Ownership - ---------------------------------------------------------------------------- Circus Circus Casinos, Inc.(1) Nevada corporation 100% MRG Slots-A-Fun, Inc.(2) Nevada corporation 100% MRG Edgewater Hotel Corporation(3) Nevada corporation 100% MRG Colorado Belle Corp.(4) Nevada corporation 100% MRG New Castle Corp.(5) Nevada corporation 100% MRG Ramparts, Inc.(6) Nevada corporation 100% MRG Circus Circus Mississippi, Inc.(7) Mississippi corporation 100% MRG Mandalay Corp. (8) Nevada corporation 100% MRG Mandalay Development Nevada corporation 100% MRG Ramparts International ("RI") Nevada corporation 100% MRG Galleon, Inc.("GI") Nevada corporation 100% MRG M.S.E. Investments, Incorporated ("MSE") Nevada corporation 100% MRG Last Chance Investments, Incorporated ("LCI") Nevada corporation 100% MRG Goldstrike Investments, Incorporated ("GSI") Nevada corporation 100% MRG Diamond Gold, Inc. ("DGI") Nevada corporation 100% MRG Oasis Development Company, Inc. ("ODC") Nevada corporation 100% MRG Circus Circus Leasing, Inc. Nevada corporation 78.7% MRG Circus Circus Michigan, Inc.("CCM") Michigan corporation 100% MRG Go Vegas Nevada corporation 100% MRG Mandalay Marketing and Events Nevada corporation 100% MRG Circus Circus New Jersey, Inc. New Jersey corporation 100% MRG Gold Strike Aviation, Incorporated Nevada corporation 100% MRG Goldstrike Finance Company, Inc. Nevada corporation 100% MRG Goldstrike Resorts, Inc. Nevada corporation 100% MRG Mandalay Vacation Resorts Nevada corporation 100% MRG New Dirt, Inc. Nevada corporation 100% MRG Pinkless, Inc. Nevada corporation 100% MRG Railroad Pass Investment Group ("RPIG")(9) Nevada partnership 70% MSE 20% LCI 10% GSI Jean Development Company ("JDC")(10) Nevada partnership 40% MSE 40% LCI 20% GSI Jean Development West ("JDW")(11) Nevada partnership 40% MSE 40% LCI 12% GSI 8% DGI Gold Strike Fuel Company Nevada partnership 16 2/3% MSE 16 2/3% LCI 16 2/3% GSI 50% ODC Jean Fuel Company West Nevada partnership 40% MSE 40% LCI 12% GSI 8% ODC Nevada Landing Partnership ("NLP") Illinois partnership 40% MSE 40% LSI 5% GSI 15% DGI Gold Strike L.V. ("GSLV") Nevada partnership 52% MSE 39% LCI 6.5% GSI 2.5% DGI Jean Development North ("JDN") Nevada partnership 47.5% MSE 38.5% LCI 5% GSI 9% DGI Lakeview Gaming Partnerships Joint Venture Nevada partnership 25% RPIG 25% JDC 25% JDN 25% JDW Pine Hills Development II ("PHDII") Mississippi partnership 58% MSE 32% LCI 7.5% GSI 2.5% DGI Other Interests: Circus and Eldorado Joint Venture Nevada partnership 50% GI Detroit Entertainment, L.L.C. Michigan limited liability company 53.5% CCM Victoria Partners Nevada partnership 50% GSLV Elgin Riverboat Resort Illinois partnership 50% NLP Pine Hills Development Mississippi partnership 90% PHDII Ramparts International PTE Ltd. Singapore corporation 100% RI (1) Doing business as Circus Circus Hotel and Casino-Las Vegas and Circus Circus Hotel and Casino-Reno. (2) Doing business as Slots-A-Fun Casino. (3) Doing business as Edgewater Hotel and Casino. (4) Doing business as Colorado Belle Hotel and Casino. (5) Doing business as Excalibur Hotel and Casino. (6) Doing business as Luxor Hotel and Casino. (7) Doing business as Gold Strike Casino Resort. (8) Doing business as Mandalay Bay Resort and Casino (9) Doing business as Railroad Pass Hotel and Casino. (10) Doing business as Gold Strike Hotel and Gambling Hall. (11) Doing business as Nevada Landing Hotel and Casino. EX-23 12 dex23.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 28, 2001 included in Mandalay Resort Group's Annual Report on Form 10-K for the year ended January 31, 2001 into Mandalay's previously filed Form S-8 Registration Statements File Nos. 2-91950, 2-93578, 33-18278, 33-29014, 33-39215, 33-56420, 33-53303, 333-51073, 333-93803, 333- 93805 and 333-47268 and to Mandalay's previously filed Form S-3 Registration Statement File No. 333-60975. Arthur Andersen LLP Las Vegas, Nevada April 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----