-----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, CJpeHh6ea+VLGSF/RJh8/dUjzkexccFd+CoQDAarrG5VsE9qjR0vorH9WCUadirS fu4GE7VuyFOTMTcWWHxcLA== 0000912057-00-020761.txt : 20000502 0000912057-00-020761.hdr.sgml : 20000502 ACCESSION NUMBER: 0000912057-00-020761 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000501 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: 615930 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 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2000 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)
Registrant's telephone number, including area code: (702)632-6700 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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, 2000 (based upon the last reported sale price on the New York Stock Exchange on such date) was $1,139,976,346. The number of shares of Registrant's Common Stock, $.01 2/3 par value, outstanding at April 20, 2000: 78,008,229. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE PART II--Portions of the Registrant's Annual Report to Stockholders for the year ended January 31, 2000 are incorporated by reference into Items 7 through 8, inclusive. PART III--Portions of the Registrant's definitive proxy statement in connection with the annual meeting of stockholders to be held on June 15, 2000, 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" AND "US," 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. WHEN WE USE THE TERM "MANDALAY," IT REFERS 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. We have the largest scaled hotel-casino resort development in Las Vegas, the world's largest gaming market. This "masterplan 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 with 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, 2000 about our properties that we wholly own and operate, except as otherwise indicated.
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 2,287 130 7,000 Luxor....................................... 4,404 120,000 2,031 107 3,200 Excalibur................................... 4,008 110,000 2,436 80 4,000 Circus Circus............................... 3,744 109,000 2,249 79 4,700 Monte Carlo (50% Owned)..................... 3,002 90,000 2,073 72 4,000 Slots-A-Fun................................. -- 16,700 526 27 -- RENO, NEVADA Circus Circus............................... 1,572 60,000 1,724 73 3,000 Silver Legacy (50% Owned)................... 1,711 85,000 2,186 79 1,800 LAUGHLIN, NEVADA Colorado Belle.............................. 1,226 64,000 1,269 41 1,700 Edgewater................................... 1,450 44,000 1,315 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 21,000 368 9 600 TUNICA COUNTY, MISSISSIPPI Gold Strike................................. 1,066 48,000 1,482 50 1,400 DETROIT, MICHIGAN MotorCity Casino (53.5% Owned)(4)........... -- 75,000 2,600 136 3,450 ELGIN, ILLINOIS Grand Victoria (50% Owned).................. -- 36,000 994 53 2,000 ------ --------- ------ ----- ------ Total......................................... 27,118 1,086,700 25,580 1,014 42,650 ====== ========= ====== ===== ======
- ------------------------ (1) Includes slot machines and other coin-operated devices. 1 (2) Generally includes blackjack ("21"), craps, pai gow poker, Caribbean stud poker, wheel of fortune and roulette. Mandalay Bay also offers baccarat. (3) This property, which opened March 2, 1999, includes a Four Seasons Hotel with 424 guest rooms that we own and Four Seasons Hotels Limited manages. (4) This property, which opened December 14, 1999, is being operated pending the construction of a permanent hotel-casino facility. NEW PROPERTIES Mandalay Bay, our newest megaresort, opened on March 2, 1999. The 43-story South Seas themed hotel-casino resort is located on approximately 60 acres on the Las Vegas Strip, adjacent to our Luxor and Excalibur properties. Within Mandalay Bay is a Four Seasons Hotel with 424 guest rooms that provides visitors with the only luxury "five-diamond" hospitality experience in Las Vegas. The Four Seasons brand name has allowed us to successfully target premium customers who are willing to spend more money for a total resort experience. 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 13 restaurants 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. Mandalay Bay is the centerpiece of our 230-acre development that we refer to as our masterplan mile. Mandalay Bay and our other masterplan 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. Our masterplan 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. Mandalay Bay, Luxor and Excalibur are connected by a monorail system as well as a climate-controlled skyway system. We are also constructing an aquarium exhibit, the Shark Reef at Mandalay Bay, which is expected to open in the summer of 2000 and will be cross-marketed to guests at all of the hotel-casinos within our masterplan mile. 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. We currently plan to build a $600 million hotel-casino. We are committed to contribute 20% of the development costs 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. PROPERTY DESCRIPTIONS We are providing below, additional information concerning each of our markets and our properties within those markets. LAS VEGAS, NEVADA Las Vegas has seen positive market trends in 1999, driven by the opening of four new megaresorts on the Las Vegas Strip, including Mandalay Bay. In 1999, Las Vegas' visitor volume increased by 10.5% to 33.8 million visitors, average occupancy increased to 88.0% from 85.8%, and total gaming revenue increased by 14.2% to $5.7 billion in the Las Vegas market. MANDALAY BAY. This property, which opened March 2, 1999, 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 has approximately 3,700 guest 2 rooms (including the 424-room Four Seasons at Mandalay Bay) and a 135,000-square-foot casino which, as of January 31, 2000, featured 2,287 slot machines and 130 table games. 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 features 13 restaurants, such as Charlie Palmer's Aureole, Wolfgang Puck's Trattoria Del Lupo, China Grill, rumjungle, Red Square and Border Grill, as well as a House of Blues nightclub and restaurant, including its signature Foundation Room (situated on Mandalay Bay's top floor). Additional features include a 125,000-square-foot convention facility and a 30,000-square-foot spa. Mandalay Bay 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. Mandalay Bay was designed to attract a higher income customer than we have historically targeted. LUXOR. This property is an Egyptian-themed hotel and casino complex situated on 64 acres of our masterplan mile, between Mandalay Bay and Excalibur. The resort features a 30-story pyramid and two 22-story hotel towers. In total, the property has 4,404 guest rooms. The resort has a 120,000-square-foot casino which, as of January 31, 2000, featured 2,031 slot machines and 107 table games. Luxor offers 20,000 square feet of convention space, a 20,000-square-foot spa, a 1,200-seat showroom that features the 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, seven 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 has 4,008 hotel rooms and a 110,000-square-foot casino which, as of January 31, 2000, featured 2,436 slot machines and 80 table games. Excalibur's other 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 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 1,300, seven 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. The property features 3,744 guest rooms and a 109,000-square-foot casino which, as of January 31, 2000, featured 2,249 slot machines and 79 table games. 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. Three specialty restaurants, a buffet with a seating capacity of approximately 1,200, two coffee shops, three fast food snack bars, several cocktail bars and a variety of gift shops and specialty shops are also available to the guests at Circus Circus-Las Vegas. 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 384 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 Mirage Resorts, Incorporated 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 Mirage Resorts and 3 connected to Monte Carlo by a monorail, and New York-New York, a 2,000-room hotel-casino resort owned by MGM Grand, Inc. which has announced plans to acquire Mirage Resorts. Monte Carlo's casino reflects a palatial style reminiscent of the BELLE EPOQUE, the French Victorian architecture of the late 19th century. Monte Carlo features 3,002 guest rooms and a 90,000-square-foot casino which, as of January 31, 2000, featured 2,073 slot machines and 72 table games. Amenities at Monte Carlo include three specialty restaurants, 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 with the world-renowned magician, Lance Burton. RENO, NEVADA Reno is located near the California-Nevada state line. The Reno market caters to locals of the Lake Tahoe-Reno area and tourists primarily from northern California. In 1999, Reno's total gaming revenue increased 4.1% to $807.5 million. CIRCUS CIRCUS-RENO. This property is a circus-themed hotel and casino complex situated in downtown Reno, Nevada. The property features 1,572 guest rooms and a 60,000-square-foot casino which, as of January 31, 2000, featured 1,724 slot machines and 73 table games. 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 casino offers 85,000 square feet of casino space which, as of January 31, 2000, featured 2,186 slot machines and 79 table games. The hotel offers 1,711 guest rooms. 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. LAUGHLIN, NEVADA Laughlin is situated on the Colorado River at the southern tip of Nevada approximately 90 miles south of Las Vegas. This market generates revenues primarily from southern California and Arizona residents who visit Laughlin for vacation or gambling. Typically, approximately 20% of people who visit Laughlin are first-time visitors, while 80% are repeat visitors. This market caters to a more mature population. Currently, this market has ten hotel-casinos with a total room capacity of 10,912. Between our two Laughlin properties, we have approximately 25% of the total rooms in the Laughlin market. In 1999, Laughlin's total gaming revenue increased 8.3% to $532.0 million. 4 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 1,226-room hotel and a 64,000-square-foot casino which, as of January 31, 2000, featured 1,269 slot machines and 41 table games. The property also 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. The property has 1,450 guest rooms and a 44,000-square-foot casino which, as of January 31, 2000, featured 1,315 slot machines and 37 table games. Edgewater's facilities include a specialty restaurant, a coffee shop, a 735-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. The principal highway between Las Vegas and southern California is Interstate-15 which passes directly through Jean, hence, Jean attracts gaming customers almost entirely from the large number of people traveling between Las Vegas and southern California. 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 812 guest rooms and a 37,000-square-foot casino which, as of January 31, 2000, featured 1,020 slot machines and 20 table games. Gold Strike also includes, 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. The property has 303 guest rooms and a 36,000-square-foot casino which, as of January 31, 2000, featured 1,020 slot machines and 21 table games. Nevada Landing includes a 72-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 RAILROAD PASS. This property is situated on approximately 56 acres along US-93, the direct route between Las Vegas and Phoenix, Arizona. The property has 120 guest rooms and a 21,000-square-foot casino which, as of January 31, 2000, featured 368 slot machines and nine table games. Railroad Pass includes, among other amenities, two full-service restaurants, a buffet, gift shop, two bars, 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, friendly 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 includes a 1,066-guest-room, 31-story hotel tower which was completed and placed in service during late 1997 and early 1998. The facilities at Gold Strike-Tunica include a 48,000-square-foot casino which, as of 5 January 31, 2000, featured approximately 1,482 slot machines and 50 table games. The property also features a 800-seat showroom, a coffee shop, a specialty restaurant, a 500-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. 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 casino includes approximately 75,000-square-foot casino which, as of January 31, 2000, featured approximately 2,600 slot machines and 136 table games. The property also features plus five restaurants and a 3,450-space parking facility. We currently plan to build a $600 million hotel-casino. We are committed to contribute 20% of the development costs 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." Our ability to own or operate a gaming facility in Detroit, Michigan is subject to certain outstanding litigation. 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, 2000. As of that date, the casino offered 994 slot machines and 53 gaming tables. After gaming legislation was passed earlier this year, the boat now offers dockside gaming, which means its operation is no longer restricted by fixed cruising schedules. The property also features a dockside complex that contains an approximately 83,000-square-foot pavilion with 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. The 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. Recently at our properties, such as Mandalay Bay, and to a lesser extent 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. MANDALAY BAY. Mandalay Bay, which opened March 2, 1999, contributed 22% of our revenues 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 guests 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, a House of Blues, rumjungle, a 1,700-seat showroom and a 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 17% of our revenues in the year ended January 31, 2000 (and 24% and 23%, respectively, in the years ended January 31, 1999 and 1998). 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. We completed an expansion program at Luxor in 1997 which added 1,950 new hotel rooms, a new spa, 20,000 square feet of convention space, a 1,200-seat showroom that features "Blue Man Group," which opened in March 2000, and a nightclub. EXCALIBUR. Excalibur contributed 14% of our revenues in the year ended January 31, 2000 (and 19% and 21%, respectively, in the years ended January 31, 1999 and 1998). 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 18% of our revenues in the year ended January 31, 2000 (and 24% and 25%, respectively, in the years ended January 31, 1999 and 1998). 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 8% of our revenues in the year ended January 31, 2000 (and 11% and 12%, respectively, in the years ended January 31, 1999 and 1998). 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. GOLD STRIKE AND NEVADA LANDING. Gold Strike and Nevada Landing together contributed 4% of our revenues in the year ended January 31, 2000 (and 5% and 6%, respectively, in the years ended January 31, 7 1999 and 1998). 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 6% of our revenues in the year ended January 31, 2000 (and 7% and 4%, respectively, in the years ended January 31, 1999 and 1998). Gold Strike-Tunica, which is 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, an 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. 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, --------------------------------------------------------------------- 2000 1999 1998 --------------------- --------------------- --------------------- (DOLLARS IN THOUSANDS) Revenues: (1) Casino(2).......................... $ 951,492 46.4% $ 709,909 48.0% $ 632,122 46.7% Rooms(3)........................... 534,132 26.0% 355,635 24.0% 330,644 24.4% Food and beverage(3)............... 346,647 16.9% 246,622 16.7% 215,584 15.9% Other(3)........................... 251,509 12.3% 170,701 11.5% 142,407 10.5% Earnings of unconsolidated affiliates....................... 98,627 4.8% 83,967 5.7% 98,977 7.3% ---------- ----- ---------- ----- ---------- ----- 2,182,407 106.4% 1,566,834 105.9% 1,419,734 104.8% Less: Complimentary allowances(3)........ 131,509 6.4% 87,054 5.9% 65,247 4.8% ---------- ----- ---------- ----- ---------- ----- Net revenues......................... $2,050,898 100.0% $1,479,780 100.0% $1,354,487 100.0% ========== ===== ========== ===== ========== =====
- ------------------------ (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. (2) Casino revenues are the net difference between the sums received as winnings and the sums paid as losses. (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. 8 We maintain stringent cost controls which historically have been exemplified by a general policy of offering minimal credit to gaming customers at our properties. During fiscal 1998, Luxor began to extend credit to gaming customers on a selective basis in an effort to appeal to a broader segment of the gaming market. We have also brought this policy to our operations at Mandalay Bay. 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, 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 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. We emphasize courteous and prompt service to our customers and aspire to a high standard of excellence in all of our operations. 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. FUTURE EXPANSION ACTIVITIES Consistent with past practice and the longstanding policy of making substantial investments in our gaming 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. 9 MASTERPLAN MILE. Our masterplan mile, which is the site of our most recently-completed resort, Mandalay Bay, as well as our Luxor and Excalibur properties, includes approximately 60 acres of land which is yet to be developed. The long-term plan for completion of our masterplan 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 future development on our masterplan mile. MISSISSIPPI GULF COAST. We have announced that we plan to develop a hotel-casino resort on the Mississippi Gulf Coast at the north end of the Bay of St. Louis, near the DeLisle exit on Interstate 10. It is currently anticipated that the resort will include as many as 1,500 hotel rooms and require an investment of approximately $225 million. We have received all necessary approvals to commence development. However, these approvals have been challenged in federal court, and we anticipate that we will not commence the design and construction of this resort until there is a satisfactory resolution of all legal actions. As presently contemplated, we will own 90% of the resort and a partner will contribute the land in exchange for the remaining 10% interest. DETROIT, MICHIGAN. For information concerning the planned construction of a hotel-casino in downtown Detroit, Michigan, see "Property Descriptions--Detroit, Michigan." 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 acquisition of the proposed permanent site 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. COMPETITION The hotel and casino industry is very competitive. Our hotel-casino operations in Las Vegas, which are conducted primarily from properties located along the Las Vegas Strip, currently compete with numerous other major hotel-casinos and a number of smaller casinos located on or near the Las Vegas Strip. Our Las Vegas operations also compete with casinos located in downtown Las Vegas, in Las Vegas' suburban areas and, to a lesser extent, 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. Las Vegas casinos, including our own, 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 September 1999, four 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 12,500, including the 3,700 at Mandalay Bay. While our Las Vegas operations had previously benefitted from growth in hotel and casino capacity in the Las Vegas market when we were a significant contributor to the new capacity, the addition of 1,000 guest rooms at Circus Circus-Las Vegas and an additional 1,950 guest rooms at Luxor in 1997 did not initially contribute to visitor growth. The impact on our operations of the added hotel and casino capacity recently completed, and any additional 10 capacity subsequently opened in Las Vegas, including another hotel-casino currently under construction, will depend on the ability of the new properties, including Mandalay Bay, to produce a significant and sustained increase in the flow of visitors to the Las Vegas market. 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. In Laughlin, the Colorado Belle and the Edgewater, which together accounted for approximately 25% of the rooms in Laughlin as of January 31, 2000, 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 Laughlin area properties, including the Colorado Belle and the 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 Laughlin properties, including the Colorado Belle and the Edgewater. 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 large number of 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. The growth of Native American casinos in southern California has also drawn visitors from the Jean, Nevada market. Gold Strike-Tunica competes with 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. 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. 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. 11 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. Other Native American tribes are either in the process of establishing or are considering establishing gaming at additional locations, including sites in California and Arizona. 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 expansion 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. 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 12 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 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 a 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 13 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. 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, such as the notes, 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; 14 - 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 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 28, 1999, 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 15 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. 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. 16 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-Tunica casino 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. 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, the regulations and/or interpretations of the Mississippi Gaming Control Act and the regulations by the Mississippi Gaming Commission 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 March 1, 2000, 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. 17 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 periodically to 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 periodically to 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 are not transferable, 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 and August 20, 1998. 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 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 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 18 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. 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. 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 or to have any other relationship with Mandalay or CCMI, Mandalay: - pays the unsuitable person any dividend or other distribution upon its voting securities; - recognizes the exercise, directly or indirectly, of any voting rights conferred by 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. 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. 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. 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 19 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. 20 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 determinations that there are means for the Mississippi Gaming Commission 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, we believe 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. 21 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-Tunica casino 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 22 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 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. 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 has been challenged and is currently the subject of 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, with the most recent renewal approved by the Illinois Board in October of 1999 for a one year period. 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; 23 - 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. 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. 24 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. 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. 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 25 - 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 from any person or entity who or which, individually or in association with 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; 26 - 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; - 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; 27 - 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. 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, two casino licenses have been issued. An application for the third casino license is pending before the Michigan Board. It is not certain when the Michigan Board will issue the third casino license. 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. 28 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 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 Application (less than 10% interest). 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. 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. 29 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 - 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: - a 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; 30 - 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; - 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 the terms of the Development Agreement, the temporary casino is to be operated for no more than 48 months unless otherwise agreed by the City of Detroit, at which time the temporary casino is to be closed and the permanent casino opened. Detroit Entertainment, L.L.C. is prepared to begin construction of the permanent casino in accordance with the Development Agreement once the permanent casino site designated by the City of Detroit has been acquired in accordance with procedures developed by the City of Detroit and the construction site is ready for construction activity. No assurance can be given regarding 31 when the permanent casino site will be available and ready for construction of the permanent casino or when construction of the permanent casino will be completed and the permanent casino opened. 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. 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; - a person who is an officer of the person who holds at least a 1% interest in the casino licensee or Casino Enterprise; and - the spouse or children of any of these persons. A "person" includes any individual and legal entity. 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 32 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; - 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 33 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 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 related 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 separate federal court proceedings initiated by the Lac Vieux Band of Lake Superior Chippewa Indians and by Barden Detroit Casino, L.L.C. 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. The Lac Vieux Band of Lake Superior Chippewa Indians had also filed an appeal with the Michigan Court of Appeals for judicial review of the Michigan Board's grant of a casino license to Detroit Entertainment, L.L.C. The Court of Appeals has decided that the Lac Vieux Band does not have standing to appeal the Michigan Board's issuance of the casino license to Detroit Entertainment, L.L.C. The Lac Vieux Band can seek to appeal this decision. If an appellate court determines that the Lac Vieux Band has standing to appeal the issuance of the license, the casino license issued by the Michigan Board to Detroit Entertainment, L.L.C. could be adversely affected, which could have an adverse impact upon us. No assurance can be given regarding the probable result of this litigation. 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 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 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. No assurance can be given regarding the impact of such a delay. 34 OTHER GAMING JURISDICTIONS Future expansion of our operations may 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, director, employees and persons associated with us. 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 has been 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. 35 Regulations adopted by the Financial Crimes Enforcement Network of the Treasury Department and the gaming regulatory authorities in some of the domestic 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, 2000, we and the joint ventures in which we participate employed approximately 36,000 persons. Approximately 41% of our employees at January 31, 2000 were employed pursuant to the terms of collective bargaining agreements. The contracts with two unions, covering approximately 850 employees, expired on May 31, 1999 and March 31, 2000. New contacts are currently being negotiated and we do not anticipate any difficulties in renewing our agreements. We currently have contracts with our other 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 recently 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) 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 current construction activities, plans for future expansion and other business development activities as well as other 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 2000 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 36 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 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. The growth in the number of hotel rooms in Las Vegas, which increased sharply in 1999, and the spread of legalized gaming in other states and countries, have negatively affected our operating results and may continue to do so. - 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 conducts gaming in the future. Any regulation in other jurisdictions may or may not be similar to that in Nevada, Mississippi, Illinois and Michigan. - Changes in applicable laws or regulations could have a significant effect on our operations of the Company and 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 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 the economic conditions in California and Mandalay Bay may be susceptible to the effects of economic conditions in the Far East. - The interstate highway between Las Vegas and southern California, where a large number of our customers reside, has experienced long traffic delays during peak periods. Such delays may affect the number of customers who visit our facilities in southern Nevada. - Plans for future construction 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 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. 37 - 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 large 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 arise from time to time. 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. We believe that the ultimate disposition of current matters will not have a material impact on our financial condition or results of operations. 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. - Legal proceedings are currently pending which challenge the city ordinance pursuant to which our Detroit joint venture was selected to develop one of three casinos permitted to be developed in Detroit, Michigan and the issuance of a casino license to our Detroit joint venture. See "Detroit Litigation" in Item 3 of this report. Depending on the eventual outcome of these legal proceedings, our Detroit joint venture's ability to continue to operate the temporary casino it opened in December 1999 could be precluded or otherwise adversely impacted and/or its ability to construct, open and/or operate a permanent Detroit hotel-casino could be delayed, precluded or otherwise adversely impacted. - 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. Therefore, 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. 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 38 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. 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, which from time to time is utilized as a parking lot for employees at Luxor and Excalibur. 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, 2000, none of the aforementioned properties we own was subject to any encumbrance securing the repayment of indebtedness. 39 JOINT VENTURE INTERESTS. Mandalay, either directly or through wholly owned subsidiaries, owns: - a 50% interest in the joint venture entity which owns and operates Silver Legacy, a hotel-casino in Reno, Nevada; - a 53.5% interest in the joint venture entity which owns and operates MotorCity Casino, a temporary casino in Detroit, Michigan; - a 50% interest in the joint venture entity which owns and operates Monte Carlo, a hotel-casino complex on the Las Vegas Strip; and - 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. 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, 2000.
PROPERTY AMOUNT - -------- ------------- (IN MILLIONS) Silver Legacy............................................ $170.0 MotorCity Casino......................................... 150.0 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 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 but has not been ruled upon by the court. Discovery on the merits has been stayed pending a ruling on the motion for class certification. 40 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. In BARDEN DETROIT CASINO, L.L.C. V. THE CITY OF DETROIT, ET AL., Barden Detroit Casino, L.L.C. sought to challenge the validity of the Michigan Act and the Detroit ordinance. On July 22, 1999 the United States District Court for the Eastern District of Michigan entered an Order dismissing this challenge. Barden Detroit Casino, L.L.C. has appealed the District Court's decision to the United States Court of Appeals for the Sixth Circuit. The appeal is currently pending in the Court of Appeals. No assurance can be given regarding the timing or outcome of further proceedings in this litigation. If it is ultimately determined that 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. In a separate action entitled LAC VIEUX DESERT BAND OF LAKE SUPERIOR CHIPPEWA INDIANS V. MICHIGAN GAMING CONTROL BOARD, the Lac Vieux Band of Lake Superior Chippewa Indians sought to appeal in the Michigan Court of Appeals the Michigan Gaming Control Board's grant of a casino license to our Detroit joint venture. The Michigan Court of Appeals has decided that the Lac Vieux Band does not have standing to appeal the issuance of the casino license. The Lac Vieux Band can seek to appeal this decision. If an appellate court determines that the Lac Vieux Band has standing to appeal the issuance of the license, then the Michigan Court of Appeals can review the issuance of the casino license to our Detroit joint venture based upon standards set forth in the Michigan Administrative Procedures Act for appeal of an administrative decision. No assurance can be given regarding the probable result of this litigation. 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, 2000. 41 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. Until June 18, 1999, when Mandalay changed its corporate name, the common stock was traded under the symbol CIR. 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 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
FISCAL 1999 LOW HIGH - ----------- -------- -------- First Quarter............................................... $17.56 $26.50 Second Quarter.............................................. $13.63 $19.25 Third Quarter............................................... $ 7.13 $13.94 Fourth Quarter.............................................. $10.75 $14.13
On April 20, 2000 there were 3,614 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. 42 ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED JANUARY 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING RESULTS:(1) Revenues (2)....................... $2,050,898 $1,479,780 $1,354,487 $1,334,250 $1,299,596 Income from operations............. 273,736 242,779 236,500 222,169 251,373 Pretax income...................... 103,116 140,815 147,922 163,863 205,759 Net income......................... 42,163 85,198 89,908 100,733 128,898 Basic earnings per share........... $ .47 $ .90 $ .95 $ .99 $ 1.33 Diluted earnings per share......... $ .46 $ .90 $ .94 $ .97 $ 1.30 BALANCE SHEET DATA: Total assets....................... $4,329,476 $3,869,707 $3,263,548 $2,729,111 $2,213,503 Long-term debt..................... 2,691,292 2,259,149 1,788,818 1,405,897 715,214 Stockholders' equity............... 1,187,780 1,157,628 1,123,749 971,791 1,226,812
- ------------------------ (1) Gold Strike, Nevada Landing and Railroad Pass were acquired on June 1, 1995. The Hacienda was acquired on September 1, 1995 and 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. (2) Revenues are net of complimentary allowances. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated herein by reference are pages 21 through 34 of Mandalay's Annual Report to Stockholders for the fiscal year ended January 31, 2000 (the "2000 Annual Report"), which pages are included as part of Exhibit 13 to this report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The information in the 2000 Annual Report beginning immediately following the caption "Market Risk and Derivative Financial Instruments" on page 32 thereof to, but not including, the caption "Year 2000 Readiness Disclosure" on page 33 thereof is incorporated herein by reference, which information is included as part of Exhibit 13 to this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated herein by reference are pages 35 through 56 of the 2000 Annual Report, which pages are included as part of Exhibit 13 to this report. 43 SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
YEAR ENDED JANUARY 31, 2000 ------------------------------------------------------------------ 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH 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
YEAR ENDED JANUARY 31, 1999 ------------------------------------------------------------------ 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL ----------- ----------- ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue.............................. $356,962 $384,661 $382,449 $355,708 $1,479,780 Income from operations............... 61,059 66,105 64,257 51,358 242,779 Income before income tax............. 35,794 40,043 39,289 25,689 140,815 Net income........................... 21,607 25,285 23,716 14,590 85,198 Basic earnings per share............. $ .23 $ .27 $ .25 $ .16 $ .90 Diluted earnings per share........... $ .23 $ .27 $ .25 $ .16 $ .90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 44 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 with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended January 31, 2000 and forwarded to stockholders prior to Mandalay's 2000 Annual Meeting of Stockholders (the "2000 Proxy Statement"), is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information in the 2000 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 2000 Proxy Statement beginning immediately following the caption "Executive Compensation" to, but not including, the caption "Certain Transactions" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information in the 2000 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 reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information in the 2000 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" and the additional information in the 2000 Proxy Statement beginning immediately following the caption "Compensation Committee Interlocks and Insider Participation" to, but not including, the caption "Comparative Stock Price Performance Graph "is incorporated herein by reference. 45 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, 2000 and 1999...................................................... 35* Consolidated Statements of Income for the three years ended January 31, 2000.......................................... 36* Consolidated Statements of Cash Flows for the three years ended January 31, 2000.................................... 37* Consolidated Statements of Stockholders' Equity for the three years ended January 31, 2000........................ 38* Notes to Consolidated Financial Statements.................. 39* Report of Independent Public Accountants.................... 56*
(a)(2)Supplemental Financial Statement Schedules: None. - ------------------------ * Refers to page of Mandalay's Annual Report to Stockholders for the year ended January 31, 2000, the incorporated portions of which are included as Exhibit 13 to this report. (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.)
46 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 National Trust and Savings Association, 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.) 4(d). Amendment No. 1 to Amended and Restated Loan Agreement, by and among the Registrant, the Banks named therein and Bank of America National Trust and Savings Association, 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 National Trust and Savings Association, 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 National Trust and Savings Association, 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. (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 October 20, 1989, by and between the Registrant and Salomon Brothers Holding Company Inc. (Incorporated by reference to Exhibit 4(q) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1990.) 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(a) 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 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(k). 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(l). 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.)
47 4(m). 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(n). 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(o). 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(p). 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(q). 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.) 4(r). 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(s). 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(t). 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(u). 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(v). 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(w). 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(x). 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(y). 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.)
48 4(z). 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(aa). 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(bb). 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 National Trust and Savings Association, 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(cc). 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(dd). 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.) 4(ee). 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.) 10(a).* 1983 Nonqualified Stock Option Plan of the Registrant. (Incorporated by reference to Exhibit 10(d) to the Registrant's Registration Statement (No. 2-85794) on Form S-1.) 10(b).* 1983 Incentive Stock Option Plan of the Registrant. (Incorporated by reference to Exhibit 10(e) to the Registrant's Registration Statement (No. 2-85794) on Form S-1.) 10(c).* Amendment to 1983 Incentive Stock Option Plan. (Incorporated by reference to Exhibit 4(a) to the Registrant's Registration Statement (No. 2-91950) on Form S-8.) 10(d).* 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(e).* 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(f).* 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(g).* 1998 Stock Option Plan. (Incorporated by reference to Exhibit 4(g) to the Registrant's Registration Statement (No.333-51073) on Form S-8.)
49 10(h). 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(i).* 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(j). Lease, dated November 1, 1957, by and between Bethel Palma and others, as lessor, and the Registrant's predecessor in interest, as lessee; Amendment of Lease, dated May 6, 1983. (Incorporated by reference to Exhibit 10(g) to the Registrant's Registration Statement (No. 2-85794) on Form S-1.) 10(k). Grant, Bargain and Sale Deed to the Registrant pursuant to the Lease dated November 1, 1957. (Incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1984.) 10(l). 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(m). 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(n). 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(o). 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(p). Lease, dated as of November 1, 1981, between Novus Property Company, as landlord, and the Registrant, as tenant. (Incorporated by reference to Exhibit 4(h) to the Registrant's Registration Statement (No. 2-85794) on Form S-1.) 10(q). First Addendum and First Amendment, each dated as of June 15, 1983, to Lease dated as of November 1, 1981. (Incorporated by reference to Exhibit 4(i) to the Registrant's Annual Report on Form 10-K for the year ended January 31, 1984.) 10(r). Second Amendment, dated as of April 1, 1984, to Lease dated as of November l, 1981. (Incorporated by reference to Exhibit 10(o) to the Registrant's Registration Statement (No. 33-4475) on Form S-1.) 10(s). 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.)
50 10(t). 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(u). 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(v). 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(w). 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 National Trust and Savings Association as Administrative Agent. 10(x). 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(y). 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(z). 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(aa). 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.)
51 10(bb). 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(cc). 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(dd). 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(ee).* Executive Officer Annual Bonus Plan. (Incorporated by reference to Exhibit 10(hh) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995.) 10(ff).* 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(gg).* 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(hh).* 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(ii).* 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(jj). 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(kk). 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(ll). 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.)
52 10(mm). 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(nn). 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(oo). 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.) 10(pp). Amendment dated June 1, 1995 to the Joint Venture Agreement between Nevada Landing Partnership and RBG, J.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(qq). 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(rr). 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 National Trust and Savings Association, 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(ss). 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(tt). 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(uu). 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(vv). 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(ww). 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.)
53 10(xx). 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(yy). 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(zz). 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(aaa). 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(bbb). 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(ccc). 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.) 10(ddd). 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(eee). 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(fff). Letter agreement between the Registrant and Atwater Casino Group, L.L.C., and related Executive Summary. (Incorporated by reference to Exhibit 10(a) to the Registrant's Amendment on Form 10-Q/A dated August 1, 1997.) 10(ggg). 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(hhh). First Amendment to Operating Agreement, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. 10(iii). Amended First Amendment to Operating Agreement, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. 10(jjj). Second Amendment to Operating Agreement, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C.
54 10(kkk). 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(lll). 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(mmm). Second Amendment to the Amended and Restated Development Agreement, 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(nnn). 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(ooo). 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.) 10(ppp). 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(qqq). 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(rrr). 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(sss). 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 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 October 31, 1998.) 10(ttt). 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.)
55 10(uuu).* 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.) 13. Portions of the Annual Report to Stockholders for the Year Ended January 31, 2000 specifically incorporated by reference as part of this Report. 21. Subsidiaries of the Registrant. 23. Consent of Arthur Andersen LLP. 27. Financial Data Schedule for the year ended January 31, 2000 as required under EDGAR.
- ------------------------ * 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, 2000, 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. 56 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 28, 2000 By: /s/ MICHAEL S. ENSIGN ------------------------------------ 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 --------- ----- ---- Chairman of the Board, Chief /s/ MICHAEL S. ENSIGN Executive Officer and Chief ------------------------------------------- Operating Officer (Principal April 28, 2000 Michael S. Ensign Executive Officer) /s/ WILLIAM A. RICHARDSON ------------------------------------------- Vice Chairman of the Board April 28, 2000 William A. Richardson President, Chief Financial /s/ GLENN SCHAEFFER Officer, Treasurer and ------------------------------------------- Director (Principal Financial April 28, 2000 Glenn Schaeffer Officer) /s/ LES MARTIN Vice President and Chief ------------------------------------------- Accounting Officer (Principal April 28, 2000 Les Martin Accounting Officer) /s/ WILLIAM E. BANNEN ------------------------------------------- Director April 28, 2000 William E. Bannen /s/ ARTHUR H. BILGER ------------------------------------------- Director April 28, 2000 Arthur H. Bilger /s/ ROSE MCKINNEY-JAMES ------------------------------------------- Director April 28, 2000 Rose McKinney-James /s/ MICHAEL D. MCKEE ------------------------------------------- Director April 28, 2000 Michael D. McKee /s/ DONNA B. MORE ------------------------------------------- Director April 28, 2000 Donna B. More
57 INDEX TO EXHIBITS FORM 10-K FISCAL YEAR ENDED JANUARY 31, 2000
EXHIBIT NUMBER - --------------------- 10(w). 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 National Trust and Savings Association as Administrative Agent. 10(hhh). First Amendment to Operating Agreement, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. 10(iii). Amended First Amendment to Operating Agreement, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. 10(jjj). Second Amendment to Operating Agreement, by and between Circus Circus Michigan, Inc. and Atwater Casino Group, L.L.C. 10(mmm). Second Amendment to the Amended and Restated Development Agreement, 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. 13. Portions of the Annual Report to Stockholders for the Year Ended January 31, 2000 specifically incorporated by reference as part of this Report. 21. Subsidiaries of the Registrant. 23. Consent of Arthur Andersen LLP. 27. Financial Data Schedule for the year ended January 31, 2000 as required under EDGAR.
58 EX-10.(W) 2 EXHIBIT 10.(W) EXHIBIT 10(w) AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT This Amendment No. 1 to the Amended and Restated Credit Agreement (this "Amendment") dated as of July 13, 1998 is entered into with reference to the Amended and Restated Credit Agreement dated as of November 24, 1997, among CIRCUS AND ELDORADO JOINT VENTURE, a Nevada general partnership ("Borrower"), the Lenders referred to therein ("Lenders"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent ("Agent") (as amended the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Borrower and the Agent, acting with the consent of the Requisite Lenders in accordance with Section 10.6 of the Credit Agreement, hereby amend the Credit Agreement as follows: 1. REVISED LEVERAGE REQUIREMENTS. Section 7.6 (B) of the Credit Agreement is hereby amended to read in full as follows: "7.6 (B) MAXIMUM LEVERAGE RATIO. Borrower shall not permit the Leverage Ratio as of the last day of any Fiscal Quarter ending during a period described below to exceed the ratio set forth opposite that period: Quarters Ending Maximum Leverage Ratio Closing Date through 4.85:1.00 December 31, 1997 January 1, 1998 through June 30, 1998 4.50:1.00 September 30, 1998 5.00:1.00 and December 31, 1998 March 31, 1999 and 4.90:1.00 June 30, 1999 September 30, 1999 and 4.80:1.00 December 31, 1999 March 31, 2000 through December 31, 2000 4.50:1.00 -1- March 31, 2001 through December 31, 2001 4.00:1.00 March 31, 2002 through December 31, 2002 3.50:1.00 March 31, 2003 and Thereafter through Termination Date 3.25:1.00 2. WAIVER OF LEVERAGE DEFAULTS. The Lenders hereby waive Borrower's failure to comply with Section 7.2B as of the last day of the Fiscal Quarters ended March 31, 1998 and June 30, 1998. This is a one-time waiver only, and shall not imply an obligation to grant further waivers; Borrower shall fully comply with this Section in the future. 3. CONDITIONS PRECEDENT. The effectiveness of this Amendment shall be conditioned upon the receipt by the Agent of the written consent to the execution, delivery and performance hereof from the Requisite Lenders and from Circus. 4. REPRESENTATION AND WARRANTY. Borrower represents and warrants to the Agent and the Lenders that no Default or Event of Default has occurred and remains continuing. -2- 5. CONFIRMATION. In all other respects, the term of the Credit Agreement and other Loan Documents are hereby confirmed. IN WITNESS WHEREOF, Borrower and Agent have executed this Amendment as of the date first written above by their duly authorized representatives. CIRCUS AND ELDORADO JOINT VENTURE, a Nevada general partnership By: GALLEON, INC. Its: Managing Partner By: GLENN SCHAEFFER ----------------------------- Title: President -------------------------- By: ELDORADO LIMITED LIABILITY COMPANY Its: General Partner By: ELDORADO RESORTS LLC Its: Manager By: DONALD CARANO ---------------------- Title: Chief Executive Officer ------------------------ -3- By: EXECUTIVE COMMITTEE By: GARY CARANO ---------------------- Title: ---------------------- By: BRUCE SEXTON ---------------------- Title: ---------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent By: JANICE HAMMOND ---------------------- Title: Vice President Agency Specialist -4- CONSENT OF LENDER This Consent of Lender is delivered with reference to the Amended and Restated Credit Agreement dated as of November 24, 1997, among Circus and Eldorado Joint Venture, a Nevada general partnership ("Borrower"), the Lenders referred to therein, ("Lenders"), and Bank of America National Trust and Savings Association, in its capacity as Administrative Agent for Lenders ("Agent"). Capitalized terms used but not defined herein are used with the meanings set forth for those terms in the Credit Agreement. The undersigned Lender hereby consents to the execution, delivery and performance of the proposed Amendment No. 1 to the Credit Agreement by the Administrative Agent on behalf of the Lenders, substantially in the form presented to the undersigned as a draft. BANK OF AMERICA NT & SA - -------------------------- [Typed/Printed Name of Lender] By: SCOTT L. FABER ----------------------- Vice President ------------------------- [Typed/Printed Name and Title] Dated July 7 , 1998 BANK OF SCOTLAND - ------------------------------ [Typed/Printed Name of Lender] By: ANNIE CHIN TAT --------------------------- Senior Vice President - ------------------------------- [Typed/Printed Name and Title] Dated July 10 , 1998 -5- CIBC OPPENHEIMER CORP., AS AGENT - ---------------------------------- [Typed/Printed Name of Lender] By: PAUL J. CHAKMAK ------------------- Managing Director --------------------- [Typed/Printed Name and Title] Dated July , 1998 FIRST SECURITY BANK, N.A. - ---------------------------- [Typed/Printed Name of Lender] By: DAVID P. WILLIAMS Vice President ------------------------- [Typed/Printed Name and Title] Dated July 8 , 1998 PNC BANK NATIONAL ASSOCIATION - ------------------------------- [Typed/Printed Name of Lender] By: GARY W. FASSELA -------------------- Vice President - ------------------------- [Typed/Printed Name and Title] Dated July 13, 1998 SOCIETE GENERALE - ---------------------------- [Typed/Printed Name of Lender] By: ALEX KIM -------------------------- Vice President --------------------------- [Typed/Printed Name and Title] Dated July 13 , 1998 -6- U.S. BANK - ----------------------------- [Typed/Printed Name of Lender] By: MARK ESNOZ Assistant Vice President ------------------------------ [Typed/Printed Name and Title] Dated July 7 , 1998 WELLS FARGO BANK, NATIONAL ASSOCIATION - ---------------------------------------- [Typed/Printed Name of Lender] By: SUE FULLER ------------------------- Vice President ----------------------------- [Typed/Printed Name and Title] Dated July , 1998 -7- EX-10.(HHH) 3 EXHIBIT 10.(HHH) EXHIBIT 10(hhh) FIRST AMENDMENT TO OPERATING AGREEMENT OF DETROIT ENTERTAINMENT, L.L.C. A MICHIGAN LIMITED LIABILITY COMPANY THIS FIRST AMENDMENT TO OPERATING AGREEMENT (the "First Amendment") is made and entered into as of the Closing Date, 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. Pursuant to that certain Operating Agreement of Detroit Entertainment, L.L.C., dated as of October 7, 1997 (the "Operating Agreement"), Circus and ACG formed Detroit Entertainment, L.L.C., a Michigan limited liability company (the "Company"). B . Atwater Entertainment Associates, L.L.C. ("AEA") and ZRX, L.L.C. ("ZRX") are the constituent members of ACG. C. Circus is a subsidiary of Mandalay Resort Group (formerly known as Circus Circus Enterprises, Inc.) ("Mandalay"). D. In connection with the initial formation of the Company, Circus acquired a 45% Membership Interest in the Company. E. As a consequence of the inability of certain members of AEA (the "Disqualified Members") to obtain Michigan gaming licenses, ACG, AEA and ZRX have requested that Circus purchase the membership interests of the Disqualified Members, with such transaction being structured so that (i) the ownership interest of AEA in ACG shall be appropriately reduced, (ii) the Membership Interest of ACG in the Company shall be appropriately reduced and (iii) the ownership interest of Circus in the Company shall be appropriately increased. F. As a consequence of such transactions, it is anticipated that the total Membership Interest of Circus in the Company will exceed 50%. As a consequence of the ownership by Circus by more than 50% of the total Membership Interest in Company, the Company may, for certain purposes, be deemed to be a subsidiary of Mandalay. G. Pursuant to certain bond indentures and/or other covenants and agreements which may now or hereafter from time to time be binding upon Mandalay and/or its affiliates or subsidiaries, Mandalay and its affiliates or subsidiaries may be subject to certain restrictions affecting the ability of such Persons to directly or indirectly enter into certain types of financial or other transactions (the "Restrictive Covenants"). H. As a material part of the inducement to Circus to purchase the ownership interests of the Disqualified Members and to increase its Membership Interest in the Company above 50%, Circus has required, and ACG, AEA and ZRX have agreed, that the parties shall enter into this First Amendment. NOW, THEREFORE, as a material inducement to Circus to purchase the ownership interests of the Disqualified Members, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Notwithstanding anything to the Operating Agreement, ACG, AEA and ZRX agree and acknowledge that Circus is acquiring the ownership interests Disqualified Members as an accommodation to ACG, AEA and ZRX. 2. Notwithstanding anything to the contrary contained in the Operating Agreement (including, without limitation, the provisions of Sections 3.1, 3.11, and 4.04(d) thereof) and notwithstanding anything to the contrary which may now or hereafter be provided at law or in equity, in no event shall Circus or any Management Committee members appointed by Circus be obligated to agree or consent to any action, or to take or permit-to be taken, any action in connection with the management of the affairs of the Company (including without limitation, the ownership, operation, financing, refinancing and/or disposition of any assets of the Company) if, in the opinion of Circus, in its sole discretion, such action would constitute a violation of any Restrictive Covenant to which Mandalay or any of its subsidiaries or affiliates are parties, or by which they are bound, even though such proposed action might otherwise be deemed beneficial to the Company and/or to the other Member and/or its constituent members. By way of example and not by way of limitation, if Circus and the Committee Members appointed by Circus withhold their approval of a proposed refinancing pursuant to Section 4.04(d) of the Operating Agreement because Circus has determined that such refinancing would constitute a violation of a Restrictive Covenant to which Mandalay and/or its subsidiaries are bound, such disapproval shall not constitute a breach of any express or implied obligation of Circus (and/or its Affiliates or subsidiaries) to the Company or to the other Member, its constituent members and/or their constituent members. 3. Except as otherwise expressly set forth herein, any defined term used in this First Amendment shall have the same meaning as set forth in the Operating Agreement. 4. Except as amended or modified hereby, the Operating Agreement shall remain unmodified and in full force and effect. 2 IN WITNESS WHEREOF, the undersigned have executed this First Amendment as the date first set forth above. DETROIT ENTERTAINMENT, L.L.C. MANAGEMENT COMMITTEE: By: THOMAS CELANI ------------------------------------------------ Thomas Celani, appointee of Z.R.X., L.L.C. By: MARIAN ILITCH ------------------------------------------------ Marian Ilitch, appointee of Z.R.X., L.L.C. By: Z.L.M. Corporation, appointee of Z.R.X., L.L.C. By: MARIAN ILITCH --------------------------------------------- Marian Ilitch, Secretary and Treasurer Z.L.M. Corporation By: HERB J. STRATHER -------------------------------------------- Herb J. Strather, appointee of Atwater Entertainment Associates, L.L.C. By: DR. NELLIE VARNER -------------------------------------------- Dr. Nellie Varner, appointee of Atwater Entertainment Associates, L.L.C. By: LAURENCE P. DOSS -------------------------------------------- Laurence P. Doss, appointee of Atwater Entertainment Associates, L.L.C. By: PETER A. SIMON -------------------------------------------- Peter A. Simon, appointee of Circus Circus Michigan, Inc. By: DONALD R. GIVENS -------------------------------------------- Donald R. Givens, appointee of Circus Circus Michigan, Inc. 3 By: YVETTE E. LANDAU -------------------------------------------- Yvette E. Landau, appointee of Circus Circus Michigan, Inc. By: GREGG H. SOLOMON -------------------------------------------- Gregg H. Solomon, appointee of Circus Circus Michigan, Inc. By: DAVID R. BELDING -------------------------------------------- David R. Belding, appointee of Circus Circus Michigan, Inc. By: GLENN W. SCHAEFFER -------------------------------------------- Glenn W. Schaeffer, appointee of Circus Circus Michigan, Inc. JOINDER ------- ATWATER ENTERTAINMENT ASSOCIATES, L.L.C., a Michigan limited liability company and ZRX, L.L.C., a Michigan limited liability company, hereby join in the execution of the foregoing First Amendment, solely for the purposes of acknowledging that they have read, understand and agree to be bound by, the terms, covenants and provisions of the foregoing First Amendment. ATWATER ENTERTAINMENT ASSOCIATES, ENTERTAINMENT ZRX, L.L.C., L.L.C., a Michigan limited liability a Michigan limited liability company company By: HERBET J. STRATHER By: THOMAS CELANI ------------------------------- --------------------------- Herbert J. Strather, Chairman Thomas Celani, President By: NELLIE M. VARNER By: MICHAEL MALIK ------------------------------- --------------------------- Nellie M. Varner, Manager Michael Malik, Member By: LAWRENCE P. DOSS By: MARIAN ILITCH ------------------------------- --------------------------- Lawrence P. Doss, Manager Marian Ilitch, Member By: THOMAS CELANI --------------------------- Thomas Celani, Member 4 EX-10.(III) 4 EXHIBIT 10.(III) EXHIBIT 10(iii) AMENDED FIRST AMENDMENT TO OPERATING AGREEMENT OF DETROIT ENTERTAINMENT, L.L.C. A MICHIGAN LIMITED LIABILITY COMPANY THIS AMENDED FIRST AMENDMENT TO OPERATING AGREEMENT (the "First Amendment") is made and entered into as of the Closing Date, 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. Pursuant to that certain Operating Agreement of Detroit Entertainment, L.L.C., dated as of October 7, 1997 (the "Operating Agreement"), Circus and ACG formed Detroit Entertainment, L.L.C., a Michigan limited liability company (the "Company"). B . Atwater Entertainment Associates, L.L.C. ("AEA") and ZRX, L.L.C. ("ZRX") are the constituent members of ACG. C. Circus is a subsidiary of Mandalay Resort Group (formerly known as Circus Circus Enterprises, Inc.) ("Mandalay"). D. In connection with the initial formation of the Company, Circus acquired a 45% Membership Interest in the Company. E. As a consequence of the inability of certain members of AEA (the "Exiting Members") to obtain Michigan gaming licenses, ACG, AEA and ZRX have requested that Circus purchase the membership interests of the Exiting Members, with such transaction being structured so that (i) the ownership interest of AEA in ACG shall be appropriately reduced, (ii) the Membership Interest of ACG in the Company shall be appropriately reduced and (iii) the ownership interest of Circus in the Company shall be appropriately increased. F. As a consequence of such transactions, it is anticipated that the total Membership Interest of Circus in the Company will exceed 50%. As a consequence of the ownership by Circus by more than 50% of the total Membership Interest in Company, the Company may, for certain purposes, be deemed to be a subsidiary of Mandalay. G. Pursuant to certain bond indentures and/or other covenants and agreements which may now or hereafter from time to time be binding upon Mandalay and/or its affiliates or subsidiaries, Mandalay and its affiliates or subsidiaries may be subject to certain restrictions affecting the ability of such Persons to directly or indirectly enter into certain types of financial or other transactions (the "Restrictive Covenants"). H. As a material part of the inducement to Circus to purchase the ownership interests of the Exiting Members and to increase its Membership Interest in the Company above 50%, Circus has required, and ACG, AEA and ZRX have agreed, that the parties shall enter into this First Amendment. NOW, THEREFORE, as a material inducement to Circus to purchase the ownership interests of the Exiting Members, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Notwithstanding anything to the Operating Agreement, ACG, AEA and ZRX agree and acknowledge that Circus is acquiring the ownership interests Exiting Members as an accommodation to ACG, AEA and ZRX. 2. Notwithstanding anything to the contrary contained in the Operating Agreement (including, without limitation, the provisions of Sections 3.10, 3.11, and 4.04(d) thereof) and notwithstanding anything to the contrary which may now or hereafter be provided at law or in equity, in no event shall Circus or any Management Committee members appointed by Circus be obligated to agree or consent to any action, or to take or permit to be taken, any action in connection with the management of the affairs of the Company (including without limitation, the ownership, operation, financing, refinancing and/or disposition of any assets of the Company) if, in the opinion of Circus, in its sole discretion, such action would constitute a violation of any Restrictive Covenant to which Mandalay or any of its subsidiaries or affiliates are parties, or by which they are bound, even though such proposed action might otherwise be deemed beneficial to the Company and/or to the other Member and/or its constituent members. By way of example and not by way of limitation, if Circus and the Committee Members appointed by Circus withhold their approval of a proposed refinancing pursuant to Section 4.04(d) of the Operating Agreement because Circus has determined that such refinancing would constitute a violation of a Restrictive Covenant to which Mandalay and/or its subsidiaries are bound, such disapproval shall not constitute a breach of any express or implied obligation of Circus (and/or its Affiliates or subsidiaries) to the Company or to the other Member, its constituent members and/or their constituent members. 3. Except as otherwise expressly set forth herein, any defined term used in this First Amendment shall have the same meaning as set forth in the Operating Agreement. 4. Except as amended or modified hereby, the Operating Agreement shall remain unmodified and in full force and effect. IN WITNESS WHEREOF, the undersigned have executed this Amended First Amendment as the date first set forth above. CIRCUS CIRCUS MICHIGAN, INC. ATWATER CASINO GROUP, L.L.C. a Michigan corporation a Michigan limited liability company By: GLENN W. SCHAEFFER By: THOMAS CELANI -------------------------------- --------------------------- Glenn W. Schaeffer, President Thomas Celani, President 2 CONSENTED TO: ZRX, L.L.C. ATWATER ENTERTAINMENT ASSOCIATES, L.L.C. By: MARIAN ILITCH By: VIVIAN CARPENTER ------------------------------ ---------------------------- Marian Ilitch, Member Vivian Carpenter, Member 3 EX-10.(JJJ) 5 EXHIBIT 10.(JJJ) EXHIBIT 10(jjj) SECOND AMENDMENT TO OPERATING AGREEMENT OF DETROIT ENTERTAINMENT, L.L.C. A MICHIGAN LIMITED LIABILITY COMPANY THIS SECOND AMENDMENT TO OPERATING AGREEMENT (the "Second Amendment") is made and entered into as of the Closing Date, 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. Pursuant to that certain Operating Agreement of Detroit Entertainment, L.L.C., dated as of October 7, 1997 (the "Operating Agreement"), Circus and ACG formed Detroit Entertainment, L.L.C., a Michigan limited liability company (the "Company"). B. Atwater Entertainment Associates, L.L.C. ("AEA") and Z.R.X., L.L.C. ("ZRX") are the constituent members of ACG. C. Circus is a subsidiary of Mandalay Resort Group (formerly known as Circus Circus Enterprises, Inc.) ("Mandalay"). D. In connection with the initial formation of the Company, Circus acquired a 45% Membership Interest in the Company. E. Certain members of AEA, the "Qualifiers With Problems ("QWPs"), have requested that Circus purchase the membership interests of the QWPs, with such transaction being structured so that (i) the ownership interest of AEA in ACG shall be appropriately reduced, (ii) the Membership Interest of ACG in the Company shall be appropriately reduced and (iii) the ownership interest of Circus in the Company shall be appropriately increased. F. As a consequence of such transactions, the parties desire to amend the Operating Agreement of the Company to reflect the changes, among others, in each Member's respective Membership Interest. H. As a material part of the inducement to Circus to purchase the ownership interests of the Disqualified Members, Circus has required, and ACG, AEA and ZRX have agreed, that the parties shall enter into this Second Amendment. NOW, THEREFORE, for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. AMENDMENTS TO OPERATING AGREEMENT . The Operating Agreement shall be amended as follows: a. Section 4.05(a) should be amended in its entirety to read as follows: "(a) PREDEVELOPMENT ADVANCES. Any Project Costs incurred after May 1, 1997 and prior to the Closing Date as defined in the Agreement dated September 9, 1999, and Approved by the Management Committee, shall be borne 45% by Circus and 55% by ACG, and thereafter until Initial Licensing such Project Costs shall be borne 53.5302% by Circus and 46.4698% by ACG. Upon Initial Licensing, all such costs and expenses Approved by the Management Committee and borne by the Members shall be included in the Project Budget and shall be promptly reimbursed to the respective Members; provided, however, the qualifier investigation fees and all legal fees incurred by the Selling Members as defined in the Agreement dated September 9, 1999 between the Selling Members and Circus Circus Michigan, Inc. shall not be Project Costs and shall not be directly or indirectly paid by and/or reimbursed by the Company." b. Section 6.01 of the Operating Agreement should be amended in its entirety to read as follows: "6.01 SHARING RATIOS The Members shall have the following Sharing Ratios in the Company as of the Closing Date: ACG 46.4698% Circus 53.5302%" 3. DEFINED TERMS . Except as otherwise expressly set forth herein, any defined term used in this Second Amendment shall have the same meaning as set forth in the Operating Agreement. 4. ENTIRE AMENDMENT. Except as amended or modified hereby, the Operating Agreement shall remain unmodified and in full force and effect. 5. CONSENT TO FURTHER AMENDMENTS. The Operating Agreement is being amended with the sole purpose of accommodating the transfers of interests being made by certain AEA members in AEA by allowing such sale to be reflected as a sale as if such persons owned a direct interest in the Company. As a result, ACG's ownership percentage in the Company is being reduced accordingly but such reduction is not intended to affect or diminish ZRX's economic or beneficial rights in the Company. Accordingly, Circus agrees to take such actions that are reasonably requested by ACG and/or ZRX and/or AEA to protect and preserve ACG's, ZRX's, and AEA's rights in the Company, if and to the extent such rights are adversely affected by the subject transaction scheduled to close on the Closing Date including, but not limited to, agreeing to amend the Company's Operating Agreement to make any necessary additional adjustments as appropriate to accomplish this objective. 2 6. COUNTERPARTS. This Amendment may be executed in counterparts, each of which when executed and delivered by all parties named as signatories below, shall have the force and effect of the original, but all such counterparts shall constitute one and the same instrument. For purposes hereof, Qualifier Investigation Fees shall not include amounts billed by the MGCB prior to September 9, 1999. Qualifier Investigation Fees billed by the MGCB after September 9, 1999 shall include only amounts billed by the MGCB if (1) such amounts are related to the investigation of a Selling Member and (2) such amounts are billed to DELLC and are separately identified on such bills as relating to a Selling Member. In all events, the provisions of Section 4.03 of the DELLC Operating Agreement shall remain in full force and effect. 3 IN WITNESS WHEREOF, the undersigned have executed this Second Amendment as the date first set forth above. DETROIT ENTERTAINMENT, L.L.C. MANAGEMENT COMMITTEE: By: THOMAS CELANI --------------------------------------------- Thomas Celani, appointee of Z.R.X., L.L.C. By: MARIAN ILITCH --------------------------------------------- Marian Ilitch, appointee of Z.R.X., L.L.C. By: Z.L.M. Corporation, appointee of Z.RX, L.L.C. By: MARIAN ILITCH --------------------------------------------- Marian Ilitch, Secretary and Treasurer Z.L.M. Corporation By: HERBERT J. STRATHER --------------------------------------------- Herb J. Strather, appointee of Atwater Entertainment Associates, L.L.C. By: DR. NELLIE VARNER --------------------------------------------- Dr. Nellie Varner, appointee of Atwater Entertainment Associates, L.L.C. By: LAURENCE P. DOSS --------------------------------------------- Laurence P. Doss, appointee of Atwater Entertainment Associates, L.L.C. By: PETER A. SIMON --------------------------------------------- Peter A. Simon, appointee of Circus Circus Michigan, Inc. By: DONALD R. GIVENS --------------------------------------------- Donald R. Givens, appointee of Circus Circus Michigan, Inc. 4 By: YVETTE E. LANDAU --------------------------------------------- Yvette E. Landau, appointee of Circus Circus Michigan, Inc. By: GREGG H. SOLOMON --------------------------------------------- Gregg H. Solomon, appointee of Circus Circus Michigan, Inc. By: DAVID R. BELDING --------------------------------------------- David R. Belding, appointee of Circus Circus Michigan, Inc. By: GLENN W. SCHAEFFER --------------------------------------------- Glenn W. Schaeffer, appointee of Circus Circus Michigan, Inc. JOINDER ATWATER ENTERTAINMENT ASSOCIATES, L.L.C., a Michigan limited liability company and Z.R.X., L.L.C., a Michigan limited liability company, hereby join in the execution of the foregoing Second Amendment, solely for the purposes of acknowledging that they have read, understand and agree to be bound by, the terms, covenants and provisions of the foregoing Second Amendment. ATWATER ENTERTAINMENT ASSOCIATES, Z.R.X, L.L.C., ENTERTAINMENT L.L.C., a Michigan limited a Michigan limited liability company liability company By: VIVIAN CARPENTER By: THOMAS CELANI -------------------------------- -------------------------- Vivian Carpenter, Manager Thomas Celani, President By: MARIAN ILITCH -------------------------- Marian Ilitch, Member 5 EX-10.(MMM) 6 EXHIBIT 10(MMM) EXHIBIT 10(mmm) SECOND 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 SECOND AMENDMENT (the "Second 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, 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 __ day of December, 1999 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 Second 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 24(d) of the Development Agreement is hereby amended by deleting the reference to "December 31, 1999" in such section and substituting in its place "December 31, 2000." 3. To give recognition to the fact that the JEPAB has already been formed, SECTION 2.6(n)(3) of the Development Agreement is hereby amended so that the third sentence reads as follows: Developer shall fund the JEPAB according to the following schedule: an initial payment of One Hundred Thousand Dollars ($100,000) within thirty (30) days after the later of: (i) the Temporary Casino Opening Date or (ii) the Amendment Effective Date (as defined in Paragraph 7 hereof); One Hundred Thousand Dollars ($100,000) within one (1) year of the due date of the initial payment; Four Hundred Thousand Dollars ($400,000) within six (6) months of the Closing Date; and Four Hundred Thousand Dollars ($400,000) within twelve (12) months of the Closing Date. 1 4. SECTION 2.10(b) of the Development Agreement is hereby amended by deleting the reference to "Closing Date" in such section and substituting in its place "Temporary Casino Opening Date." 5. Anything in the Development Agreement to the contrary notwithstanding, including, but not limited to the reporting requirements set forth in SECTION 2.19(b) of the Development Agreement, Developer agrees that not later than thirty (30) days after the and of any calendar quarter, commencing with the calendar quarter ending December 31, 1999, Developer shall deliver to City a report in such form and having such statistical information as may be reasonably prescribed by the City setting forth a description of Developer's efforts during such calendar quarter with respect to the following: a. compliance with SECTION 2.6(e) of the Development Agreement; b. compliance with SECTION 2.6(i) of the Development Agreement; and c. compliance with SECTION 2.6(j) of the Development Agreement. 6. Except as amended by this Second Amendment the Development Agreement is reaffirmed in all respects, and shall remain in full force and effect. 7. This Second Amendment shall become effective on the date (the "Amendment Effective Date") on which all of the following have been accomplished: this Second Amendment has been executed by all parties hereto and the City Council has duly approved the last of the following: (i) this Second Amendment; and (ii) a second amendment to the amended and reinstated development agreements of each of the Other Land-Based Casino Developers containing substantially the same terms and conditions as set forth in this Second Amendment. 8. This Second 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: MAYOR DENNIS ARCHER ------------------------------- Mayor Dennis Archer THE ECONOMIC DEVELOPMENT CORPORATION OF THE CITY OF DETROIT, a Michigan public body corporate By: SIGNATURE UNREADABLE ------------------------------ Authorized Agent By: C. BETH DUNCOMBE ------------------------------ C. Beth DunCombe, Authorized Agent DETROIT ENTERTAINMENT, L.L.C., a Michigan liability company By: Circus Circus Michigan, Inc., a Michigan corporation, one of its members By: GLENN W. SCHAEFFER ----------------------------- Glenn W. Schaeffer, President By: Atwater Casino Group, LLC, a Michigan limited liability company, one of its members By: Atwater Management Corporation, a Delaware corporation, its manager By: ------------------------ Its: Chairman of the Board By: THOMAS CELANI ------------------------ Thomas Celani, President 3 EX-13 7 EXHIBIT 13 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL POLICY A key part of Mandalay's financial policy is a focus on free cash flow, which is the cash remaining after all expenses, including ordinary (or maintenance) reinvestment in the business. We believe free cash flow represents true economic profit. Strong free cash flow provides us with financial flexibility and the opportunity to pursue a range of options, including sizeable reinvestment in our business, repayment of indebtedness or cash distributions to shareholders, such as share repurchases. Strong free cash flow also ensures ready access to capital markets at comparatively low rates. Mandalay has always been an extraordinary cash generator, producing nearly $1.2 billion in free cash flow over the past five years. For fiscal 2000, our free cash flow on a per share basis was $2.72, two and one-half times higher than our earnings per share (excluding nonrecurring items).
FREE CASH FLOW ANALYSIS Year ended January 31, (in thousands) 2000 1999 1998 1997 1996 ---------------------------------------------------- Income from operations* $328,303 $249,279 $247,152 $276,092 $301,753 Operating lease rent 25,994 - - - - Minority interest (3,591) - - - - Add noncash expenses Depreciation and amortization 178,301 142,141 129,729 103,717 98,380 Depreciation of unconsolidated affiliates 25,283 24,490 24,357 18,785 6,712 Other (49) (65) (65) (65) (65) --------------------------------------------------- Cash generated from operations before income tax 554,241 415,845 401,173 398,529 406,780 Cash income taxes (42,551) (18,770) (37,395) (48,043) (55,995) Interest, dividends and other income 6,427 5,852 15,820 11,941 11,539 Proceeds from disposal of assets 697 5,788 8,160 3,056 1,353 ---------------------------------------------------- Cash available for repayment of debt and reinvestment 518,814 408,715 387,758 365,483 363,677 Operating lease rent (25,994) - - - - Scheduled principal and interest payments (184,039) (131,468) (99,831) (63,356) (58,018) Scheduled principal and interest payments of unconsolidated affiliates (15,550) (16,087) (25,417) (22,261) (7,076) Ordinary capital expenditures (43,451) (40,035) (50,979) (50,117) (31,936) ---------------------------------------------------- FREE CASH FLOW $249,780 $221,125 $211,531 $229,749 $266,647 ----------------------------------------------------
* Before nonrecurring items. 21 Furthermore, excluding joint ventures, we estimate that our annual maintenance capital spending will be in the range of $40- $60 million over the next three years, well below the estimated annual depreciation expense of approximately $180 million. This difference alone, before the impact of positive operating results, could translate into as much as $1.30 per share in free cash flow. GRAPH DESCRIPTION: DEPICTS MANDALAY'S FREE CASH FLOW PER SHARE FOR THE FISCAL YEARS ENDED JANUARY 31, 2000, 1999 AND 1998.
FREE CASH FLOW PER SHARE -------------- 1998 $2.22 1999 2.34 2000 2.72
Mandalay estimates that its cost of capital, blended for the amounts of debt and equity used to finance the business, is approximately 9%. Achieving rates of return on invested capital that trend above this cost is a primary goal when we evaluate new projects or reinvest in existing resorts. Traditionally, we have employed leverage as a technique for lowering our overall cost of capital and raising returns to shareholders (since debt is considerably cheaper than equity). Currently, Mandalay has no significant mandatory principal repayments for three years and expects to refinance any then-maturing debt beyond those dates. DESCRIPTION: DEPICTS MANDALAY'S EBITDA FOR THE FISCAL YEARS ENDED JANUARY 31, 2000, 1999 AND 1998.
EBITDA ------ 1998 401.2 1999 415.8 2000 554.2
EBITDA Companies frequently refer to operating cash flow, or EBITDA, as a benchmark of earning power. The following table shows the amounts of EBITDA (earnings before interest, taxes, depreciation and amortization) for Mandalay's wholly owned properties and its joint venture properties. 22 EBITDA by property (in millions):
Year ended January 31, ---------------------- 2000 1999 ---- ---- Luxor $104.1 $97.6 Mandalay Bay* 86.3 - Excalibur 83.8 74.2 Circus Circus-Las Vegas/Slots-A-Fun/Silver City 62.7 55.9 Gold Strike-Tunica 34.6 26.0 Colorado Belle/Edgewater 29.4 29.1 Circus Circus-Reno 25.7 24.3 Gold Strike/Nevada Landing/Railroad Pass 22.6 19.2 Grand Victoria** 104.1 76.9 Monte Carlo** 87.1 83.5 Silver Legacy** 49.5 47.1 MotorCity Casino*** 7.7 -
(*) Amount excludes operating lease rent of $26.0 million. This property opened March 2, 1999. (**) Amount represents 100% of this joint venture property, of which Mandalay is a 50% owner. (***) Amount represents 100% of this joint venture property, of which Mandalay is a 53.5% owner. This property opened December 14, 1999. 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 share, compared to $85.2 million, or $.90 per share, in the prior year. The results for fiscal 2000 include $83.0 million in preopening expenses associated with Mandalay Bay, our flagship hotel/casino resort in Las Vegas, and MotorCity Casino, a 53.5%-owned temporary casino in Detroit. Mandalay Bay opened March 2, 1999 and MotorCity Casino opened December 14, 1999. Fiscal 2000 results also include $5.4 million 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 of political campaign costs associated with Proposition 5, a voter initiative to approve gaming on Native American lands in California. Excluding the effects of these nonrecurring items, earnings per share were $1.08 for fiscal 2000 versus $.94 in the prior year. This increase in earnings reflected the openings of Mandalay Bay and MotorCity Casino, as well as significantly improved results at Grand Victoria, offset by increased net interest expense due to higher average borrowings. The preopening expenses mentioned above were recorded in two ways. Costs incurred prior to January 31, 1999 were treated as a cumulative effect of a change in accounting principle and expensed in the first quarter of fiscal 2000. Costs incurred subsequent to January 31, 1999 were expensed as incurred. See Note 1 of Notes to Consolidated Financial Statements included in this annual report. 23 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, which produced revenues of $456.2 million in its initial 11 months of operation. MotorCity Casino was also a contributor, generating revenues of $39.0 million. At Gold Strike Casino Resort in Tunica County, Mississippi, revenues rose $20.6 million, or 19%. The addition of 1,100 hotel rooms in early 1998 has enabled this property to be marketed more effectively and has spurred growth in its operating results. Grand Victoria, our riverboat casino in Illinois, generated a $13.4 million, or 40%, increase in its contribution to our revenues. Legislation permitting dockside gaming was passed in June 1999 and was a significant factor in this increase. This legislation is, however, being challenged in court. Meanwhile, revenues at Excalibur rose $10.9 million, or 4%, driven by higher room and occupancy rates during the year. 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, however, are consolidated for financial reporting purposes. Casino revenues increased $241.6 million, or 34%, during fiscal 2000, due principally to the openings of Mandalay Bay ($182.6 million in casino revenues) and MotorCity Casino ($36.1 million in casino revenues). Gold Strike-Tunica, with a 19% increase to $110.0 million, also contributed to the overall growth in casino revenues. Hotel revenues, meanwhile, 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. 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 (excluding nonrecurring items) Income from operations for fiscal 2000 increased $79.0 million, or 32%, from the prior year. The composite operating margin was 16.0%, compared to 16.8% in fiscal 1999. While the opening of Mandalay Bay was the main driver of this growth, all of our wholly owned properties, with the exception of Edgewater, reported double-digit increases in income from operations. All of the growth occurred in the first three quarters of the year; fourth quarter results were unchanged from the prior year due to an unusually soft holiday period in Nevada. A discussion of operating results by market follows. 24 Las Vegas Overall, operating income at our Las Vegas properties increased $54.1 million, or 31%. Mandalay Bay led the way, generating $26.3 million in its first 11 months. 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 (a national advertising campaign had been in effect during the prior year). Meanwhile, operating income at Circus Circus-Las Vegas grew by $6.1 million, or 20%, due to higher average daily room rates. The 50%-owned Monte Carlo also benefitted from higher room rates, with its contribution to operating income rising 3% to $29.4 million. Reno In Reno, Circus Circus posted a $2.6 million, or 21%, increase in operating income over the prior year. Contributing to this strong year-to-year comparison were gains in occupancy and room rates from the prior year. Meanwhile, the Company's share of operating income from Silver Legacy grew 3% to $20.4 million in fiscal 2000. Operating results at both Reno properties improved despite the absence of a major bowling tournament last year. Reno is the host to national bowling tournaments two out of every three years, and in fiscal 2000 the city was without a tournament. Although Mandalay owns 50% of Silver Legacy, during fiscal 2000 we recorded approximately two-thirds of Silver Legacy's operating income as a priority return on our investment. Based upon current projections, we anticipate that this priority return will be eliminated during fiscal 2001, and we will receive our normal 50% allocation. Laughlin Our two properties in Laughlin -- Colorado Belle and Edgewater -- reported a combined decrease in operating income of $1.0 million, or 5%, from the prior year. While both properties reported increases in revenues, health insurance costs grew as a result of unexpected increases in claims, particularly at Edgewater. Other Markets At Gold Strike, in Tunica County, Mississippi, operating income rose 76% during fiscal 2000, to $21.2 million. The increase is the result of the addition of an 1,100-room hotel tower and extensive remodeling of the property that was completed during the first quarter of the prior year. The 50%-owned Grand Victoria's contribution to income from operations grew by $13.8 million for the year. As previously noted, the introduction of dockside gaming was the principal factor in this increase. 25 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. For fiscal 2001, we estimate that our depreciation expense will be approximately $210 million (including depreciation from MotorCity, which is consolidated). Depreciation expense by property (in millions):
Year ended January 31, ---------------------- 2000 1999 ---- ---- Luxor $36.8 $41.8 Mandalay Bay 33.9 - Excalibur 16.6 15.0 Circus Circus-Las Vegas/Slots-A-Fun/Silver City 24.0 24.6 Gold Strike-Tunica 13.4 14.0 Colorado Belle/Edgewater 10.7 9.5 Circus Circus-Reno 10.8 12.0 MotorCity Casino 5.9 - Other 26.2 25.2 ----- ----- $178.3 $142.1 ====== ======
INTEREST EXPENSE In fiscal 2000, interest incurred (excluding interest expense from unconsolidated affiliates and before 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 our core components of Masterplan Mile. Capitalized interest was $11.0 million in fiscal 2000 versus $45.5 million in the prior year; the decrease was attributable to the completion of Mandalay Bay. We recorded interest expense from unconsolidated affiliates of approximately $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. TAXES The effective tax rates for the years ended January 31, 2000 and 1999 were 39.1% and 39.5%. These rates reflect the federal statutory rate of 35% plus the effect of various nondeductible expenses, primarily the amortization of goodwill associated with our 1995 Gold Strike acquisition. For fiscal 2001, we estimate our effective tax rate will be approximately 37%. 26 FISCAL 1999 COMPARED WITH FISCAL 1998 RESULTS OF OPERATIONS Excluding the effect of nonrecurring items, earnings per share for fiscal 1999 were $.94 versus $1.01 in the prior year. During fiscal 1999, we recorded a charge to corporate expense of $6.5 million for political campaign costs associated with Proposition 5 in California. In the prior year, we recognized approximately $8.0 million in costs associated with the resignation of our chairman and $3.4 million in preopening expenses related to a new 1,100-room hotel at our remodeled Gold Strike Casino Resort in Tunica County, Mississippi. Also during fiscal 1998, we recognized a $6.0 million gain on the sale of a company airplane. The decrease in earnings per share reflects higher net interest expense due to higher average borrowings, as well as lower interest income due to a $35.1 million note receivable from Silver Legacy which was redeemed in the prior year. REVENUES Revenues for fiscal 1999 increased $125.3 million, or 9%, from fiscal 1998. All of our wholly owned properties posted increases in revenues, with the exception of Excalibur, whose revenues declined slightly. The primary contributors to the increase were Gold Strike-Tunica, Luxor and Circus Circus-Las Vegas. The completion of an 1,100-room hotel tower at Gold Strike-Tunica in the first quarter of fiscal 1999 contributed to a 133% increase in revenue at that property. Luxor achieved a revenue increase of 15% due to a new national advertising campaign, an increase in the amount of high-budget play in the casino and the opening of a new 1,200-seat showroom in the third quarter of the prior year. Revenues at Circus Circus-Las Vegas rose 6%, driven by increased contributions from the hotel department (rooms were being remodeled in the prior year) and the food and beverage department (due to selective price increases). The above revenue increases were partially offset by reduced contributions from our joint venture properties. Our share of the operating income of joint ventures declined $15.0 million from fiscal 1998. The decline was due primarily to Grand Victoria, a 50%-owned riverboat casino in Elgin, Illinois. A January 1998 hike in the maximum tax rate on casino revenues in Illinois to 35% from 20% was responsible for a 23% decrease in Grand Victoria's contribution. INCOME FROM OPERATIONS (excluding nonrecurring items) Income from operations for fiscal 1999 increased $2.1 million, or 1%, from fiscal 1998. Income from operations for the first quarter decreased $21.6 million from the prior year; then, over the next three quarters, it rose $23.7 million, as we started to reap the benefits of our larger capacity, product advertising and player marketing efforts. 27 Operating income at Luxor rose 12% due primarily to a new national advertising campaign, while at Circus Circus-Las Vegas, operating income also grew 12% driven by higher contributions from the hotel and food departments. These increases were largely offset by 10% decreases at Excalibur and the 50%-owned Monte Carlo. Both properties incurred higher marketing expenses while revenues remained level. Meanwhile, Circus Circus-Reno posted an 18% increase in operating income, benefitting from the casino remodeling that was completed in the prior year and from more favorable weather. In Laughlin, our two properties posted a 9% increase in operating income, their first year-over-year increase since 1993. At Gold Strike-Tunica, operating income more than quadrupled to $12.1 million, as that property benefitted from extensive remodeling and the addition of an 1,100-room hotel tower which were completed in early 1998. DEPRECIATION AND AMORTIZATION In fiscal 1999, depreciation and amortization expense rose $12.4 million, to $142.1 million. This increase derived primarily from the new hotel tower at Gold Strike-Tunica, and from a full year's depreciation on the improvements at Circus Circus-Reno. INTEREST EXPENSE In fiscal 1999, interest incurred (excluding interest expense from unconsolidated affiliates and before capitalized interest) rose $30.2 million to $141.1 million. This increase was due primarily to higher average debt outstanding ($2.0 billion versus $1.6 billion in fiscal 1998) which was mainly related to the construction of Mandalay Bay. The increase in interest incurred was partially offset by higher capitalized interest ($45.5 million versus $22.0 million in fiscal 1998), also largely associated with the construction of Mandalay Bay. Mandalay recorded interest expense from unconsolidated affiliates of approximately $12.3 million in fiscal 1999 versus $15.6 million in fiscal 1998. These amounts represent our 50% share of Silver Legacy's and Monte Carlo's interest expense. FINANCIAL POSITION AND CAPITAL RESOURCES Mandalay had cash and cash equivalents of $116.6 million at January 31, 2000, sufficient for normal daily operating requirements. Our pretax cash flow from operations (before nonrecurring items) was $554.2 million in fiscal 2000 compared to $415.8 million in fiscal 1999 and $401.2 million in fiscal 1998. Pretax cash flow from operations is defined as income from operations (before nonrecurring items) plus noncash operating expenses (primarily depreciation and amortization). See "Free Cash Flow Analysis" on page 21. In fiscal 2000, we used our cash flow (in combination with borrowings) primarily to fund completion of the construction of Mandalay Bay and other core components of Masterplan Mile (a convention center, arena, monorail and aquarium exhibit); the renovation of hotel rooms at Excalibur; other miscellaneous construction projects; and the repurchase of 1.7 million shares of our common stock. During fiscal 1999, we used our cash flow (in combination with borrowings) to fund the construction of Mandalay Bay and 28 other core components of Masterplan Mile; the renovation of hotel rooms at Excalibur; the completion of the hotel tower at Gold Strike-Tunica; other miscellaneous construction projects; and the repurchase of 4.5 million shares of our common stock. CAPITAL SPENDING Capital expenditures in fiscal 2000 were $352.1 million compared with $671.5 million in fiscal 1999 and $663.3 million in fiscal 1998. The majority of capital expenditures in fiscal 2000 related to the construction of Mandalay Bay ($140.6 million), the construction of the convention center and arena at Mandalay Bay ($46.1 million), the construction of the monorail connecting Mandalay Bay, Luxor and Excalibur ($26.8 million), the construction of the aquarium exhibit ($23.6 million) and the renovation of the hotel rooms at Excalibur ($13.9 million). Most of the capital expenditures in fiscal 1999 related to the construction of Mandalay Bay ($431.8 million), the construction of the other core components of Masterplan Mile ($92.0 million), the completion of construction and remodeling at Gold Strike-Tunica ($18.8 million) and the renovation of the hotel rooms at Excalibur($12.3 million). CREDIT FACILITY To allow for increased borrowing capacity during the construction of Mandalay Bay, we amended our unsecured credit facility with our bank group in May 1998 to provide a more liberal test for total indebtedness during construction and a new leverage test for senior debt. The facility, which currently permits total borrowings of $1.8 billion, was amended in June 1999 to provide for a single leverage test for total indebtedness. As part of our corporate debt program, we also have a commercial paper program pursuant to which we may utilize up to $1 billion of our borrowing capacity under the credit facility to issue commercial paper. As of January 31, 2000, we had aggregate borrowings of $1.4 billion outstanding under the credit facility and an additional $50 million outstanding under our corporate debt program. LEASE FACILITY On October 30, 1998, we entered into an operating lease with a group of financial institutions (the "Lease Facility") that permits us to lease up to $200 million of equipment. As of June 30, 1999, we had utilized the entire $200 million Lease Facility to lease equipment at Mandalay Bay. Concurrently, the commitment under our bank credit facility was permanently reduced by the amount of the lease financing to the current $1.8 billion level. The base term of the lease expires June 30, 2001, but the lease provides for up to two successive one-year renewal terms. SHELF REGISTRATION In August 1998, we filed a shelf registration statement relating to $550 million of securities. These securities may be issued from time to time in the form of additional Mandalay debt securities or preferred 29 securities of Delaware business trusts formed for the purpose of issuing their trust securities and investing the proceeds in our debt securities. In November 1998, we issued $275 million principal amount of 9-1/4% Senior Subordinated Notes due December 1, 2005 under this registration statement. Proceeds from this offering were used to repay outstanding borrowings under the credit facility. See Note 3 of Notes to Consolidated Financial Statements included in this annual report. SILVER LEGACY In July 1995, Silver Legacy, a 50/50 joint venture with the Eldorado Hotel/Casino, opened in downtown Reno, Nevada. As a condition of the joint venture's $230 million bank credit agreement, 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). NEW PROJECTS MANDALAY BAY On March 2, 1999, we opened Mandalay Bay, a 43-story hotel/casino resort in Las Vegas, Nevada. The resort includes approximately 3,700 rooms and 135,000 square feet of casino space and is situated on approximately 60 acres of land just south of Luxor. Mandalay Bay's attractions include an 11-acre tropical lagoon featuring a sand-and-surf beach, a three-quarter-mile lazy river ride, a 30,000-square-foot spa and other entertainment attractions. In addition to internationally renowned restaurants, Mandalay Bay offers a House of Blues nightclub and restaurant, including its signature Foundation Room sited on Mandalay Bay's top floor. Four Seasons operates 424 rooms at Mandalay Bay, providing Las Vegas visitors with a luxury "five-diamond" hospitality experience. The Four Seasons Hotel, which is owned by us and managed by Four Seasons, represents the first step in our cooperative effort with Four Seasons to identify strategic opportunities for development of hotel and casino properties worldwide. The total cost of Mandalay Bay, including the Four Seasons Hotel and including leased equipment, but excluding land, capitalized interest and preopening expenses, was approximately $1 billion. During construction, Mandalay Bay's hotel tower experienced settling in excess of the level contemplated in the building's original design. The settling was greater in some portions of the structure than in others. We retained geotechnical, structural engineering and foundation consultants who evaluated the situation and recommended remedial measures, which were completed prior to the opening of the property. The evaluation of these remedial measures will continue over time to determine if any further action will be required. MASTERPLAN MILE Masterplan Mile is our development property with approximately one mile of frontage on the Las Vegas Strip. The property currently contains the Mandalay Bay, Luxor and Excalibur sites. Our development plan for Masterplan Mile includes various core components which will be cross-marketed to guests at our existing and future hotel/casino within this resort development. These components include a 125,000-square- 30 foot convention facility (which opened March 12, 1999) and a 12,000-seat arena (which opened April 10, 1999). The total cost of the convention facility and arena (excluding land, capitalized interest and preopening expenses) was approximately $125 million. Additional core components include a monorail system (which opened April 10, 1999) linking the resorts within our Masterplan Mile, as well as an aquarium exhibit, the Shark Reef at Mandalay Bay, which is currently under construction and is expected to open in the summer of 2000. The cost of the monorail (excluding land, capitalized interest and preopening expenses) was approximately $40 million. The estimated cost of the aquarium (excluding land, capitalized interest and preopening expenses) is approximately $45 million, of which $25.3 million had been incurred as of January 31, 2000. We may add other core components to our development plan for Masterplan Mile in the future. 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. Effective December 14, 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. MotorCity Casino contains approximately 75,000 square feet of gaming space, with approximately 2,600 slot machines and 136 table games, plus five restaurants and a 3,450-space parking facility. 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 subject to the release of the guaranty if certain performance measures are reached. The joint venture's operation of the temporary casino is subject to ongoing regulatory oversight, and its ability to proceed with a permanent hotel/casino facility is contingent upon the receipt of all necessary gaming approvals and satisfaction of other conditions. The Detroit joint venture is planning a $600 million permanent hotel/casino facility. We have committed to contribute 20% of this amount in the form of equity, and the joint venture will seek project-specific funding for the balance of the cost. 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 the land on which the permanent facility will be built. 31 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 its ability to obtain a certificate of suitability and a casino license for its permanent facility. MISSISSIPPI GULF COAST We have announced plans to develop a hotel/casino resort on the Mississippi Gulf Coast at the north end of the Bay of St. Louis, near the DeLisle exit on Interstate 10. While we have received all necessary approvals to commence development, these approvals have been challenged in federal court. We anticipate that the design and construction of this project will begin only after satisfactory resolution of all legal actions. Currently, we expect the resort to include approximately 1,500 rooms and involve an investment of approximately $225 million. Present plans call for Mandalay to own 90% of the resort, with a partner contributing land (up to 500 acres) in exchange for the remaining 10% interest. 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 repurchase shares of our common stock. As of January 31, 2000, under our most restrictive loan covenant, we could issue additional debt of approximately $10 million. Our borrowing capacity was diminished by the low fourth quarter results, but should increase substantially in the first quarter of fiscal 2001, and thereafter, as operating cash flow rebounds to normal quarterly levels. In April 1999, our Board of Directors authorized the repurchase of up to 15% (or approximately 13.6 million) of the outstanding shares of common stock, as market conditions and other factors warrant. 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 were no material quantitative changes in our market risk exposure, or how such risks are managed, during fiscal 2000. 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. 32 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, --------------------------------------- (in millions) 2001 2002 2003 2004 2005 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Long-term debt (including current portion) Fixed-rate $0.5 $0.3 $0.3 $150.2 $0.3 $927.7 $1,079.3 Average interest rate 5.6% 6.7% 6.7% 6.7% 6.7% 7.6% 7.5% Variable-rate $12.5 $52.5 $1,535.0 $25.0 - - $1,625.0 Average interest rate 6.9% 7.3% 7.3% 7.4% - - 7.3% Interest rate swaps Pay fixed $200.0 - $200.0 $200.0 - $150.0 $750.0 Average payable rate 6.1% - 6.1% 6.4% - 5.9% 6.1% Average receivable rate 6.9% - 7.3% 7.4% - 7.7% 7.3%
YEAR 2000 READINESS DISCLOSURE In the past, many computer software programs were written using two digits rather than four to define the applicable year. As a result, information technology ("IT"), such as date-sensitive computer software, as well as non-IT systems (such as equipment containing microcontrollers or other embedded technology) might recognize a date using "00" as the year 1900 rather than the year 2000. This has generally been referred to as the Year 2000 issue. The inability to correctly recognize the year 2000 created the potential for computer system failures or miscalculations by computer programs, which might have disrupted operations. We established a task force to coordinate our response to the Year 2000 issue, and established a program for dealing with the issue at our wholly owned properties and at our joint venture properties. The program is described in our earlier reports on Form 10-K and Form 10-Q beginning with our report on Form 10-Q for the quarter ended July 31, 1998. 33 The program was completed prior to January 31, 2000, and, as of the date of this report, we have not experienced any significant Year 2000 problems or incurred any disruption in operations. We estimate that the total cost of making our systems and those of our joint venture properties Year-2000 compliant was approximately $6 million. Most of this cost related to the acquisition of new computer hardware and software to replace noncompliant personal computers and noncompliant software. These costs were capitalized, and the equipment and software are being depreciated over their expected useful lives. To the extent that existing hardware or software was replaced, we recognized a loss currently for the undepreciated balance. This loss is included in the above cost estimate. Furthermore, all costs related to software modification and to the administration of our Year 2000 project were expensed as incurred and are likewise included in the cost estimate above. 34 MANDALAY RESORT GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
January 31, (in thousands, except share data) 2000 1999 ------ ------ ASSETS Current assets Cash and cash equivalents $ 116,617 $ 81,389 Accounts receivable 53,071 26,136 Income tax receivable 9,096 - Inventories 28,499 24,270 Prepaid expenses 47,807 21,451 Deferred income tax 26,449 8,032 --------- --------- Total current assets 281,539 161,278 --------- --------- Property, equipment and leasehold interests, at cost, net 3,335,071 3,000,822 --------- --------- Other assets Excess of purchase price over fair market value of net assets acquired, net 396,433 367,076 Notes receivable 1,605 10,895 Investments in unconsolidated affiliates 264,995 271,707 Deferred charges and other assets 49,833 57,929 --------- --------- Total other assets 712,866 707,607 --------- --------- Total assets $4,329,476 $3,869,707 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 13,022 $ 3,481 Accounts and contracts payable Trade 40,395 23,745 Construction 33,415 75,030 Accrued liabilities Salaries, wages and vacations 46,897 40,006 Progressive jackpots 11,417 8,889 Advance room deposits 11,005 8,195 Interest payable 19,395 27,767 Other 69,073 44,460 ---------- --------- Total current liabilities 244,619 231,573 ---------- --------- Long-term debt 2,691,292 2,259,149 ---------- --------- Other liabilities Deferred income tax 210,689 200,376 Other long-term liabilities 20,192 20,981 --------- --------- Total other liabilities 230,881 221,357 --------- --------- Total liabilities 3,166,792 2,712,079 --------- --------- Commitments and contingent liabilities --------- --------- Minority interest (25,096) - --------- --------- Stockholders' equity Common stock $.01-2/3 par value Authorized -- 450,000,000 shares Issued -- 113,634,013 and 113,622,508 shares 1,894 1,894 Preferred stock $.01 par value Authorized -- 75,000,000 shares - - Additional paid-in capital 565,925 558,935 Retained earnings 1,201,632 1,159,469 Treasury stock (23,764,216 and 22,959,425 shares), at cost (581,671) (562,670) --------- --------- Total stockholders' equity 1,187,780 1,157,628 --------- --------- Total liabilities and stockholders' equity $4,329,476 $3,869,707 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 35 MANDALAY RESORT GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Year ended January 31, (in thousands, except share data)
2000 1999 1998 ------ ------ ------ Revenues Casino $ 951,492 $ 709,909 $ 632,122 Rooms 534,132 355,635 330,644 Food and beverage 346,647 246,622 215,584 Other 251,509 170,701 142,407 Earnings of unconsolidated affiliates 98,627 83,967 98,977 -------- --------- --------- 2,182,407 1,566,834 1,419,734 Less-complimentary allowances (131,509) (87,054) (65,247) --------- --------- --------- 2,050,898 1,479,780 1,354,487 --------- --------- --------- Costs and expenses Casino 510,794 367,449 316,902 Rooms 189,419 128,622 122,934 Food and beverage 276,261 207,663 199,955 Other operating expenses 179,907 113,864 99,460 General and administrative 339,455 253,138 223,263 Depreciation and amortization 169,226 133,801 117,474 Operating lease rent 25,994 - - Preopening expenses 49,134 - 3,447 Abandonment loss 5,433 - - --------- --------- --------- 1,745,623 1,204,537 1,083,435 --------- --------- --------- Operating profit before corporate expense 305,275 275,243 271,052 Corporate expense 31,539 32,464 34,552 --------- --------- --------- Income from operations 273,736 242,779 236,500 --------- --------- --------- Other income (expense) Interest, dividends and other income 3,652 2,730 9,779 Interest income and guarantee fees from unconsolidated affiliate 2,775 3,122 6,041 Interest expense (165,670) (95,541) (88,847) Interest expense from unconsolidated affiliates (11,085) (12,275) (15,551) --------- --------- --------- (170,328) (101,964) (88,578) --------- --------- --------- Minority interest (292) - - --------- --------- --------- Income before provision for income tax 103,116 140,815 147,922 Provision for income tax 38,959 55,617 58,014 --------- --------- --------- Income before cumulative effect of change in accounting principle 64,157 85,198 89,908 Cumulative effect of change in accounting principle for pre- opening expenses, net of tax benefit of $11,843 (21,994) - - --------- --------- --------- Net income $ 42,163 $ 85,198 $ 89,908 ========= ========= ========= Basic earnings per share: Income before cumulative effect of change in accounting principle $ .71 $ .90 $ .95 Cumulative effect of change in accounting principle (.24) - - --------- --------- -------- Net income $ .47 $ .90 $ .95 ========= ========= ======== Diluted earnings per share: Income before cumulative effect of change in accounting principle $ .70 $ .90 $ .94 Cumulative effect of change in accounting principle (.24) - - --------- --------- -------- Net income $ .46 $ .90 $ .94 ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 36 MANDALAY RESORT GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended January 31, Increase (decrease) in cash 2000 1999 1998 and cash equivalents (in thousands) ------- ------- -------- Cash flows from operating activities Net income $ 42,163 $ 85,198 $ 89,908 ------- ------- ------- Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 172,407 142,141 129,729 Increase (decrease) in deferred income tax (8,104) 24,281 24,005 Increase (decrease) in interest payable (8,372) 9,939 8,824 (Gain) loss on sale of fixed assets 2,903 (1,641) (6,519) (Increase) decrease in other current assets (53,797) 4,504 (2,605) Increase in other current liabilities 42,930 19,906 6,148 (Increase) decrease in other noncurrent assets 21,217 (35,817) (785) Decrease in other noncurrent liabilities (49) (65) (65) Unconsolidated affiliates' earnings in excess of distributions (6,419) (10,863) (33,330) ------- ------- ------- Total adjustments 162,716 152,385 125,402 ------- ------- ------- Net cash provided by operating activities 204,879 237,583 215,310 ------- ------- ------- Cash flows from investing activities Capital expenditures (352,133) (671,547) (663,270) Increase (decrease) in construction payable (63,474) 34,360 19,526 (Increase) decrease in investments in unconsolidated affiliates 10,728 (5,865) (8,353) Net cash paid for additional ownership interest in joint venture (19,331) - - (Increase) decrease in notes receivable (24,952) (9,820) 35,368 Proceeds from sale of equipment and other assets 697 5,788 8,160 ------- ------- ------- Net cash used in investing activities (448,465) (647,084) (608,569) ------- ------- ------- Cash flows from financing activities Proceeds from issuance of senior notes - 275,000 - Net effect on cash of issuances and payments of debt with initial maturities of three months or less 294,990 502,528 474,355 Issuance of debt with initial maturities in excess of three months - 337,334 201,843 Principal payments of debt with initial maturities in excess of three months (3,425) (644,241) (290,712) Exercise of stock options 17,616 310 7,889 Purchase of stock warrants - - (2,000) Purchases of treasury stock (29,627) (51,634) (1,300) Other (740) 12,962 (7,701) ------- ------- ------- Net cash provided by financing activities 278,814 432,259 382,374 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 35,228 22,758 (10,885) Cash and cash equivalents at beginning of year 81,389 58,631 69,516 ------- ------- ------- Cash and cash equivalents at end of year $116,617 $ 81,389 $ 58,631 ======= ======= ======= Supplemental cash flow disclosures Cash paid during the year for interest (net of amount capitalized) $170,272 $ 82,879 $ 77,426 Income tax $ 42,551 $ 18,770 $ 37,395 Acquisition of additional ownership interest in joint venture Cash paid $(38,386) $ - $ - Current assets, other than cash (13,462) - - Property and equipment (146,143) - - Other assets (14,092) - - Current liabilities 33,693 - - Long-term debt 179,180 - - Stockholders' equity (20,121) - - ------- ------- ------- Net cash paid for acquisition $(19,331) $ - $ - ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 37 MANDALAY RESORT GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Issued Additional Total ------------------- Paid-in Retained Treasury Stockholders' Shares Amount Capital Earnings Stock Equity ------ ------ ------- -------- ----- ------ (in thousands) Balance, January 31, 1997 112,808 $1,880 $498,893 $984,363 $(513,345) $971,791 Net income - - - 89,908 - 89,908 Exercise of stock options 46 - 4,317 - 3,572 7,889 Treasury stock acquired (38 shares), at cost - - - - (1,300) (1,300) Conversion of subsidiary preferred stock 755 13 17,618 - - 17,631 Sale/purchase of puts and calls - - 35,536 - - 35,536 Amortization of deferred compensation - - 4,294 - - 4,294 Purchase of warrants - - (2,000) - - (2,000) ------- ----- ------- --------- ------- --------- 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 ======= ===== ======= ========= ======= =========
The accompanying notes are an integral part of these consolidated financial statements. 38 MANDALAY RESORT GROUP AND SUBSIDIARIES 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. 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. 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 money. The amounts capitalized during the years ended January 31, 2000, 1999 and 1998, were $11.0 million, $45.5 million and $22.0 million, respectively. 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. 39 CASH EQUIVALENTS At January 31, 2000 and 1999, 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. 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. 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 $51.7 million and $41.3 million, as of January 31, 2000 and 1999, respectively. REVENUES AND EXPENSES Casino revenues are the net difference between the sums received as winnings and the sums paid as losses. 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: $76.5 million, $58.7 million and $45.9 million for the fiscal years ended January 31, 2000, 1999 and 1998, respectively. For the three years, approximately 80-85% of such costs were for food and beverage with the balance for rooms. 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. 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. 40 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, 2000, preopening expenses of $83.0 million relate primarily to Mandalay Bay, The Four Seasons at Mandalay Bay, and the Company's joint venture in Detroit. For the year ended January 31, 1998, preopening expenses amounted to $3.4 million related to the opening of a hotel tower at Gold Strike Casino Resort in Tunica County, Mississippi. 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. Note 2. Property, Equipment and Leasehold Interests Property, equipment and leasehold interests consist of the following: January 31, (in thousands) 2000 1999 - ---------------------------------------------------------------- Land and land leases $ 364,781 $ 362,661 Buildings and improvements 2,872,900 1,851,511 Equipment, furniture and fixtures 896,435 653,058 Leasehold interests and improvements 11,305 11,192 - ---------------------------------------------------------------- 4,145,421 2,878,422 Less - accumulated depreciation and amortization (893,776) (733,967) - ---------------------------------------------------------------- 3,251,645 2,144,455 Construction in progress 83,426 856,367 - ---------------------------------------------------------------- $3,335,071 $3,000,822 ========== ========== 41 Note 3. Long-term Debt Long-term debt consists of the following:
January 31, (in thousands) 2000 1999 - ---------------------------------------------------------------- Amounts due under bank credit agreements at floating interest rates, weighted average of 6.8% and 6.0% $1,425,000 $1,130,000 Amounts due under corporate debt program at floating interest rates, weighted average of 6.2% and 5.7% 50,000 50,000 Amounts due under majority-owned joint venture revolving credit facility at floating interest rates, weighted average of 7.1% 150,000 - 9-1/4% Senior Subordinated Notes due 2005 275,000 275,000 6.45% Senior Notes due 2006 (net of unamortized discount of $264 and $308) 199,736 199,692 7-5/8% Senior Subordinated Debentures due 2013 150,000 150,000 6-3/4% Senior Subordinated Notes due 2003 (net of unamortized discount of $55 and $71) 149,945 149,929 7.0% Debentures due 2036 (net of unamortized discount of $119 and $133) 149,881 149,867 6.70% Debentures due 2096 (net of unamortized discount of $183 and $231) 149,817 149,769 Other notes 4,935 8,373 --------- --------- 2,704,314 2,262,630 Less - current portion (13,022) (3,481) --------- --------- $2,691,292 $2,259,149 ========= =========
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. In May 1997, the Company renegotiated its $1.5 billion unsecured credit facility, dated January 29, 1996. This agreement was replaced by a new $2 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 17.5 basis points) on the unused portion of the Facility. As of January 31, 2000, the Company had $1.4 billion of borrowings under the Facility. At such date, the Company also had $50 million issued under the corporate debt program thus reducing, by that amount, 42 the credit available under the Facility for purposes other than repayment of such indebtedness. 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, beginning 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 unconditionally guaranteed by the Company, subject to release after one year if certain performance measures are reached. As of January 31, 2000, the joint venture had $150 million of borrowings outstanding under the Detroit Facility. The fair value of the debt issued under the Detroit Facility approximates the carrying amount of the debt. 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% of the 9-1/4% Notes prior to December 1, 2001. The 9-1/4% 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, 2000, the estimated fair value of the 9-1/4% Notes was $273.6 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. The net proceeds from these offerings were used primarily to repay borrowings under the Company's corporate debt program. As of January 31, 2000, the estimated fair value of the 7.0% Debentures was $131.3 million and the estimated fair value of the 6.70% Debentures was $139.1 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 sub- 43 ject to any sinking fund requirements. The net proceeds from this offering were used primarily to repay borrowings under the Company's corporate debt program. As of January 31, 2000, the estimated fair value of the 6.45% Notes was $177.0 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. The net proceeds from these offerings were used primarily to repay borrowings under the Company's corporate debt program. As of January 31, 2000, the estimated fair value of the 6-3/4% Notes was $138.8 million and the estimated fair value of the 7-5/8% Debentures was $126.0 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, they are accounted for as hedging instruments. In order to qualify for hedge accounting, the underlying hedged item must expose the Company to risks associated with market fluctuations and the financial instrument used must be designated as a hedge and must reduce the Company's exposure to market fluctuation throughout the hedge period. If these criteria are not met, a change in the market value of the financial instrument is recognized as a gain or loss in the period of change. Otherwise, gains and losses are not recognized except to the extent that the financial instrument is disposed of prior to maturity. Net interest paid or received pursuant to the financial instrument is included as interest expense in the period. The Company has entered into various interest rate swaps, principally with its bank group, to manage interest expense, which is subject to fluctuation due to the variable-rate nature of the debt under the Company's corporate debt program. The Company has interest rate swap agreements under which it pays a fixed interest rate (weighted average of approximately 6.1%) and receives a variable interest rate (weighted average of approximately 6.1% at January 31, 2000) on $550 million notional amount of "initial" swaps. The net effect of all such swaps resulted in additional interest expense of $1.7 million for the year. Two of the initial swaps with a combined notional amount of $150 million provide that the swaps will terminate two business days after any date on which three-month LIBOR is set at or above 9.0% on or after October 15, 2000 for $100 million notional amount and on or after January 15, 2001 for $50 million notional amount. These swaps otherwise terminate in fiscal 2008. The remaining two initial swaps of $200 million notional amount each terminate in fiscal 2003 and 2004. The Company had also entered into a forward interest rate swap with a notional amount of $200 million which has an effective date of December 31, 1999 and a termination date of March 31, 2000. Under this agreement, the Company paid a fixed rate of 6.1% and received a variable interest rate based on three-month LIBOR. 44 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, 2000, the Company would have received a net amount of approximately $11.4 million based on quoted market values from the various financial institutions holding the swaps. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 - Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). 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 valued at its fair value. The statement also defines the criteria and conditions which govern the recognition of subsequent changes in the fair value of the instrument as either balance sheet or income statement events. SFAS 133 is effective for fiscal years beginning after June 15, 2000. The Company does not expect the adoption of this pronouncement to materially impact its results of operations or financial position. As of January 31, 2000, under the Company's most restrictive loan covenant, the Company was restricted from issuing additional debt in excess of approximately $10 million. Required annual principal payments as of January 31, 2000 are as follows: Year ending January 31, (in thousands) - ---------------------------------------------------------------- 2001 $ 13,022 2002 52,793 2003 1,535,274 2004 175,219 2005 274 Thereafter 927,732 - ---------------------------------------------------------------- $2,704,314 ========== 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 the commitment under the Company's bank credit facility was permanently reduced to $1.8 billion. The base term of the lease expires June 30, 2001, but the lease provides for up to two successive one-year renewal terms. The rent expense related to this lease facility is reported separately on the consolidated statements of income as operating lease rent. 45 On October 31, 1999, the lease pursuant to which the Company operated the Silver City Casino expired and the Company ceased operation of that facility. 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, 2000 under those operating leases that have lease terms in excess of one year:
Year ending January 31, (in thousands) - ---------------------------------------------------------------- 2001 $40,236 2002 20,789 2003 1,709 2004 1,036 2005 636 Thereafter 6,109 - ---------------------------------------------------------------- $70,515 =======
Rent expense for all leases accounted for as operating leases was as follows:
Year ended January 31, (in thousands) 2000 1999 1998 - ----------------------------------------------------------------- Operating rent expense $27,988 $3,454 $3,211 ======= ====== ======
Note 5. Income Tax The components of the provision for income tax are as follows:
Year ended January 31, (in thousands) 2000 1999 1998 - ----------------------------------------------------------------- Current Federal $38,069 $34,810 $36,980 State 734 510 491 ------- ------- ------- 38,803 35,320 37,471 ------- ------- ------- Deferred Federal (11,687) 20,297 20,543 ------- ------- ------- $27,116 $55,617 $58,014 ======= ======= =======
46 The Company has recognized a tax benefit of $1.7 million, $38,000 and $0.9 million related to the exercise of stock options for the fiscal years ended January 31, 2000, 1999 and 1998, respectively. Such amounts reduce the current portion of taxes payable. The cumulative balance of the deferred tax liability is due predominantly to temporary book/tax depreciation differences. The components of deferred income tax expense are as follows:
Year ended January 31, (in thousands) 2000 1999 1998 - ---------------------------------------------------------------- Additional depreciation resulting from the use of accelerated methods for tax purposes and the straight-line method for financial statement purposes $10,723 $11,811 $14,089 Effect of writing off preopening expenses for financial statement purposes and amortizing over five years for tax purposes (16,932) 1,062 1,281 Difference between book and tax basis of assets written off - 497 327 Book reserve for bad debts not currently deductible for tax purposes (2,715) (872) (462) Difference between book and tax basis of investments in uncon- solidated affiliates (2,294) 3,392 5,730 Outstanding chips and tokens 42 1,501 (150) Capitalized interest 431 2,993 1,432 Other, net (942) (87) (1,704) ---------------------------- $(11,687) $20,297 $20,543 ============================
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, 2000 1999 1998 - ----------------------------------------------------------------- Federal statutory tax rate 35.0% 35.0% 35.0% Nondeductible goodwill 5.3 2.5 2.4 Nondeductible political contributions .8 2.0 .3 Nondeductible compensation - - 2.2 Nondeductible tax credits (1.8) (.6) (.5) Other, net (.2) .6 (.2) ----------------------- Effective tax rate 39.1% 39.5% 39.2% =======================
47 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, 2000 and 1999, under the provisions of Statement of Financial Accounting Standards No. 109, are as follows:
Year ended January 31, (in thousands) 2000 1999 - ---------------------------------------------------------------- Deferred tax liabilities Property and equipment $192,898 $176,592 Investments in unconsolidated affiliates 17,310 18,697 Other 9,647 13,205 ------- ------- Gross deferred tax liabilities 219,855 208,494 Deferred tax assets Accrued vacation benefits 6,471 5,045 Bad debt reserve 4,832 2,117 Preopening expense, net of amortization 17,451 520 Other 6,861 8,468 ------- ------- Gross deferred tax assets 35,615 16,150 ------- ------- Net deferred tax liabilities $184,240 $192,344 ======= =======
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 $12.8 million, $10.2 million and $9.9 million during the years ended January 31, 2000, 1999 and 1998, 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 $4.7 million, $4.5 million and $4.2 million in the years ended January 31, 2000, 1999 and 1998. Contributions are funded with cash. 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. For the fiscal year ending January 31, 2000, approximately $2.9 million of benefits were accrued and expensed. The SERP is being funded through life insurance contracts on the key employees, 48 though the plan does not require formal funding. At January 31, 2000, the life insurance contracts had a value of $10.3 million. The vested benefit obligation and accumulated benefit obligation were $6.0 million and $11.2 million, respectively, at January 31, 2000. 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, --------------------------------------------------------------- 2000 1999 1998 ------------------ -------------------- -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- ----- --------- ----- --------- ----- Outstanding at beginning of year... 3,872,674 $14.72 5,143,505 $23.94 7,183,560 $25.43 Granted.............. 3,354,666 14.20 3,188,335 12.51 575,000 23.52 Exercised............ (878,914) 18.08 (16,500) 13.29 (341,005) 20.75 Canceled............. (333,467) 19.08 (4,442,666) 23.81 (2,274,050) 29.01 --------- --------- --------- Outstanding at end of year............ 6,014,959 $13.70 3,872,674 $14.72 5,143,505 $23.94 ========= ========= ========= Options exercisable at end of year..... 1,937,662 $13.71 1,314,005 $21.19 3,340,498 $22.54 Options available for grant at end of year............... 1,927,032 3,973,231 2,026,900
The following table summarizes information about stock options outstanding at January 31, 2000:
Options Outstanding Options Exercisable ----------------------------------------------- ------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life (Yrs) Price Exercisable Price ------ ----------- ---------- ----- ----------- ----- $11.25 to $11.25 2,161,793 5.77 $11.25 1,457,662 $11.25 13.00 to 13.00 2,824,333 9.02 13.00 - - 14.50 to 23.08 780,000 6.25 19.72 480,000 21.18 24.00 to 24.00 248,833 9.30 24.00 - - --------- ---- ----- --------- ----- 6,014,959 7.51 $13.70 1,937,662 $13.71 ========= ==== ===== ========= =====
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. 49 In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 is effective for fiscal years beginning after December 15, 1995 and 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 intrinsic value at the date of grant 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, ---------------------- (in thousands, except share data) 2000 1999 -------- -------- Net income As reported............................. $ 42,163 $ 85,198 Pro forma............................... 31,527 79,722 Net income per share (basic) As reported............................. $ .47 $ .90 Pro forma............................... .35 .84 Net income per share (diluted) As reported............................. $ .46 $ .90 Pro forma............................... .34 .84 Weighted average assumptions Expected stock price volatility......... 45.1% 43.6% Risk-free interest rate................. 6.4% 5.0% Expected option lives (years)........... 2.7 2.1 Estimated fair value of options granted. $ 4.79 $ 3.50
50 Because the accounting method prescribed by SFAS 123 has not been applied to options granted prior to January 1, 1995, the compensation cost reflected in the pro forma amounts shown above may not be representative of that to be expected in future years. 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. During the year ended January 31, 2000, the Company repurchased 1.7 million shares of its common stock at a cost of $29.6 million. In the fiscal years ended 1999 and 1998, the Company repurchased 4.5 million shares of its common stock at a cost of $51.6 million and 38,486 shares of its common stock at a cost of $1.3 million, respectively. During the year ended January 31, 1998, the Company elected to settle, for cash, outstanding put options on 2.0 million shares of its common stock and call options on 600,000 shares of common stock. The net cost to the Company was $9.4 million. The put and call options were entered into as a complement to the Company's overall share repurchase program. In connection with the acquisition of Gold Strike Resorts, New Way, Inc., a wholly owned subsidiary of the Company, issued 1,069,926 shares of $10.00 Cumulative Preferred Stock. Of the preferred shares issued, 866,640 were issued to another wholly owned subsidiary of the Company. During the year ended January 31, 1997, the Company purchased 9,864 shares of the preferred stock for $1.3 million. The price paid by the Company was based on the trading price of the Company's common stock prior to the transaction. On February 26, 1997, New Way, Inc. merged into another subsidiary of the Company and, therefore, the remaining preferred stock was converted into 754,666 shares of common stock. 51 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 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, (in thousands, except per share data) 2000 1999 1998 - ----------------------------------------------------------------- Net income $42,163 $85,198 $ 89,908 ====== ====== ======= Weighted average shares out- standing used in computation of basic earnings per share 90,607 94,601 94,943 Stock options 1,289 70 309 ------ ------ ------ Weighted average shares out- standing used in computation of diluted earnings per share 91,896 94,671 95,252 ====== ====== ======= Basic earnings per share $.47 $.90 $.95 ====== ====== ======= Diluted earnings per share $.46 $.90 $.94 ====== ====== =======
52 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, (in thousands) 2000 1999 - ------------------------------------------------------------------ Circus and Eldorado Joint Venture (50%) (Silver Legacy, Reno, Nevada) $ 87,150 $74,871 Elgin Riverboat Resort (50%) (Grand Victoria, Elgin, Illinois) 40,780 42,461 Victoria Partners (50%) (Monte Carlo, Las Vegas, Nevada) 137,065 141,658 Detroit Entertainment (see below) (MotorCity Casino, Detroit, Michigan) - 12,717 ------- ------- $264,995 $271,707 ======= =======
Effective December 14, 1999, the Company acquired an additional 8.5% interest in Detroit Entertainment, bringing its total investment to 53.5%. As a result of this majority ownership position, the Company is no longer accounting for its investment under the equity method and is consolidating Detroit Entertainment results beginning December 14, 1999. 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, 1999 and 1998 is as follows:
(in thousands) 1999 1998 - ----------------------------------------------------------------- Current assets $ 95,602 $ 81,539 Property and other assets, net 698,982 747,790 Current liabilities 71,712 74,177 Long-term debt and other liabilities 261,006 283,006 Equity 461,866 472,146
53 Summarized results of operations of the unconsolidated affiliates for the years ended December 31, 1999 and 1998 are as follows:
(in thousands) 1999 1998 - ----------------------------------------------------------------- Revenues $764,664 $676,268 Expenses 577,193 518,169 Operating income 187,471 158,099 Net income 166,816 134,405
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. 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. MotorCity Casino contains approximately 75,000 square feet of gaming space, with approximately 2,600 slot machines and 136 table games, plus five restaurants and a 3,450-space parking facility. 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 subject to the release of the guaranty if certain performance measures are reached. The joint venture's operation of the temporary casino is subject to ongoing regulatory oversight, and its ability to proceed with a permanent hotel/casino facility is contingent upon the receipt of all necessary gaming approvals and satisfaction of other conditions. The Detroit joint venture is planning a $600 million permanent hotel/casino facility. The Company has committed to contribute 20% of this amount in the form of equity, and the joint venture will seek project-specific funding for the balance of the cost. The development agreement provides that Mandalay 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. 54 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 the land on which the permanent facility will be built. 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. 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. 55 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, 2000 and 1999 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended January 31, 2000. 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, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2000, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 of Notes to Consolidated Financial Statements, the Company changed its method of accounting for preopening expenses effective February 1, 1999. ARTHUR ANDERSEN LLP Las Vegas, Nevada February 22, 2000 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 its 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. 56 EX-21 8 EXHIBIT 21 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 Louisiana, Inc. ("CCLI") Louisiana 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 162/3% MSE 162/3% LCI 162/3% 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 & Casino-Las Vegas and Circus Circus Hotel & Casino-Reno. (2) Doing business as Slots-A-Fun Casino. (3) Doing business as Edgewater Hotel & Casino. (4) Doing business as Colorado Belle Hotel & Casino. (5) Doing business as Excalibur Hotel & Casino. (6) Doing business as Luxor Hotel & Casino. (7) Doing business as Gold Strike Casino Resort. (8) Doing business as Mandalay Bay Resort & Casino (9) Doing business as Railroad Pass Hotel & Casino. (10) Doing business as Gold Strike Hotel and Gambling Hall. (11) Doing business as Nevada Landing Hotel & Casino. EX-23 9 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 22, 2000 included (or incorporated by reference) in Mandalay Resort Group's Annual Report on Form 10-K for the year ended January 31, 2000 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, and 333-93805 and to Mandalay's previously filed Form S-3 Registration Statement File No. 333-60975. ARTHUR ANDERSEN LLP Las Vegas, Nevada April 27, 2000 EX-27 10 EXHIBIT 27
5 1,000 YEAR JAN-31-2000 JAN-31-2000 116,617 0 53,071 0 28,499 281,539 4,228,847 893,776 4,329,476 244,619 2,691,292 0 0 1,894 1,185,886 4,329,476 2,050,898 2,050,898 0 1,745,623 31,539 0 170,328 103,116 38,959 64,157 0 0 21,994 42,163 .47 .46
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