As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/09/04  Mandalay Resort Group             10-Q       10/31/04    5:982K                                   Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    598K 
 2: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
 3: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     13K 
 4: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML      7K 
 5: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML      7K 

 

MANDALAY RESORT GROUP AND SUBSIDIARIES

Form 10-Q

INDEX

				Page No.
Part I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) at October 31, 2004 and January 31, 2004			3
	Condensed Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended October 31, 2004 and 2003			4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended October 31, 2004 and 2003			5
	Notes to Condensed Consolidated Financial Statements (Unaudited)			6-17
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18-35
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35-36
	Item 4.	Controls and Procedures		36-37
Part II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		38
	Item 6.	Exhibits		39

 

2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

		October 31, 2004			January 31, 2004
ASSETS
Current assets
Cash and cash equivalents		$	181,623		$	153,490
Receivables, net of allowance		78,198			87,112
Inventories		39,163			35,166
Prepaid expenses and other		66,712			74,099
Total current assets		365,696			349,867
Property, equipment and leasehold interests, at cost, net		3,533,733			3,590,699
Other assets
Excess of purchase price over fair value of net assets acquired		37,965			37,965
Investments in unconsolidated affiliates		577,309			573,306
Other investments		73,321			60,886
Intangible development costs		97,693			95,610
Deferred charges and other assets		65,601			74,163
Total other assets		851,889			841,930
Total assets		$	4,751,318		$	4,782,496
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt		$	16,687		$	16,681
Accounts and contracts payable
Trade		47,812			39,016
Construction		8,759			10,122
Accrued liabilities		253,719			265,132
Total current liabilities		326,977			330,951
Long-term debt, net of current portion		2,725,036			3,001,975
Deferred income tax		242,318			230,324
Accrued intangible development costs		49,360			49,360
Other long-term liabilities		105,701			96,393
Total liabilities		3,449,392			3,709,003
Minority interest		47,821			43,223
Stockholders’ equity
Common stock $.012¤3 par value
Authorized—450,000,000 shares
Issued—114,786,988 and 113,654,263 shares		1,913			1,894
Preferred stock $.01 par value
Authorized—75,000,000 shares		—			—
Additional paid-in capital		618,345			549,022
Retained earnings		1,768,406			1,592,199
Deferred compensation		(56,456		)	(540		)
Accumulated other comprehensive loss		(23,293		)	(23,293		)
Treasury stock (47,255,118 and 48,242,286 shares), at cost		(1,054,810		)	(1,089,012		)
Total stockholders’ equity		1,254,105			1,030,270
Total liabilities and stockholders’ equity		$	4,751,318		$	4,782,496

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except share data)

		Three Months Ended October 31,						Nine Months Ended October 31,
		2004			2003			2004			2003
REVENUES:
Casino		$	340,311		$	304,808		$	1,018,882		$	916,970
Hotel		210,124			167,728			615,271			493,365
Food and beverage		127,321			113,335			387,729			347,749
Other		89,212			83,614			283,903			257,112
		766,968			669,485			2,305,785			2,015,196
Less—complimentary allowances		(46,645		)	(43,865		)	(142,254		)	(128,231		)
		720,323			625,620			2,163,531			1,886,965
COSTS AND EXPENSES:
Casino		173,891			160,296			515,982			481,530
Hotel		70,875			57,998			208,202			173,806
Food and beverage		89,576			78,924			268,245			240,435
Other operating expenses		55,724			52,394			169,970			155,888
General and administrative		120,607			110,120			358,754			330,802
Corporate general and administrative		19,922			7,889			43,572			24,100
Depreciation and amortization		46,001			49,821			142,164			124,593
Operating lease rent		—			—			—			20,172
Preopening expenses		—			4,015			—			4,372
		576,596			521,457			1,706,889			1,555,698
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES		23,307			19,846			65,624			65,593
INCOME FROM OPERATIONS		167,034			124,009			522,266			396,860
OTHER INCOME (EXPENSE):
Interest, dividend and other income		(366		)	686			1,942			3,390
Interest expense		(46,933		)	(46,545		)	(140,061		)	(148,451		)
Loss on early extinguishment of debt, net of related gain on swap terminations		—			—			—			(6,327		)
Net interest expense from unconsolidated affiliates		(2,068		)	(2,239		)	(6,267		)	(6,037		)
		(49,367		)	(48,098		)	(144,386		)	(157,425		)
MINORITY INTEREST		(14,831		)	(13,552		)	(48,372		)	(42,766		)
INCOME BEFORE PROVISION FOR INCOME TAX		102,836			62,359			329,508			196,669
Provision for income tax		(35,729		)	(21,717		)	(116,859		)	(69,645		)
NET INCOME		$	67,107		$	40,642		$	212,649		$	127,024
BASIC EARNINGS PER SHARE
Net income per share		$	.99		$	.65		$	3.17		$	2.07
DILUTED EARNINGS PER SHARE
Net income per share		$	.99		$	.63		$	3.15		$	1.98
Average shares outstanding—basic		67,518,118			62,659,704			67,081,990			61,405,530
Average shares outstanding—diluted		68,075,411			64,894,681			67,568,942			64,241,628

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

MANDALAY RESORT GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Nine Months Ended October 31,
		2004			2003
Cash flows from operating activities
Net income		$	212,649		$	127,024
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		142,164			124,593
Provision for bad debts		2,923			1,765
Increase (decrease) in deferred income tax		11,994			(3,769		)
Tax benefit from stock option exercises		12,418			40,034
Decrease in interest payable		(17,334		)	(21,770		)
Increase in accrued pension cost		11,641			8,192
Loss on disposition of fixed assets		1,189			1,049
Unconsolidated affiliates’ (earnings in excess of distributions) distributions in excess of earnings		(4,308		)	4,453
Minority interest in earnings, net of distributions		4,598			29,501
Changes in assets and liabilities:
Other current assets		9,381			(9,843		)
Other current liabilities		18,967			12,898
Other noncurrent assets		9,429			9,071
Other		(2,258		)	(3,890		)
Total adjustments		200,804			192,284
Net cash provided by operating activities		413,453			319,308
Cash flows from investing activities
Capital expenditures		(105,437		)	(454,225		)
(Decrease) increase in construction payable		(1,363		)	7,379
Increase in other investments		(10,177		)	(9,973		)
Intangible development costs		(6,333		)	(16,000		)
Proceeds from insurance settlement		18,147			—
Other		950			1,884
Net cash used in investing activities		(104,213		)	(470,935		)
Cash flows from financing activities
Proceeds from issuance of senior notes and convertible senior debentures		—			650,000
Proceeds from equipment financing		—			145,000
Net effect on cash of issuances and payments of debt with initial maturities of three months or less		(270,000		)	(100,000		)
Principal payments of debt with initial maturities in excess of three months		(12,677		)	(445,446		)
Debt premium on reverse interest rate swap termination		5,424			—
Debt issuance costs		(186		)	(17,012		)
Exercise of stock options		19,886			89,632
Settlements and interest under equity forward agreements, net of tax benefit		—			(100,419		)
Reversal of deferred gain		—			(10,339		)
Payment of cash dividend		(36,442		)	(29,962		)
Other		12,888			(8,291		)
Net cash (used in) provided by financing activities		(281,107		)	173,163
Net increase in cash and cash equivalents		28,133			21,536
Cash and cash equivalents at beginning of year		153,490			148,442
Cash and cash equivalents at end of year		$	181,623		$	169,978
Supplemental cash flow disclosures
Cash paid for interest (net of amounts capitalized of $530 and $5,922)		$	149,729		$	166,873
Cash paid for income taxes		$	61,741		$	31,033
Noncash items
Increase in market value of investment in insurance contracts		$	(2,258	)	$	(3,889	)
Decrease in market value of interest rate swaps		—			$	(5,756	)
Application of deposit for purchase of equipment		—			$	22,500

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

 

MANDALAY RESORT GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1. Summary of Significant Accounting Policies

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

Mandalay Resort Group (the “Company”), which changed its name from Circus Circus Enterprises, Inc. effective June 18, 1999, was incorporated February 27, 1974 in Nevada. The Company owns and operates hotel and casino facilities in Las Vegas, Reno, Laughlin, Jean and Henderson, Nevada and a hotel and dockside casino in Tunica County, Mississippi. In Detroit, Michigan, the Company is the majority investor in a casino. It is also an investor in several unconsolidated affiliates, with operations that include a riverboat casino in Elgin, Illinois, a hotel/casino in Reno, Nevada and a hotel/casino on the Las Vegas Strip. (See Note 2—Investments in Unconsolidated Affiliates.)

The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and the Detroit joint venture (53.5% owned), which is required to be consolidated. Material intercompany accounts and transactions have been eliminated. Investments in 50% or less owned affiliated companies are accounted for under the equity method. The Company views each casino property as an operating segment and all such operating segments have been aggregated into one reporting segment.

Minority interest, as reflected on the condensed consolidated financial statements, represents the 46.5% interest of the minority partner in MotorCity Casino in Detroit, Michigan.

The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. The results for the three and nine months ended October 31, 2004 are not necessarily indicative of results to be expected for the full fiscal year.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended January 31, 2004.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, while diluted earnings per share reflects the impact of additional dilution for all potentially dilutive securities, such as stock options.

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The table below reconciles weighted-average shares outstanding used to calculate basic earnings per share with the weighted-average shares outstanding used to calculate diluted earnings per share. There were no reconciling items for net income.

		Three Months Ended October 31,						Nine Months Ended October 31,
		2004			2003			2004			2003
		(in thousands, except per share data)
Net income		$	67,107		$	40,642		$	212,649		$	127,024
Weighted-average shares outstanding (basic)		67,518			62,660			67,082			61,406
Dilutive effect of stock options		557			2,235			487			2,836
Weighted-average shares outstanding (diluted)		68,075			64,895			67,569			64,242
Basic earnings per share		$	.99		$	.65		$	3.17		$	2.07
Diluted earnings per share		$	.99		$	.63		$	3.15		$	1.98

 

STOCK-BASED COMPENSATION

The Company has various employee stock option plans. Statement of Financial Accounting  Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) provides that companies may elect to account for employee stock options using a fair value method or continue to apply the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). The Company has elected to continue to apply APB 25 and related interpretations in accounting for its stock option plans using the intrinsic value method. Intrinsic value represents the excess, if any, of the market price of the underlying common stock at the grant date over the exercise price of the stock option. Since all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant, no compensation expense related to stock options was reflected in net income. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. Had compensation expense related to stock options been determined in accordance with the fair value recognition provisions of SFAS 123, the effect on the Company’s net income and basic and diluted earnings per share would have been as follows:

		Three Months Ended October 31,						Nine Months Ended October 31,
		2004			2003			2004			2003
		(in thousands, except per share data)
Net income as reported		$	67,107		$	40,642		$	212,649		$	127,024
Less total stock-based employee compensation expense determined under the fair value method, net of tax		(190		)	(682		)	(831		)	(2,235		)
Pro forma net income		$	66,917		$	39,960		$	211,818		$	124,789
Net income per share (basic)
As reported		$	.99		$	.65		$	3.17		$	2.07
Pro forma		.99			.64			3.16			2.03
Net income per share (diluted)
As reported		$	.99		$	.63		$	3.15		$	1.98
Pro forma		.98			.62			3.13			1.94

 

The Company has also issued restricted stock pursuant to one of its stock incentive plans. The total value of each restricted stock grant, based upon the fair market value of the stock on the date of grant, is initially reported as deferred compensation under stockholders’ equity. This deferred compensation is then amortized to compensation expense over the related vesting period. Total deferred compensation amounted to $56.5 million at October 31, 2004 (net of amortization). The following table shows the

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amount of compensation expense reflected in the income statement related to grants of restricted stock (in thousands):

		Three Months Ended October 31,								Nine Months Ended October 31,
		2004			2003					2004			2003
Compensation expense		$	4,870			$	67			$	11,539			$	89

 

COMPREHENSIVE INCOME

Comprehensive income is a broad concept of an enterprise’s financial performance that includes all changes in equity during a period that arise from transactions and economic events from nonowner sources. Comprehensive income is net income plus “other comprehensive income,” which consists of revenues, expenses, gains and losses that do not affect net income under accounting principles generally accepted in the United States. Other comprehensive income for the Company includes adjustments for minimum pension liability and adjustments to interest rate swaps, net of tax.

Comprehensive income consisted of the following (in thousands):

		Three Months Ended October 31,						Nine Months Ended October 31,
		2004			2003			2004			2003
Net income		$	67,107		$	40,642		$	212,649		$	127,024
Change in fair value of interest rate swaps		—			1,777			—			4,956
Comprehensive income		$	67,107		$	42,419		$	212,649		$	131,980

 

The accumulated comprehensive loss reflected on the balance sheet at October 31, 2004 and January 31, 2004 consisted solely of the minimum pension liability adjustment.

RECLASSIFICATIONS

The condensed consolidated financial statements for the prior year reflect certain other reclassifications to conform to classifications adopted in the current year. These reclassifications had no effect on previously reported net income.

Note 2. 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 unamortized interest capitalized during construction.  Investments in unconsolidated affiliates consisted of the following (in thousands):

		October 31,        2004					January 31,        2004
Circus and Eldorado Joint Venture (50%) (Silver Legacy, Reno, Nevada)			$	63,485				$	60,032
Elgin Riverboat Resort (50%) (Grand Victoria, Elgin, Illinois)			243,944					246,637
Victoria Partners (50%) (Monte Carlo, Las Vegas, Nevada)			269,880					266,637
			$	577,309				$	573,306

 

8

 

The Company’s unconsolidated affiliates operate with fiscal years ending on December 31. Selected results of operations for each of the unconsolidated affiliates are as follows:

Three months ended					Silver					Grand			Monte
September 30, 2004					Legacy					Victoria			Carlo			Total
					(in thousands)
Revenues						$	42,358			$	99,799		$	69,621		$	211,778
Expenses						33,927				86,954			50,748			171,629
Income from operations						8,431				12,845			18,873			40,149
Net income						4,110				12,892			18,997			35,999

 

Three months ended					Silver					Grand			Monte
September 30, 2003					Legacy					Victoria			Carlo			Total
					(in thousands)
Revenues						$	43,186			$	93,749		$	67,951		$	204,886
Expenses						34,824				84,609			48,300			167,733
Income from operations						8,362				9,140			19,651			37,153
Net income						4,116				9,166			19,657			32,939

 

Nine months ended				Silver					Grand			Monte
September 30, 2004				Legacy					Victoria			Carlo			Total
				(in thousands)
Revenues					$	119,823			$	294,302		$	214,515		$	628,640
Expenses					96,136				257,310			147,229			500,675
Income from operations					23,687				36,992			67,286			127,965
Net income					10,868				37,135			67,429			115,432

 

Nine months ended				Silver					Grand			Monte
September 30, 2003				Legacy					Victoria			Carlo			Total
				(in thousands)
Revenues					$	117,495			$	281,233		$	200,575		$	599,303
Expenses					96,429				228,369			142,211			467,009
Income from operations					21,066				52,864			58,364			132,294
Net income					9,204				53,064			58,467			120,735

 

Note 3. Intangible Development Costs

On August 2, 2002, the Detroit City Council approved a revised development agreement pursuant to which MotorCity Casino is to expand its current facility by December 31, 2005. Under the revised development agreement, MotorCity Casino has paid the City of Detroit $44.0 million. MotorCity is further obligated, through letters of credit issued by the Company, to fund approximately $49.4 million to repay bonds issued by the Economic Development Corporation of the City of Detroit (“EDC”). The Company recorded an intangible asset of $93.4 million, representing the total of the above payments and obligations. As of October 31, 2004, the remaining unpaid obligation is $49.4 million.

MotorCity is also obligated under an indemnity agreement to indemnify the EDC and the City of Detroit with respect to certain liabilities. As of October 31, 2004, MotorCity had paid $4.3 million under this indemnity agreement.  These payments are also considered to be part of the intangible development costs.

The above intangible development costs have an indefinite life. See Note 10—Commitments and Contingent Liabilities for additional details regarding the Company’s Detroit joint venture.

 

9

Note 4. Long-term Debt

Long-term debt consisted of the following:

		October 31,			January 31,
		2004			2004
		(in thousands)
Amounts due under bank credit agreements at floating interest rates, weighted average of 3.7% and 2.9%		$	180,000		$	450,000
6.45% Senior Notes due 2006 (net of unamortized discountof $55 and $88)		199,945			199,912
101¤4% Senior Subordinated Notes due 2007		500,000			500,000
91¤2% Senior Notes due 2008		200,000			200,000
61¤2% Senior Notes due 2009		250,000			250,000
93¤8% Senior Subordinated Notes due 2010 (net of unamortized discount of $1,414 and $1,612)		298,586			298,388
63¤8% Senior Notes due 2011 (net of unamortized discount of $1,727 and $1,907)		248,273			248,093
75¤8% Senior Subordinated Debentures due 2013		150,000			150,000
Amounts due under Convertible Senior Debentures due 2033 at floating interest rates, weighted average of 2.7% and 1.9%		400,000			400,000
7.0% Debentures due 2036 (net of unamortized discount of $55 and $65)		149,945			149,935
6.70% Debentures due 2096		4,265			4,415
Obligation under capital lease		132,710			145,000
Other notes		3,653			3,888
		2,717,377			2,999,631
Current portion of long-term debt		(16,687		)	(16,681		)
Debt premium from termination of reverse interest rate swaps		17,674			17,711
Market value of reverse interest rate swaps		6,672			1,314
		$	2,725,036		$	3,001,975

 

With respect to the Convertible Senior Debentures due 2033, Mandalay and The Bank of New York, as trustee, executed a supplemental indenture dated as of July 26, 2004. The supplemental indenture amends the notice provisions of the indenture to permit Mandalay, at any time prior to a conversion date, to elect to exercise its right to deliver cash in lieu of shares of Mandalay common stock for all or any portion of the shares due to holders of the debentures upon conversion of the debentures. Thereafter, Mandalay delivered an irrevocable cash settlement notice to The Bank of New York, the conversion agent for the debentures, which irrevocably obligates Mandalay to cash settle a number of shares of common stock equal to the base conversion rate in effect on the conversion date if the debentures are ultimately converted, provided however, that the amount of cash that Mandalay could be required to pay to cash settle the shares is limited to $1,000 for each $1,000 original principal amount of debentures, or a total of $400 million.  Any additional obligation to holders who elect conversion will be settled, at the option of Mandalay, in cash or shares of Mandalay common stock.

At October 31, 2004, the Company was in compliance with all of the covenants in its credit facilities and lease agreement and, under the most restrictive covenant, was restricted from issuing additional debt in excess of approximately $650 million.

Note 5. Interest Rate Swaps

The Company has a policy aimed at managing interest rate risk associated with its current and anticipated future borrowings. Under this policy, the Company may use any combination of interest rate swaps, futures, options, caps and similar instruments. To the extent the Company employs such financial

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instruments pursuant to this policy, and the instruments qualify for hedge accounting, they are accounted for as hedging instruments. In order to qualify for hedge accounting, the underlying hedged item must expose the Company to risks associated with market fluctuations and the financial instrument used must be designated as a hedge and must reduce the Company’s exposure to market fluctuation throughout the hedge period. If these criteria are not met, a change in the market value of the financial instrument is recognized as a gain or loss in the period of change. Otherwise, gains and losses are not recognized except to the extent that the financial instrument is disposed of prior to maturity. Net interest paid or received pursuant to the financial instrument is included as interest expense in the period.

The Company has entered into various interest rate swaps, principally with its bank group, to manage interest expense, which is subject to fluctuation due to the variable-rate nature of the debt under the Company’s credit facilities.

In February 2003, the Company entered into two “reverse” interest rate swap agreements (“fair value hedges”) with members of its bank group. Under one agreement, the Company received a fixed interest rate of 9.25% and paid a variable interest rate (based on LIBOR plus 6.35%) on $275 million notional amount. Under the other, the Company received a fixed rate of 6.45% and paid a variable interest rate (based on LIBOR plus 3.57%) on $200 million notional amount. In May 2003, the Company elected to terminate the $275 million swap and received $2.7 million in cash, representing the fair market value of the swap. Accounting rules require such gains to be treated as debt premium and amortized over the remaining life of the related debt instrument using an effective interest method. However, since the underlying $275 million Senior Subordinated Notes were called on July 15, 2003, the unamortized portion of this gain (along with the unamortized portion of the gain related to a similar interest rate swap that was terminated in October 2002) was offset against the related loss on early retirement of debt. The total gain thus offset was $9.0 million. Meanwhile, in June 2003, the Company elected to terminate the $200 million swap. The Company received $4.1 million in cash, representing the fair market value of this swap, and recorded a corresponding debt premium which is being amortized to interest expense over the then remaining life of the related debt instrument, which was approximately 21¤2 years.

In July 2003, the Company entered into two “reverse” interest rate swap agreements (“fair value hedges”) with members of its bank group. Under one agreement, the Company received a fixed interest rate of 6.5% and paid a variable interest rate (based on LIBOR plus 2.39%) on $200 million notional amount. Under the other, the Company received a fixed rate of 6.5% and paid a variable interest rate (based on LIBOR plus 2.42%) on $50 million notional amount. These swaps were being used to hedge the Company’s $250 million 61¤2% Senior Notes due 2009. In March 2004, the Company elected to terminate both of the swaps, pursuant to which it received $5.4 million in cash representing the fair market value of these swaps, and recorded a corresponding debt premium which is being amortized to interest expense over the remaining life of the related debt, which was approximately 51¤2 years at the time the swap was terminated.

In December 2003, the Company entered into two “reverse” interest rate swap agreements (“fair value hedges”) with members of its bank group. Under one agreement, the Company receives a fixed interest rate of 6.375% and pays a variable interest rate (based on LIBOR plus 1.74%, or 4.0% at October 31, 2004) on $125 million notional amount. Under the other, the Company receives a fixed rate of 6.375% and pays a variable interest rate (based on LIBOR plus 1.72%, or 4.0% at October 31, 2004) on $125 million notional amount. These swaps are being used to hedge the Company’s $250 million 63¤8% Senior Notes due 2011.

In April 2004, the Company entered into a “reverse” interest rate swap agreement (“fair value hedge”) with a member of its bank group. Under this agreement, the Company receives a fixed interest rate of 6.5% and pays a variable interest rate (based on LIBOR plus 2.58%, or 4.9% at October 31, 2004)

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on $250 million notional amount. This swap is being used to hedge the Company’s $250 million 6½% Senior Notes due 2009.

The net effect of all swaps resulted in a reduction of interest expense of $4.3 million in the quarter and $13.4 million in the nine months ended October 31, 2004.

The Company is exposed to credit loss in the event of nonperformance by the counterparties 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 of its then-existing swaps as of October 31, 2004, the Company would have received a net amount of $6.7 million based on quoted market values from the various financial institutions holding the swaps.

Our swaps meet the criteria for hedge accounting established by Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), which the Company adopted in fiscal 2002. The Company reports its swap related assets and liabilities on a net basis in “Other Long-term Liabilities”. The fair market value of the swaps designated as fair value hedges increased $5.4 million during the nine months ended October 31, 2004, which decreased the net liability with a corresponding increase in long-term debt.

Note 6. Leasing Arrangements

On June 30, 2003, the Company exercised its purchase options under previously existing operating leases and purchased equipment for a total purchase price of $198.3 million, representing the equipment’s fair market value based upon independent appraisals. Of this amount, $188.0 million was reflected as capital expenditures, with the balance of $10.3 million representing the reversal of unamortized deferred gain related to the December 2001 sale and leaseback transaction. The purchase price was financed utilizing the $145 million the Company received under its new capital lease agreement, with the balance being borrowed under the revolving credit facility.

Note 7. Stock Options and Restricted Stock

The Company has various stock incentive plans for executive, managerial and supervisory personnel, as well as the Company’s outside directors and consultants. All of the plans permit grants of options, and two of the plans also permit the grant of performance shares and restricted stock awards relating to the Company’s common stock. As of October 31, 2004, the awards granted pursuant to these plans were stock options, which are generally exercisable in one or more installments beginning not less than six months after the grant date, and restricted stock, which generally vests ratably over three or five years. As of October 31, 2004, the total remaining shares available for grant under these plans (as options, performance shares, or restricted stock) was 2,068,249.

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Summarized information for stock options was as follows:

		Nine Months Ended October 31, 2004
		Options		Weighted-Average Exercise Price
Outstanding at beginning of period		1,744,302			$	21.19
Granted		—			—
Exercised		(987,168	)		20.14
Canceled		(2,500	)		23.88
Outstanding at end of period		754,634			22.56
Exercisable at end of period		219,034			23.02

 

Summarized information for unvested restricted stock was as follows:

		Nine Months Ended October 31, 2004
Unvested at beginning of period			20,250
Granted			1,133,425
Vested			(6,750	)
Canceled			(700	)
Unvested at end of period			1,146,225

 

During the nine months ended October 31, 2004, the Company did not purchase any shares of its common stock. In the prior year period, the Company did not purchase any shares of its common stock, though it did settle its equity forward agreements (see Note 9).

Note 8. Stock Related Matters

On June 16, 2004, Mandalay and MGM MIRAGE jointly announced that they had entered into a definitive merger agreement pursuant to which MGM MIRAGE will acquire Mandalay for $71.00 in cash for each outstanding share of common stock of Mandalay. The transaction is structured as a merger of a wholly owned subsidiary of MGM MIRAGE with and into Mandalay. The transaction is subject to the approval of Mandalay’s stockholders and to the satisfaction of customary closing conditions contained in the definitive merger agreement, including the receipt of all necessary regulatory and governmental approvals. Accordingly, there can be no assurance as to when, or if, the transaction will be consummated.

On June 15, 2004, Mandalay amended its rights agreement to provide, among other things, that neither MGM MIRAGE, nor MGM MIRAGE Acquisition #61 or any affiliate or associate of either shall be deemed to be an acquiring person either individually or collectively, by virtue of (i) the announcement of the merger, (ii) the acquisition of common stock of Mandalay pursuant to that merger, (iii) the execution of the related merger agreement, or (iv) the consummation of the merger or the other transactions contemplated by the merger agreement. On August 2, 2004 the rights agreement was further amended to extend from August 15, 2004 to August 15, 2014 the date the rights issued under the rights agreement will expire, subject to Mandalay’s right to extend that date, unless the rights are earlier redeemed or exchanged by Mandalay or terminated.

Note 9. Equity Forward Agreements

To facilitate the purchase of shares of its common stock, the Company entered into equity forward agreements with Bank of America (“B of A” or “the Bank”) providing for the Bank’s purchase of up to an agreed amount of the Company’s outstanding common stock. Bank of America acquired a total of 6.9

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million shares at a total cost of $138.7 million under these agreements. Pursuant to the interim settlement provisions and an amendment to the agreements, the Company received a net of 3.6 million shares and reduced the notional amount of the agreements by $38.7 million as of January 31, 2003. On March 31, 2003, the Company purchased the remaining 3.3 million shares from B of A for the notional amount of $100 million. The settlement of the contract was funded under the Company’s revolving credit facility.

The Company incurred quarterly interest charges on the notional amount at a rate equal to LIBOR plus 1.95%. Total interest charges incurred from inception through March 31, 2003, amounted to $12.3 million, of which $0.7 million was incurred during fiscal 2004. The Company also incurred structuring fees and commission charges totaling $3.7 million. These interest charges and other fees were included in the cost of treasury stock, net of the related tax benefit.

Note 10. Commitments and Contingent Liabilities

Detroit

The Company participates with the Detroit-based Atwater Casino Group in a joint venture that owns and operates a casino in Detroit, Michigan. This joint venture is one of three groups which negotiated casino development agreements with the City of Detroit. The Company has a 53.5% ownership interest in the joint venture.

On August 2, 2002, the Detroit City Council approved a revised development agreement between the joint venture and the City of Detroit (the “Revised Development Agreement”). Under the Revised Development Agreement, MotorCity Casino is to be expanded into a permanent facility at its current location by December 31, 2005. The permanent facility is currently expected to include 100,000 square feet of casino space, a 400-room hotel, a 1,200-seat theater, convention space, and additional restaurants, retail space and parking. Depending upon market conditions, the availability of additional land and the joint venture’s ability to obtain reasonable financing, the joint venture could be required to construct an additional 400 rooms. Under the terms of this agreement, the joint venture has paid the City a total of $44.0 million. Also, beginning January 1, 2006, the joint venture is to pay the City 1% of its adjusted casino revenues. If its casino revenues top $400 million in any given calendar year, the payment will be increased to 2% for that calendar year.

Originally, the joint venture’s permanent facility was to have been located on land along the Detroit River. The City’s Economic Development Corporation issued bonds to finance the City’s acquisition of that land, and Bank of America issued letters of credit totaling $49.4 million to secure (and ultimately make) the payments of principal and interest on those bonds. Mandalay then issued letters of credit totaling $49.4 million to back Bank of America’s letters of credit. The Company will continue to provide such letters of credit. As part of the Revised Development Agreement, the joint venture has relinquished the right to receive any of the riverfront land acquired by the City, and has transferred to the City its interest in certain real property previously purchased by the joint venture and the other casino developers. Both the joint venture and Mandalay are subject to a radius restriction prohibiting them from operating additional casinos within approximately 150 miles of Detroit, so long as the laws of the state are not amended to permit more than three casinos within the radius. Additionally, the joint venture is required to indemnify the City for up to $20 million in claims against the City in connection with the acquisition of the riverfront land and in connection with the Lac Vieux litigation described below.

The Company has committed to contribute 20% of the costs of the permanent facility in the form of an investment in the joint venture. The joint venture will seek to borrow any additional funds (in excess of Mandalay’s equity contribution) which may be necessary to complete the expanded permanent facility. Under the operating agreement, the project costs are to be reviewed every nine months. As of October 31, 2004, the Company had contributed 20% of the project costs as most recently determined. The cost of the additional facilities (excluding land, capitalized interest and preopening expenses) is currently estimated to

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be $275 million. Under the Revised Development Agreement, the Company guaranteed completion of the expanded facility and entered into a keep-well agreement with the City that could require it to contribute additional funds to continue operation of the facility until two years following the execution of the completion guarantee and keep-well agreement. There is no contractual limitation on the amount that the Company may be required to contribute under the completion guarantee or the keep-well agreement. However, based on the performance of the casino to date, the Company does not expect that its completion guarantee or keep-well agreement with the City will require the outlay of additional capital.

The joint venture’s $150 million credit facility matured June 30, 2003. The Company had guaranteed this credit facility.

Under the terms of the joint venture’s operating agreement, Mandalay is to receive a management fee for a period of ten years equal to 1.5% of the cost of the permanent casino facility. The management committee of the joint venture initially determined that Mandalay was entitled to the management fee commencing on the date the Revised Development Agreement was signed, since that agreement provided for the existing facility to become the permanent facility. The management committee ultimately determined that the management fee should not be paid until the permanent casino expansion is completed. As a result, the Company reversed previously accrued management fee income of $1.8 million in the second quarter ended July 31, 2003.

Various lawsuits have been filed in the state and federal courts challenging the constitutionality of the Casino Development Competitive Selection Process Ordinance and the Michigan Gaming Control and Revenue Act, and seeking to appeal the issuance of a certificate of suitability and casino license to MotorCity Casino. A decision by the Sixth Circuit Court of Appeals in Lac Vieux Desert Band of Lake Superior Chippewa Indians v. The Michigan Gaming Control Board et al. held that the ordinance in its current form was unconstitutional and remanded the case to the District Court. The Michigan Gaming Control Board (“MGCB”) took the ruling of the Sixth Circuit Court of Appeals under advisement without comment. The District Court declared that the ordinance in its current form is unconstitutional and awarded the Lac Vieux Band attorneys’ fees and costs totaling $545,094, but rejected the Lac Vieux Band’s request to require a rebidding of the three casino licenses, and in addition, rejected the Lac Vieux Band’s request to enjoin the City of Detroit from entering into revised development agreements with the three casino developers, including MotorCity Casino. The Lac Vieux Band has appealed the District Court’s decision to the Sixth Circuit Court of Appeals.  The Sixth Circuit Court of Appeals issued an opinion granting the Lac Vieux Band’s motion for an injunction pending appeal that temporarily enjoins the City of Detroit from issuing building permits for the permanent casino facilities and temporarily enjoins the casino developers from commencing construction of the permanent casino facilities.

The Lac Vieux Band has filed a separate action in the Gogebic County, Michigan, Circuit Court entitled Lac Vieux Desert Band of Lake Superior Chippewa Indians v. Michigan Gaming Control Board, in which the Lac Vieux Band has requested the Circuit Court to enter an order requiring the MGCB to revoke the casino licenses issued to the three Detroit casinos, including MotorCity Casino.  As a result of the settlement agreement discussed below, this action has been dismissed.

On November 26, 2003, the Company announced that MotorCity Casino had signed a settlement agreement with the Lac Vieux Desert Band of Lake Superior Chippewa Indians. On April 23, 2004, pursuant to the terms of this settlement agreement which was approved by the District Court, MotorCity Casino paid to the Lac Vieux Band $1.5 million, plus $500,000 for attorneys’ fees. Because approval of the settlement agreement was subsequently appealed, all further settlement payments ($1.5 million due 30 days after the initial payment, $5.75 million due on the first and second anniversaries of the initial payment and $1 million due annually for 25 years beginning on the third anniversary of the initial payment) were suspended pending resolution of the appeal. If the Sixth Circuit Court of Appeals ultimately affirms the approval of the settlement agreement, then, absent filing of another adverse claim, the payment schedule

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will be reinstated and MotorCity Casino will have to immediately pay all amounts that otherwise would have been due during the period of suspension (plus interest thereon). The occurrence of certain other events will suspend, lower and/or terminate the payments. There can be no assurance as to when final resolution will occur with respect to this matter, or what action the courts might take.  These payments would satisfy the joint venture’s obligations under the indemnity agreement described above with respect to Lac Vieux litigation claims. However, the joint venture would still be liable for claims related to the acquisition of the riverfront land, which potentially are capped at $4 million.

Any future adverse ruling by the courts in the above lawsuits or in other lawsuits, or any adverse ruling by the MGCB, could affect the joint venture’s operation of its current facility, as well as its ability to retain its certificate of suitability and casino license for its expanded permanent facility. No assurance can be given regarding the timing or outcome of any of these proceedings.

The joint venture’s operation of MotorCity Casino is subject to ongoing regulatory oversight, and its ability to proceed with an expanded hotel/casino project is contingent upon the receipt of all necessary governmental approvals, successful resolution of pending litigation and satisfaction of other conditions.

On August 17, 2004, the Governor of Michigan signed new legislation providing for an increase in the gaming tax rate from 18% to 24% effective September 1, 2004. The new law provides for an additional one percent increase in the tax rate on each of July 1, 2009, 2010 and 2011. Once a permanent facility is fully operational, the tax is reduced to 19%. The legislation further provides that the tax increase is eliminated if the Michigan Lottery Act is amended and  video lottery terminals at horse racetracks become operational.

Legal Proceedings

Slot Machine Litigation

As previously reported, 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. On June 26, 2002, the Motion for Class Certification was denied. Subsequently, the Plaintiffs sought permission from the Ninth Circuit Court of Appeals to appeal the issue of class certification. The Court of Appeals granted the Plaintiffs’ motion. On August 10, 2004, the Ninth Circuit entered its order affirming the district court’s denial of the motion for class certification. The time period for filing a motion for rehearing of that ruling has since passed.

Shareholder Litigation

The Company and its directors were named defendants in Stephen Ham, Trustee for the J.C. Ham Residuary Trust v. Mandalay Resort Group, et al., Case No. A487100, which was filed on June 11, 2004 in the

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8^th Judicial District Court for Clark County, Nevada, and Robert Lowinger v. Mandalay Resort Group, et al., Case No. A486782, which was filed on June 7, 2004 also in the 8^th Judicial District Court for Clark County, Nevada. Both of these actions make claims concerning the announced merger between the Company and MGM MIRAGE, including claims of breach of fiduciary duty against the Company’s directors, and seek injunctive relief and unspecified monetary damages. The plaintiffs in both actions agreed that the Company and the directors do not need to respond to the pending complaints, as they intend to file a joint amended complaint and consolidate both actions. On December 3, 2004, without an operative complaint, the plaintiff in Ham filed a motion for temporary restraining order and motion for preliminary injunction enjoining the Mandalay shareholder vote on the proposed merger and for an order shortening time to allow plaintiff to conduct expedited discovery. The motion was denied.

The Company is a defendant in various other 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are one of the four largest hotel/casino operators in the United States, in terms of revenues, rooms and casino space. Our operations consist of wholly owned resorts in Nevada and Mississippi, as well as jointly owned resorts in Nevada, Illinois and Michigan. Our resorts cater to a wide variety of customers, from value-oriented to high-end, and we strive to provide the best overall experience in each of the market segments in which we compete. Our core market is Las Vegas, the world’s largest gaming market, where our properties are expected to generate approximately 75% of our operating income in fiscal 2005. We have the largest-scaled hotel/casino resort development in Las Vegas. Our “Mandalay Mile” consists of three interconnected megaresorts on 230 acres, and includes our flagship property, Mandalay Bay. Mandalay Bay is typically the best performer among our properties, as it possesses amenities that appeal to higher-income customers. Strong demand from this segment of our customer base has permitted us greater pricing leverage, which has helped to drive results at this property. With the recent additions of an all-suites hotel tower and a retail center (discussed more fully under “Financial Position and Capital Resources—New Projects” below), Mandalay Bay should continue to be the leading driver of near-term growth for our company.

Our operating results are highly dependent on the volume of customers visiting and staying at our resorts, which drives results in our two principal revenue centers—the casino and the hotel. We generate approximately 50% of our revenues from gaming activities, and approximately 25% from hotel operations. The volume of casino activity is measured by “drop,” which refers to amounts wagered by our customers. The amount of drop which we keep and recognize as casino revenue is referred to as our “win” or “hold.”  In our hotel business, the key metric is revenue per available room, or “REVPAR.”  REVPAR reflects both occupancy levels and room rates, each of which is impacted by customer demand, among other factors. Although the casino accounts for approximately 50% of our revenues companywide, we consider the hotel to be the principal driver of our business in the Las Vegas market. This is due to the fact that the majority of our revenues are derived from “in-house” customers, that is, customers who stay in our hotel rooms. Consequently, to the extent we can place higher-value customers in our rooms, we can generate increased revenues throughout our properties. Furthermore, due to the nature of gaming activities, we have little pricing leverage in the casino, whereas we possess significant pricing leverage in our rooms.

Recent Developments

Merger Agreement

On June 16, 2004, Mandalay and MGM MIRAGE jointly announced that they had entered into a definitive merger agreement pursuant to which MGM MIRAGE will acquire Mandalay for $71.00 in cash for each outstanding share of common stock of Mandalay. The transaction is structured as a merger of a wholly owned subsidiary of MGM MIRAGE with and into Mandalay. The transaction is subject to the approval of Mandalay’s stockholders and to the satisfaction of customary closing conditions contained in the definitive merger agreement, including the receipt of all necessary regulatory and governmental approvals. Accordingly, there can be no assurance as to when, or if, the transaction will be consummated.

Critical Accounting Policies

A description of our critical accounting policies can be found in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2004. There were no material changes to those policies during the quarter and nine months ended October 31, 2004.

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Significant Factors Affecting Results of Operations

Economic Conditions

Historically, there has not been a high correlation between economic conditions and our operating results. This has been true with respect to the overall U.S. economy and also the regional economies from which we derive a sizeable portion of our customers (e.g., California). However, we believe an improved economy in the country contributed to positive results in the first nine months of fiscal 2005. Visitor volume on the Las Vegas Strip increased 6% in the first nine months of calendar 2004 (the most recent period for which information is available) and we expect this trend to continue during the remainder of the year.

Results of Operations

Earnings per Share

For the quarter ended October 31, 2004, we reported net income of $67.1 million, or $.99 per diluted share, versus $40.6 million, or $.63 per diluted share in the prior year. For the nine months, net income was $212.6 million, or $3.15 per diluted share, compared to $127.0 million, or $1.98 per diluted share.

The increases in earnings for the three and nine month periods were due principally to strong results at our Las Vegas Strip properties. Income from operations at these properties (including our 50% share of Monte Carlo) increased $50.6 million, or 59% in the quarter, driven by a 28% increase in hotel revenues and a 14% increase in casino revenues. In the nine-month period, income from operations at these properties (including our 50% share of Monte Carlo) increased $125.0 million, or 46%, driven by a 27% increase in hotel revenues and a 13% increase in casino revenues. The Mandalay Bay convention center and THEhotel (the all-suites tower which opened in December 2003 at Mandalay Bay), along with the rebound in the national economy, contributed to REVPAR increases of 18% and 19% in the three-month and nine-month periods and likewise contributed to higher customer counts, which factored into the increases in casino revenues.

Results for the three and nine months ended October 31, 2004 included (1) a change in accounting estimate with respect to our fixed jackpot accrual, which resulted in additional revenue of $8.2 million included in casino revenues; (2) merger related costs (which are not deductible for tax purposes) of $6.6 million included in corporate expense; and (3) a reduction of other revenues of $3.4 million related to an adjustment of the amortization of deferred income.

Results for the nine months ended October 31, 2003 included a loss on early retirement of debt of $6.3 million arising from the call of our $275 million 91¤4% Senior Subordinated Notes due 2005 (see “Interest Expense,” below) and also included the effect of reversing previously accrued management fee income of $1.8 million from our 53.5%-owned MotorCity Casino in Detroit, Michigan (see the discussion under “New Projects—Detroit” in the “Financial Position and Capital Resources” section, below).

Results for the three and nine months ended October 31, 2004 and 2003, include an adjustment to the carrying value of investments associated with our Supplemental Executive Retirement Plan (“SERP”), a defined benefit plan for senior executives, to reflect the investments’ market value. This noncash adjustment (reflected in the “Interest, dividends and other income” caption in the Condensed Consolidated Statements of Income) resulted in a loss of $0.2 million in the quarter and a gain of $2.3 million in the nine-month period in fiscal 2005, compared with gains of $1.0 million and $3.9 million in the comparable periods in fiscal 2004. Results for the current nine-month period also include a noncash loss of $0.9 million related to interest rate swaps.

Average diluted shares outstanding in the three and nine months ended October 31, 2004 were 68.1 million and 67.6 million, versus 64.9 million and 64.2 million in the prior year periods. The increases from

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prior year periods reflect the issuance of shares pursuant to the exercise of employee stock options over the course of the past year, as well as grants of restricted stock to key executives in the first quarter of fiscal 2005.

Revenues

Revenues increased $94.7 million, or 15%, for the three months ended October 31, 2004 and $276.6 million, or 15%, for the nine months compared to the same periods last year, due primarily to results at our Las Vegas Strip properties. Mandalay Bay was the largest contributor, with revenues rising $50.9 million, or 31%, and $145.2 million, or 30%, over the prior year. Expanded convention business, along with the opening of THEhotel, helped drive a $29.6 million, or 46%, increase in hotel revenue at this property in the quarter, and a $77.4 million, or 40%, increase in the nine-month period.

Casino Revenues

Casino revenues rose $35.5 million, or 12%, in the third quarter and $101.9 million, or 11%, in the nine-month period. These increases include the effect of the previously discussed change in accounting estimate with respect to our fixed jackpot accrual of $8.2 million.

All of our Las Vegas properties demonstrated strong increases in the quarter and nine months, led by Mandalay Bay and Luxor. Casino revenues at Mandalay Bay increased $6.4 million, or 13%, in the three months and $23.3 million, or 16%, in the nine months, while Luxor increased $6.3 million, or 24%, and $14.9 million, or 20%, in the same periods. The December 2003 opening of THEhotel at Mandalay Bay and the October 2003 opening of Mandalay Place (our retail shopping experience connecting Mandalay Bay and Luxor), along with a stronger economy, have contributed to sizeable increases in casino traffic at these two properties. Elsewhere in Nevada, the rebound in the economy contributed to an overall modest increase in casino revenues despite competitive challenges from expanded Native American gaming. Meanwhile, casino revenues at MotorCity Casino in Detroit rose $10.9 million, or 12%, in the quarter and $31.4 million, or 11%, in the nine months. At Gold Strike Resort in Tunica County, Mississippi, casino revenues rose $1.8 million, or 6%, and $7.4 million, or 8%, in those same periods. The upturn in the economy and increased marketing efforts resulted in those properties gaining market share.

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Hotel Revenues

Hotel revenues increased $42.4 million, or 25%, in the quarter and $121.9 million, or 25%, in the nine-month period. Our Las Vegas Strip properties were the source for most of this increase, as REVPAR at these properties rose 18% and 19% in the three and nine month periods, respectively. Mandalay Bay was the most significant contributor, generating an increase of $29.6 million, or 46%, in the quarter and $77.4 million, or 40%, in the nine months, driven in large part by the additional 1,117 suites in THEhotel. With two million square feet of convention facilities and the opening of THEhotel, this property has increased its emphasis on the business and convention segment of the market, which has traditionally been willing to pay higher rates for midweek rooms. Hotel revenues at Mandalay Bay include revenues related to the rental of convention space, which amounted to $4.2 million in the third quarter compared with $2.5 million in the prior year quarter, and $9.9 million in the nine months compared with $8.7 million in the prior year. The following table compares average room rates, occupancy and REVPAR at our wholly owned properties:

		Quarter 10/31/04												Quarter 10/31/03
		Rate			Occ.%				REVPAR					Rate			Occ.%				REVPAR
Weighted average all wholly owned properties		$	102			89	%			$	90			$	88			86	%			$	76
Weighted average wholly owned Las Vegas Strip properties		$	120			93	%			$	112			$	105			90	%			$	94

 

		Nine Months 10/31/04												Nine Months 10/31/03
		Rate			Occ.%				REVPAR					Rate			Occ.%				REVPAR
Weighted average all wholly owned properties		$	100			89	%			$	89			$	86			87	%			$	75
Weighted average wholly owned Las Vegas Strip properties		$	120			92	%			$	110			$	103			90	%			$	93

 

Food and Beverage Revenues

Food and beverage revenues increased $14.0 million, or 12%, in the quarter and $40.0 million, or 11%, in the nine-month period. The increase was due mainly to the expansion of Mandalay Bay’s convention business and the December 2003 opening of THEhotel.

Other Revenues

Other revenues derive primarily from entertainment, amusements and retail. Other revenues rose $5.6 million, or 7%, in the third quarter, and $26.8 million, or 10%, in the nine-month period, notwithstanding a reduction of $3.4 million representing an adjustment of the amortization of deferred income related to a long-term contract. Retail revenues in the three-month and nine-month periods benefited from the October 2003 opening of Mandalay Place. Entertainment revenues were higher in the nine-month period due to a number of major events that were held in Mandalay Bay’s Special Events Center (most notably the May 15, 2004 championship boxing match between Roy Jones Jr. and Antonio Tarver and two concerts by Prince).

Costs and Expenses

Health Care

Employee health care costs increased $4.6 million, or 12%, and $15.1 million, or 14%, in the three and nine months ended October 31, 2004. Rising medical costs, a higher incidence of catastrophic claims and an increase in the number of employees (due primarily to the December 2003 opening of THEhotel) contributed to these increases. These costs are included in the various departmental expenses reported in the Condensed Consolidated Statements of Income.

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Depreciation and Amortization

For the three and nine months ended October 31, 2004, depreciation and amortization expense was $46.0 million and $142.2 million, versus $49.8 million and $124.6 million in the comparable prior-year periods. Depreciation expense decreased in the three months due to original equipment at Mandalay Bay that became fully depreciated on March 2, 2004, the five-year anniversary of the opening of Mandalay Bay.  The June 30, 2003 exercise of purchase options under two operating lease agreements (pursuant to which we paid $198.3 million to acquire the equipment under the leases) and the December 2003 opening of THEhotel resulted in additional depreciation expense in the nine-month period this year (partially offset by the fully depreciated equipment at Mandalay Bay). (See the discussions under “Financing Activities—Other Financing Transactions” and “Off Balance Sheet Arrangements—Operating Leases” under “Financial Position and Capital Resources” for additional details regarding the operating lease agreements discussed above.)

Operating Lease Rent

We had no operating lease rent for the three or nine months ended October 31, 2004, compared with $20.2 million for the corresponding nine-month period. The decrease was related to the previously discussed June 30, 2003 termination of our operating leases.

Corporate General and Administrative

For the three and nine months ended October 31, 2004, corporate general and administrative expense was $19.9 million and $43.6 million, versus $7.9 million and $24.1 million in the comparable prior-year periods. The increases were due to merger related costs (which are not deductible for tax purposes) of $6.6 million and $7.3 million in the three and nine months this year, along with amortization of deferred compensation related to restricted stock awards of $4.9 million and $11.5 million in the same periods.

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