MGM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, for MGM Mirage (formerly MGM Grand, Inc.). The company operates a portfolio of casino resorts in Las Vegas, Detroit, Biloxi, and Darwin, Australia, alongside joint ventures in Atlantic City and Las Vegas. As of September 30, 2002, Tracinda Corporation, wholly owned by Kirk Kerkorian, held approximately 51.1% of the outstanding common stock.

Key Financial Metrics

Note: Debt figures include current portion of long-term debt ($6.7 million) and long-term debt ($5,069.2 million).

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 1.9% quarter-over-quarter (Q3 2002 vs. Q3 2001) to $1.01 billion, driven by a return to more normal business volumes following the September 11, 2001 attacks. However, nine-month revenues decreased 1% to $3.07 billion due to the lingering impact of the attacks in the first half of 2002.
• Profitability Improvement: Net income turned from a loss of $14.4 million in Q3 2001 to a profit of $69.6 million in Q3 2002. This was primarily due to the absence of $20 million in restructuring costs and $47 million in asset write-downs recorded in Q3 2001.
• Expense Reduction: Consolidated operating expenses decreased 11% in Q3 2002 compared to Q3 2001, largely due to lower bad debt expense (a reversal of $2.3 million in Q3 2002 vs. a $27 million provision in Q3 2001) and cost containment measures.
• Debt Reduction: The company repaid $410 million of bank debt during the first nine months of 2002. Total long-term debt decreased from $5.46 billion at year-end 2001 to $5.07 billion at September 30, 2002.

Outlook, Risks, and Unusual Items

• Unusual Items:
  • Storm Damage: Tropical Storm Isidore caused $8 million in damage to the Beau Rivage resort in September 2002. The company recorded an $8 million impairment charge and does not expect insurance proceeds as the deductible exceeds the loss.
  • Detroit Development: A revised development agreement with the City of Detroit resulted in a $5 million write-off of previously incurred development costs. The permanent casino is now expected to open by January 2006.
  • Restructuring Credit: A $10 million credit was recorded in the nine-month period due to the re-hiring of employees previously laid off in 2001.
• Legal Proceedings: Construction of the permanent Detroit casino is currently subject to an injunction by the 6th Circuit Court of Appeals pending an appeal regarding the constitutionality of the casino selection ordinance. Additionally, a class-action lawsuit regarding slot machine randomness remains pending.
• Capital Projects: The company announced a $375 million expansion of the Bellagio resort (completion expected late 2004) and a $84 million installation of a cashless gaming system. Development activities on the company's wholly-owned Atlantic City project were temporarily suspended in October 2002.
• Debt Covenants: Following a credit rating downgrade to Ba1 in January 2002, the company pledged substantially all assets as collateral. As of September 30, 2002, the company was in compliance with leverage (4.56:1) and interest coverage (3.47:1) covenants.

Investor Verification Checklist

• Detroit Litigation Status: Verify the timeline for the resolution of the 6th Circuit Court of Appeals injunction regarding the permanent Detroit casino construction.
• Atlantic City Strategy: Confirm the long-term status of the suspended wholly-owned Renaissance Pointe project and the timeline for the Borgata joint venture opening.
• Insurance Coverage: Review the specific terms of the new insurance policies, particularly the exclusions for terrorist acts and the impact of increased deductibles on future risk management.
• Debt Maturity Profile: Assess the impact of the $2.0 billion and $600 million revolving credit facilities maturing in April 2003 on future liquidity.
• Operating Metrics: Monitor the recovery of Average Daily Rate (ADR) and occupancy levels at Las Vegas Strip properties to pre-2001 levels.