MGM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1996, for MGM Grand, Inc. (MGM). The Company operates the MGM Grand Hotel/Casino in Las Vegas, Nevada, and the MGM Grand Australia Hotel/Casino in Darwin, Australia (acquired September 1995). MGM is also a 50% partner in the New York-New York (NYNY) joint venture in Las Vegas, scheduled for completion in winter 1996-1997.

Key Financial Metrics

Revenue Breakdown (Six Months 1996): Casino ($236,993), Room ($87,425), Food & Beverage ($39,535), Entertainment/Retail/Other ($62,111).

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net revenues increased 13.1% quarter-over-quarter and 21.0% year-over-year (six months). This was driven by a 24.3% increase in casino revenues at MGM Grand Las Vegas due to improved hold percentages and a 7.7% increase in room revenues due to higher occupancy (99.5%) and average daily rates ($97).
• Profitability Surge: Operating income jumped 460.1% to $48.6 million for the quarter and 237.5% to $97.8 million for the six months. Net income turned from a loss of $6.6 million in the prior year quarter to a profit of $20.6 million.
• Expense Management: Operating expenses decreased 10.7% quarter-over-quarter, aided by a significant reduction in the provision for doubtful accounts and discounts, and efficiencies from outsourcing restaurants.
• Liquidity: Cash and cash equivalents grew from $110.0 million at year-end 1995 to $210.2 million at June 30, 1996, fueled by strong operating cash flows of $108.5 million for the six-month period.

Outlook, Risks, and Unusual Items

• Capital Projects: The Company announced a $250 million, 30-month "Master Plan" for MGM Grand Las Vegas to transform it into "The City of Entertainment." Approximately $40 million is expected to be spent in 1996. Additionally, the NYNY joint venture has drawn down $185.6 million of its $225 million financing, with an additional $75 million anticipated in 1996.
• Debt Refinancing: On July 1, 1996, MGM secured a new $500 million senior reducing revolving credit facility. On July 3, 1996, the Company used proceeds from a $328 million stock offering and cash on hand to defease $473 million in First Mortgage Notes. This transaction will result in an extraordinary charge of approximately $31 million (net of tax) in the quarter ending September 30, 1996.
• Atlantic City Expansion: On July 9, 1996, MGM announced an agreement to develop a new project on the Atlantic City boardwalk, utilizing funds from the new credit facility.
• Risks and Contingencies:
  • Legal: A lawsuit filed by Sheldon Gordon and Randy Brant alleges breach of an oral joint venture agreement, seeking over $100 million in damages. Management believes the claims are without merit.
  • Joint Venture Guarantees: MGM and its partner have provided a joint and several unlimited "Keep-Well" agreement for the NYNY project, requiring cash infusions if the project cannot meet financial covenants.
  • Asset Write-downs: Implementation of the Master Plan may require the write-down of existing assets, though currently not expected to exceed $50 million.

Investor Verification Checklist

• Verify the impact of the $31 million extraordinary charge related to the defeasance of First Mortgage Notes on Q3 1996 earnings.
• Monitor the progress and capital drawdowns for the NYNY joint venture and the Atlantic City development.
• Assess the execution of the $250 million Master Plan at MGM Grand Las Vegas and potential asset write-downs associated with it.
• Review the status of the Gordon/Brant litigation and any potential settlement or judgment risks.
• Confirm the sustainability of the improved hold percentages and room occupancy rates at MGM Grand Las Vegas.