Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1994, for MGM Grand, Inc. (now MGM Resorts International). The Company operates two primary segments: the MGM Grand Hotel, Casino, and Theme Park in Las Vegas (commenced operations December 18, 1993) and MGM Grand Air (commenced scheduled service September 8, 1994). As of September 30, 1994, approximately 74.2% of outstanding common stock was owned by Kirk Kerkorian and Tracinda Corporation.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1994 | Nine Months Ended Sep 30, 1994 |
|---|---|---|
| Total Revenues | $212,654,000 | $583,674,000 |
| Operating Income | $45,823,000 | $97,865,000 |
| Net Income | $31,785,000 | $55,334,000 |
| Earnings Per Share (Diluted) | $0.65 | $1.13 |
| Cash and Cash Equivalents | $157,367,000 (Balance Sheet) | $157,367,000 (Balance Sheet) |
| Net Cash from Operating Activities | N/A | $86,961,000 |
| Total Long-Term Debt | $485,915,000 | $485,915,000 |
| Interest Expense (Net) | $15,515,000 | $46,366,000 |
Segment Performance (Nine Months 1994):
- Hotel/Casino: Revenues of $570.6 million; Operating Income of $104.6 million. Room occupancy averaged 93% (affected by partial availability in Jan 1994); Table games win percentage was 24%.
- Airline: Revenues of $14.9 million; Operating Loss of $2.6 million.
Material Changes vs. Prior Period
The Company transitioned from a pre-opening construction phase in 1993 to full operations in 1994, resulting in a dramatic shift from losses to profitability.
- Revenue Growth: Total revenues increased from $4.7 million (3 months 1993) to $212.7 million (3 months 1994). The 1993 period included only airline revenues; the 1994 period includes the full hotel/casino operation.
- Profitability: Net income improved from a loss of $4.5 million (3 months 1993) to a profit of $31.8 million (3 months 1994).
- Interest Expense: Interest expense rose significantly to $46.4 million for the nine months of 1994 compared to $4.4 million in 1993. In 1993, $40.2 million of interest was capitalized due to construction; in 1994, no interest was capitalized as construction was complete.
- Cash Flow: Net cash from operating activities turned positive, generating $87.0 million in the first nine months of 1994, compared to a use of $1.1 million in the same period in 1993.
Outlook, Risks, and Unusual Items
Capital Projects and Liquidity:
- Monorail Project: Construction began in July 1994 on a $25 million monorail linking MGM Grand and Bally's Las Vegas. The project is a joint venture with costs shared equally; each partner has contributed $7 million. Operational by June 1995.
- Remaining CapEx: Expected remaining capital expenditures for 1994 are approximately $10.6 million, primarily for hotel improvements and aircraft refurbishment.
- Liquidity: The Company expects to finance operations through cash flow, cash on hand ($157.4 million), and a bank line of credit.
Unusual Items and Contingencies:
- Contractor Claim: In June 1994, the Company recognized a $3.0 million note receivable from a contractor's bonding company for previously capitalized services, reducing property and equipment.
- Tax Benefit: The Company reduced its valuation allowance on deferred tax assets by $18.5 million due to the utilization of net operating loss carryforwards.
- Related Party Transaction: A lease for 18 acres across from the hotel with Tracinda (majority shareholder) was terminated in September 1994 after the Company announced a joint venture to develop the property. The option to acquire the property was extended to September 1995.
- Stock Repurchase: The Company repurchased 905,800 shares of common stock for approximately $25.5 million through September 30, 1994.
Investor Verification Checklist
- Verify the sustainability of the 93-96% room occupancy rates and 24-27% table games win percentages as the hotel matures.
- Confirm the timeline and cost overruns for the $25 million monorail joint venture with Bally's Las Vegas.
- Monitor the profitability trajectory of the MGM Grand Air segment, which remains in an operating loss position despite revenue growth.
- Review the status of the $3.0 million receivable from the contractor's bonding company to ensure collectability.
- Assess the impact of the $486 million long-term debt load on future interest coverage ratios as the company moves past the initial post-opening phase.