MGM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2006, for MGM Mirage (formerly MGM Resorts International). The company operates a portfolio of casino resorts primarily in Las Vegas, Nevada, with additional properties in Mississippi, Michigan, Illinois, and a joint venture in Macau. A significant business event during this period was the integration of the Mandalay Resort Group, acquired in April 2005, which now contributes substantially to consolidated revenues. The company is also actively developing "Project CityCenter" in Las Vegas and rebuilding the Beau Rivage resort in Biloxi, Mississippi, following Hurricane Katrina damage.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 56% year-over-year, driven primarily by the inclusion of Mandalay Resort Group properties (which contributed $721 million in revenue) and strong same-store growth in room rates and occupancy.
• Profitability: Operating income rose 45% to $424.4 million. However, operating margins compressed slightly from 24% to 23% due to the adoption of SFAS 123(R) (adding $22 million in stock compensation expense) and increased preopening/property transaction costs ($30 million vs. $7 million in 2005).
• Interest Expense: Net interest expense nearly doubled to $197.4 million from $101.5 million, reflecting the debt assumed in the Mandalay merger.
• Cash Flow: Operating cash flow decreased to $139.8 million from $167.2 million, despite higher net income, due to a $112 million tax payment related to the Motor City Casino sale and higher interest payments.
• Capital Spending: Capital expenditures surged to $355.4 million, largely due to $119 million spent on rebuilding Beau Rivage, $67 million on Project CityCenter, and $65 million on the permanent MGM Grand Detroit casino.

Guidance, Outlook, and Risks

• Project CityCenter: The company is developing a $7 billion urban metropolis on the Las Vegas Strip, with an estimated net cost of $4.5 billion after residential sales. Completion is targeted for late 2009.
• Beau Rivage Reopening: The resort in Biloxi, damaged by Hurricane Katrina, is expected to reopen in stages beginning in the third quarter of 2006. The company expects insurance proceeds to cover a significant portion of rebuilding costs.
• Debt Management: In April 2006 (post-period), the company issued $750 million in senior notes to repay borrowings under its senior credit facility. As of March 31, 2006, the company maintained $1.8 billion in available liquidity under its $7.0 billion senior credit facility.
• Accounting Changes: The adoption of SFAS 123(R) resulted in a $14 million reduction in net income for the quarter. Future quarters will continue to reflect these stock-based compensation costs.
• Risks: Key risks include the execution of large-scale development projects (CityCenter, Detroit, Macau), insurance claim resolutions for Beau Rivage, and exposure to general economic conditions and tourism trends.

Investor Verification Checklist

• Verify the timeline and cost estimates for the Beau Rivage reconstruction and the status of insurance claim approvals.
• Monitor the funding requirements and progress of Project CityCenter, given the $4.5 billion net cost estimate and late 2009 opening target.
• Review the company's leverage ratios (currently 5.4:1 debt-to-EBITDA) against covenant requirements (max 7.0:1) as capital expenditures continue.
• Assess the impact of the SFAS 123(R) adoption on future earnings, noting the $22 million incremental expense in Q1 2006.
• Track the same-store revenue growth (reported at 4% for the quarter) to gauge organic performance excluding the Mandalay acquisition.