MGM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2001, for MGM Mirage (formerly MGM Grand, Inc.). The company operates a portfolio of hotel, casino, and entertainment resorts, primarily in Las Vegas, Nevada, with additional properties in Detroit, Primm, Biloxi, Australia, and South Africa. The reporting period was significantly impacted by the terrorist attacks of September 11, 2001, which caused an unprecedented decline in business volumes at Las Vegas Strip properties during the final 20 days of the quarter.

Key Financial Metrics

Note: Operating margins for the three months ended September 30, 2001, were compressed due to significant non-recurring charges. Net income for the nine-month period benefited from the full inclusion of Mirage Resorts' results following the May 2000 acquisition.

Material Changes vs. Prior Period

• Revenue Decline (Q3): Consolidated net revenues decreased 5% to $992.9 million in Q3 2001 compared to $1.05 billion in Q3 2000. Casino revenues fell 3%, and room revenues fell 7%, primarily due to the post-September 11 travel slump.
• Profitability Shift: The company reported a net loss of $14.4 million for Q3 2001, a reversal from a net income of $67.4 million in Q3 2000. This was driven by a $47.4 million charge for write-downs and impairments and a $19.9 million restructuring charge.
• Provision for Doubtful Accounts: Increased by $16.3 million (153%) year-over-year in Q3 to $27.0 million, reflecting management's assessment of receivables collectibility following the economic impact of the attacks.
• Debt Reduction: Despite the Mirage acquisition adding debt in 2000, the company reduced total debt by $420 million during the first nine months of 2001, including the full repayment of a $1.3 billion term loan.

Outlook, Risks, and Unusual Items

• September 11 Impact: Management implemented immediate cost containment strategies, including the layoff of approximately 6,400 employees (full-time equivalent), resulting in a $20 million restructuring charge. Occupancy levels on the Las Vegas Strip averaged 64% from September 11–30, though mid-week and weekend levels showed signs of recovery by quarter-end.
• Asset Impairments: A $47.4 million write-down was recorded, primarily related to land on the Atlantic City Boardwalk intended for future development.
• Legal Proceedings: A class-action lawsuit was filed in July 2001 in Michigan alleging deceptive practices regarding slot machine bonus wheels. The company intends to defend the case vigorously, though the outcome is uncertain.
• South Africa Exit: The company has entered an agreement to sell its South African operations, expected to close in Q1 2002.
• Capital Allocation: The Board authorized a $10 million share repurchase program; approximately 2.2 million shares were repurchased in September 2001 for $46 million.

Investor Verification Checklist

• Recovery Trajectory: Verify the sustainability of the occupancy and room rate recovery mentioned in the MD&A for the period following September 30, 2001.
• Atlantic City Land Value: Assess the rationale and future development plans for the Atlantic City Boardwalk land that triggered the $47 million impairment charge.
• Debt Covenants: Review the impact of the Q3 loss and reduced cash flow on compliance with debt covenants, particularly given the $5.47 billion debt load.
• Michigan Litigation: Monitor the status of the class-action lawsuit regarding slot machine mechanics and potential exposure to damages.
• Restructuring Accruals: Confirm the timing and cash outflow associated with the $20 million restructuring accrual, as substantially all costs remained unpaid at period-end.