MGM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 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, which commenced operations on December 18, 1993, and MGM Grand Air, a luxury charter airline. As of June 30, 1994, approximately 74.2% of outstanding common stock was owned by Kirk Kerkorian and Tracinda Corporation.

Key Financial Metrics

Segment Performance (Six Months 1994):

• Casino Revenues: $214,203,000 (Table games win percentage: 22.2%).
• Room Revenues: $66,751,000 (Occupancy rate: 91.1%).
• Airline Revenues: $9,985,000 (Operating income: $183,000).

Material Changes vs. Prior Period

The Company transitioned from a construction phase in 1993 to full operations in 1994, resulting in significant revenue growth.

• Revenue Growth: Total revenues for the six months ended June 30, 1994, were $371,020,000 compared to $9,657,000 in the same period in 1993. This increase is driven entirely by the MGM Grand Hotel, Casino and Theme Park, which had no revenue in 1993.
• Profitability: The Company reported a Net Income of $23,549,000 for the six months ended June 30, 1994, reversing a Net Loss of $4,797,000 in the prior year period.
• Interest Expense: Net interest expense increased to $30,851,000 (six months 1994) from $4,375,000 (six months 1993). The 1993 figure was significantly lower due to the capitalization of $25,356,000 in interest during the construction phase. No interest was capitalized in 1994 as construction was complete.
• Airline Segment: MGM Grand Air improved from an operating loss of $5,125,000 in the first six months of 1993 to an operating income of $183,000 in 1994, aided by reduced depreciation and increased charter demand.

Outlook, Risks, and Unusual Items

Capital Expenditures and Projects:

• Remaining capital expenditures for 1994 are expected to be $13,978,000, primarily for hotel improvements and aircraft refurbishment.
• Construction began in July 1994 on a $25,000,000 monorail linking the MGM Grand and Bally's Las Vegas, scheduled for operation by June 1995. Costs are shared equally with Bally's.

Liquidity: The Company expects to finance operations and capital expenditures through cash flow from operations, cash on hand ($130.7 million), and a bank line of credit.

Legal Proceedings: A class-action lawsuit was filed on April 26, 1994, alleging fraudulent conduct regarding video poker and slot machines, seeking damages in excess of $6 billion. Management believes the claims are without merit and expects no material adverse effect.

Related Party Transactions: The Company entered a two-year lease with Tracinda Corporation (majority shareholder) for 18 acres adjacent to the hotel at $172,500 per month, below the appraised fair market value of $287,500. Plans were announced to develop a joint venture hotel/casino on this property.

Investor Verification Checklist

• Verify the sustainability of the 91.1% occupancy rate and 22.2% table games win percentage as the property matures beyond its initial opening phase.
• Confirm the impact of the $6 billion class-action lawsuit on future legal reserves and potential settlement costs.
• Monitor the execution and cost-sharing agreement for the $25 million monorail project with Bally's Las Vegas.
• Review the terms of the related-party lease with Tracinda Corporation to ensure continued compliance with fair market value standards.
• Assess the airline segment's ability to maintain profitability given the reduction in block hours flown and reliance on charter demand.