Tender-Offer Statement — Issuer Tender Offer — Schedule 13E-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SC 13E4 Tender-Offer Statement -- Issuer Tender Offer 5 25K
2: EX-99.(A)(1) Form of Offer to Purchase 34 158K
3: EX-99.(A)(2) Form of Letter of Transmittal 12 54K
4: EX-99.(A)(3) Form of Notice of Guaranteed Delivery 2 16K
5: EX-99.(A)(4) Form of Letter to Brokers, Dealers 2 13K
6: EX-99.(A)(5) Form of Letter to Clients 2 13K
7: EX-99.(A)(6) Press Release Dated 6/23/98 2 12K
8: EX-99.(A)(7) Form of Summary Advertisement 4± 17K
9: EX-99.(A)(8) Substitute W-9 Tax Guidelines 4± 16K
10: EX-99.(G)(1) Exhibit 13 to Company's Annual Report on Form 37 182K
10-K
11: EX-99.(G)(2) Certain Pages of the Company's Form 10-Q 9 47K
12: EX-99.(G)(3) Consent of Independent Accountants 1 6K
EX-99.(G)(1) — Exhibit 13 to Company’s Annual Report on Form 10-K
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EXHIBIT (g)(1)
FINANCIAL HIGHLIGHTS
(In thousands except share data)
[Enlarge/Download Table]
For the Years Ended 1997 1996 1995 1994 1993
December 31,
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NET REVENUES $827,597 $800,189 $718,781 $739,676 $ 37,016
Operating profit before non-recurring
items and corporate expense 222,960 196,585 113,905 137,147 6,124
Operating income (loss) 190,970 129,294 103,823 129,715 (44,546)
Income (loss) before income taxes,
discontinued operations and
extraordinary item 180,301 99,151 46,565 73,540 (38,895)
Net income (loss) 111,018 43,706 46,565 74,576 (117,586)
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before
discontinued operations and
extraordinary item $ 2.00 $ 1.41 $ 0.97 $ 1.53 $ (0.82)
Discontinued operations - - - 0.02 (1.65)
Extraordinary item - loss on
early extinguishment of debt,
net of income tax benefit (0.07) (0.58) - - -
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Net income (loss) per share $ 1.93 $ 0.83 $ 0.97 $ 1.55 $ (2.47)
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Weighted average number of shares 57,475,000 52,759,000 48,076,000 48,232,000 47,587,000
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before
discontinued operations and
extraordinary item $ 1.96 $ 1.38 $ 0.96 $ 1.50 $ (0.82)
Discontinued operations - - - 0.02 (1.65)
Extraordinary item - loss on
early extinguishment of debt,
net of income tax benefit (0.07) (0.57) - - -
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Net income (loss) per share $ 1.89 $ 0.81 $ 0.96 $ 1.52 $ (2.47)
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Weighted average number of shares 58,835,000 54,257,000 48,544,000 48,988,000 47,587,000
AT YEAR END
Total assets $ 1,398,374 $ 1,287,689 $ 1,282,222 $ 1,153,511 $ 1,160,123
Total debt 57,830 83,391 551,099 473,000 483,000
Stockholders' equity 1,101,622 973,382 584,548 529,379 481,755
Stockholders' equity per share $ 19.00 $ 16.82 $ 11.98 $ 11.05 $ 9.86
Number of shares at year end 57,985,000 57,884,000 48,775,000 47,925,000 48,845,000
The selected financial data above includes information for New York-New York
which is 50% owned and commenced operations on January 3, 1997, MGM Grand Las
Vegas which commenced operations on December 18, 1993, MGM Australia, which was
acquired on September 7, 1995, and MGM Grand Air until December 31, 1994, when
the company was sold.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company, through its wholly-owned subsidiaries, owns and operates MGM Grand
Hotel/Casino in Las Vegas, Nevada ("MGM Grand Las Vegas"), which commenced
operations on December 18, 1993, and MGM Grand Hotel/Casino in Darwin, Australia
("MGM Grand Australia"), which was acquired on September 7, 1995, and manages a
casino in Nelspruit, in the Mpumalanga Province of the Republic of South Africa,
which began operations on October 15, 1997 (see Notes 1 and 18). The Company
also owns a 50% interest in New York-New York Hotel and Casino, LLC ("NYNY
LLC"), which owns and operates New York-New York Hotel and Casino in Las Vegas,
Nevada ("NYNY"), which commenced operations on January 3, 1997 (see Note 1).
Additionally, the Company's wholly-owned subsidiaries, MGM Grand Detroit and MGM
Grand Atlantic City are in the development stage, with plans to construct
hotel/casino and entertainment facilities in Detroit, Michigan and Atlantic
City, New Jersey, respectively (see Note 1).
1997 COMPARED WITH 1996
Net revenues for the year ended December 31, 1997 were $827.6 million,
representing an increase of $27.4 million (3.4%) when compared with $800.2
million during the prior year. The increase in net revenues was largely due to
income from the Company's 50% ownership in NYNY (see Note 1) and higher food and
beverage revenues partially offset by decreased casino, room, entertainment,
retail and other revenues and increased promotional allowances.
Consolidated casino revenues for the year ended December 31, 1997 were $457.2
million, representing a decrease of $19.5 million (4.1%) when compared with
$476.7 million during the prior year. MGM Grand Las Vegas casino revenues were
$429.9 million, representing a decrease of $15.5 million (3.5%) when compared
with $445.4 million during 1996. The reduction in casino revenues at MGM Grand
Las Vegas was a result of lower table games win percentages despite an
increase in volume, partially offset by higher slot volume and win. MGM Grand
Australia reported casino revenues of $27.3 million, which decreased $4 million
(12.8%) when compared with $31.3 million during the prior year, primarily
attributable to lower baccarat volume and win partially offset by an increase in
slot volume and win along with the addition of Northern Territory Keno, a
territory-wide keno game in local pubs, hotels and clubs, which was not
operational in the prior year.
Consolidated room revenues for 1997 were $171.3 million compared with $174.4
million for 1996, representing a decrease of $3.1 million (1.8%). MGM Grand Las
Vegas room revenues were $169.3 million in 1997, representing a decrease of $3.1
million (1.8%) when compared with $172.4 million in the prior year. The decrease
was due to a lower occupancy of 94.5% for 1997 when compared with 94.7% in 1996,
as well as a lower average daily room rate for 1997 of $100 compared with $101
for 1996. MGM Grand Australia room revenues were $2.2 million for the year ended
December 31, 1997, representing an increase of $.1 million (4.8%) when compared
with $2.1 million for the prior year.
Consolidated food and beverage revenues for 1997 were $92.6 million,
representing an increase of $14.2 million (18.1%) when compared with $78.4
million for the prior year. The increase was attributable to MGM Grand Las
Vegas which had food and beverage revenues of $86.1 million during 1997,
representing an increase of $14.1 million (19.6%) when compared with $72 million
in 1996. This
2
increase reflects the Company's decision to operate the previously leased Studio
Cafe coffee shop. MGM Grand Australia reported food and beverage revenues of
$6.6 million, representing an increase of $.1 million (1.5%) when compared with
$6.5 million during the prior year.
Consolidated entertainment, retail and other revenues decreased $10.4 million
(8.2%) from $126.9 million in 1996 to $116.5 million in 1997. The decrease was
attributable to MGM Grand Las Vegas which had lower theme park and midway/arcade
revenues due to the downsizing of the facilities. These decreases were
partially offset by increases in MGM Grand Garden Arena revenues and increased
revenues from the SkyScreamer thrill ride which opened in September 1996.
Income from unconsolidated affiliate was $53.8 million for the year ended
December 31, 1997, representing the Company's 50% share of NYNY's operating
income.
Consolidated operating expenses (before Master Plan asset disposition,
preopening and Corporate expense) for 1997 were $604.6 million, which were
consistent when compared with $603.6 million for 1996. The increase was
attributable to MGM Grand Las Vegas, offset by decreases at MGM Grand Australia.
The increases at MGM Grand Las Vegas were due primarily to increased casino,
food and beverage, advertising and depreciation expenses offset by lower
expenses related to EFX and midway/arcade operations. Additionally, the
provision for doubtful accounts and discounts decreased by $6.7 million at MGM
Grand Las Vegas as a result of reduced casino revenues, changes in anticipated
collectibility, and collections made on previously reserved receivable balances.
Management anticipates the impact from recent worldwide financial conditions,
particularly throughout Asia, although not currently measurable, will not have a
material adverse effect on the Company's future operations or its ability to
collect current receivables. MGM Grand Australia operating expenses decreased
$6.9 million (18.5%) from $37.3 million in 1996 to $30.4 million in 1997 as a
result of continuing cost containment efforts.
Consolidating operating profit (before Master Plan asset disposition, preopening
and corporate expense) was $223 million for the year ended December 31, 1997,
reflecting an increase of $26.4 million (13.4%) over 1996 of $196.6 million. The
increase was primarily attributable to the Company's 50% share of NYNY's
operating income and higher operating profit at MGM Grand Australia offset by
lower operating profit at MGM Las Vegas.
Master Plan asset disposition relates to the write-off of various assets related
to the transformation of MGM Grand Las Vegas into "The City of Entertainment."
The prior year charge of $49.4 million (pre-tax) was recognized when the plan
was announced, and the current year charge of $28.6 million (pre-tax) resulted
from the increase in the transformation scope from $250 million to over $700
million (see Note 15).
Corporate expense decreased from $10 million in 1996 to $3.4 million in 1997,
primarily due to the reversal of $5.9 million in previously expensed stock price
guarantee amortization under the agreement with Don King Productions (see Note
11).
Interest income of $1.3 million for the year ended December 31, 1997 decreased
by $2.9 million from $4.2 million in 1996. The decrease was attributable to
lower invested cash balances at MGM Grand Las Vegas during 1997.
Interest expense for the year ended December 31, 1997 of $1.2 million (net of
amounts capitalized) decreased by $32.6 million when compared with $33.8 million
in 1996. The decrease in 1997 was primarily due to the defeasance of the MGM
Grand Hotel Finance Corp. First Mortgage Notes ("FMN") (see Note 9) in the prior
year, along with greater capitalization of interest in the current year from
continuing construction and development projects. Also, the Company recognized
interest expense from its unconsolidated affiliate of $9.9 million during 1997,
which had been capitalized in the prior year as a result of the NYNY
construction project.
3
Income tax provision of $65 million has been recorded at a rate of 36.1% for the
year ended December 31, 1997, compared with $24.6 million in 1996 at a rate of
24.8%. The 1996 rate was lower than 1997, reflecting no provision in the first
quarter of 1996. During 1996, the Company determined that it was more likely
than not that it would fully realize its deferred tax assets.
Extraordinary loss of $4.2 million, net of income tax benefit, reflects the
write-off of unamortized debt costs from the previous $600 million credit
facility (see Note 9) in 1997. The extraordinary loss of $30.8 million, net of
income tax benefit, in the prior year represented the loss on defeasance of the
FMN (see Note 9).
1996 COMPARED WITH 1995
Consolidated net revenues for the year ended December 31, 1996, were $800.2
million, representing an increase of $81.4 million (11.3%) when compared with
$718.8 million for 1995. MGM Grand Las Vegas accounted for a majority of the
improved 1996 revenues with growth in every revenue segment over the prior year,
excluding food and beverage, which was a result of the Company's 1995
restructuring plan that included the conversion of three Company operated
restaurants into leased facilities (see Note 16). MGM Grand Australia revenues
for the year ended December 31, 1996 were significantly higher than the prior
year due to a full year operating period in 1996, compared with an abbreviated
1995 operating period from the acquisition of the property on September 7, 1995
through December 31, 1995 (see Note 18). Promotional allowances remained
consistent between years, reflecting management's focus on diversifying its
customer mix.
Consolidated casino revenues were $476.7 million for the year ended December 31,
1996, reflecting an increase of $75 million (18.7%) compared with $401.7 million
for the prior year. MGM Grand Las Vegas primarily accounted for the increase,
where casino revenues of $445.4 million were $51.1 million (13%) above the prior
year of $394.3 million, reflecting improved win and win percentages in table
games, baccarat and slots. MGM Grand Australia casino revenues were $31.3
million for 1996, reflecting a significant increase of $24 million above the
prior year due to the shortened operating period in 1995 from the acquisition on
September 7, 1995 (see Note 18).
Consolidated room revenues were $174.4 million for 1996, reflecting an increase
of $13.9 million (8.7%) above the prior year of $160.5 million. MGM Grand Las
Vegas reported room revenues of $172.4 million for 1996, which were $12.3
million (7.7%) above the prior year of $160.1 million. This increase reflected
higher occupancy and average daily room rate of 94.7% and $101, respectively,
when compared with 90.6% and $98 for the prior year. MGM Grand Australia
reported room revenues for 1996 of $2.1 million, which were above the prior year
by $1.5 million, reflecting the shortened 1995 operating period.
Consolidated food and beverage revenues of $78.4 million for the year ended
December 31, 1996 were $10.9 million (12.2%) below the prior year of $89.3
million. MGM Grand Las Vegas accounted for the reduction, where revenues of $72
million for the 1996 year were $15.4 million (17.6%) below the prior year of
$87.4 million, reflecting the effect of the conversion of three Company operated
restaurants to tenancies during the last half of 1995. MGM Grand Australia
revenues of $6.5 million for the year ended December 31, 1996 were above the
1995 year by $4.4 million, reflecting the shortened prior year operating period.
4
Consolidated entertainment, retail and other revenues for 1996 were $126.9
million, representing an increase of $3.6 million (2.9%) above the prior year of
$123.3 million. The increase was attributable to MGM Grand Las Vegas,
reflecting a full year of operations for the EFX production show (which opened
during March 1995) and the Star Lane Shops retail mall (which opened during
September 1995), as well as higher rental income from added restaurant and
retail tenancies. Additionally, the MGM Grand Garden arena revenues for 1996
were higher than 1995, reflecting the increased number of entertainment events
held. Such improvements were partially offset by reduced revenues at the theme
park due to decreased overall attendance for the year and lower average ticket
prices, and lower midway/arcade revenues in 1996 which reflects the relocation
of the midway/arcade to a smaller facility.
Consolidated operating expenses (before Master Plan Asset disposition,
preopening and Corporate expense) of $603.6 million for the year ended December
31, 1996 decreased $1.3 million (0.2%) when compared with the prior year of
$604.9 million. MGM Grand Las Vegas operating expenses for 1996 were $570.9
million, or $25.2 million (4.2%) below the prior year of $596.1 million.
Operating expenses as a percentage of net revenues were reduced from 84.2% in
1995 to 75.4% in 1996. This reduction was primarily attributable to the
continued cost containment efforts at MGM Grand Las Vegas, lower food and
beverage expenses in 1996 due to the conversion of three of the Company operated
restaurants to tenancies as part of the prior year restructuring plan, and a
lower provision for doubtful accounts and discounts reflecting changes in
anticipated collectibility and payments on fully reserved casino receivables.
Additionally, 1995 contained a one-time charge of $5.9 million related to the
restructuring program. Such decreases were partially offset by higher casino
operating costs for gaming taxes (based upon the improved gaming revenues) and
increased marketing programs, increased room expenses due to the higher average
occupancy throughout the 1996 year, and higher depreciation and amortization
expense as a result of additional property and equipment placed in service
during 1996. MGM Grand Australia operating expenses were $37.4 million for the
year ended December 31, 1996, representing a $28.7 million increase above the
prior year of $8.7 million as a result of the abbreviated 1995 operating period.
Consolidated operating profit (before Master Plan asset disposition, preopening
and Corporate expense) was $196.6 million for the year ended December 31, 1996,
reflecting an increase of $82.7 million (72.6%) over $113.9 million for 1995.
The increase was primarily attributable to MGM Grand Las Vegas, where continued
operating efficiencies and the impact of the 1995 restructuring plan boosted
operating profit (before Master Plan asset disposition) to $195.6 million,
representing an increase of $82 million (72.2%) over $113.6 million in 1995. MGM
Grand Australia had operating income of $1.3 million for the 1996 period,
representing an increase when compared with the prior year operating income of
$. 9 million, reflecting the property acquisition on September 7, 1995 and the
subsequent construction and remodeling program which was completed in June 1996.
Master Plan asset disposition represented the write-off of various assets as a
result of the transformation of MGM Grand Las Vegas into "The City of
Entertainment," which resulted in a pre-tax charge of $49.4 million in the 1996
period (see Note 15).
Preopening and other - unconsolidated affiliate represented the Company's 50%
share of NYNY preopening expenses, which included direct salaries, marketing and
other costs incurred during the period prior to the hotel/casino being
substantially complete. NYNY commenced operations on January 3, 1997 (see Note
1).
5
Interest income and other was $3.6 million for the year ended December 31, 1996,
reflecting an increase of $1.5 million (71.4%) from $2.1 million in 1995. The
increase was attributable to higher average invested cash balances at MGM Grand
Las Vegas in the first half of the 1996 year (prior to the defeasance of the
FMN-see Note 9), reflecting higher operating cash flow when compared with the
prior year.
Interest expense (net of amounts capitalized) for the year ended December 31,
1996 was $33.8 million, reflecting a decrease of $25.5 million (43%) when
compared with $59.3 million for 1995. The significant decrease resulted from a
combination of the defeasance of the FMN (see Note 9) and increased
capitalization of interest expense during 1996 related to various new and
ongoing construction projects, including the MGM Grand Las Vegas Master Plan,
MGM Grand Atlantic City land acquisition and pre-construction activities, and
the NYNY construction project. The reduction in interest expense was partially
offset by the effect of the MGM Grand Australia bank loan which was outstanding
for the entire 1996 year, compared with the period from the acquisition on
September 7, 1995 to December 31, 1995.
The Company recorded an income tax provision of $24.6 million at a rate of 24.8%
for the year ended December 31, 1996, compared with the prior year period when
there was no provision due to the benefit resulting from the reduction of the
valuation allowance (see Note 17).
The Company recorded an extraordinary loss of $30.8 million, net of income tax
benefit of $17.7 million reflecting the defeasance of the FMN (see Note 9).
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year, which may result in
systems failures and disruptions to operations at January 1, 2000. During 1996,
the Company established a remediation plan and a timetable to complete this
plan. The Company has incurred immaterial costs during 1996 and 1997 to modify
its existing computer systems and applications. All available Year 2000
compliant systems have been obtained and tested by the Company, excluding
certain systems that are non-critical to operations, which are scheduled to be
upgraded during 1998. For those Year 2000 systems which are still in the
developmental stage, the Company has initiated formal communications with its
suppliers to determine the timing of the necessary upgrades and the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 Issue. The Company does not anticipate any material costs
in the future relating to the Year 2000 Issue.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997 and 1996, the Company held cash and cash equivalents of
$34.6 million and $61.4 million, respectively. Cash provided by operating
activities for 1997 was $184 million, compared with $245.2 million for 1996.
On May 6, 1996, MGM Grand Las Vegas announced details of a 30-month, $250
million Master Plan designed to transform the facility into "The City of
Entertainment." The Master Plan, which on June 3, 1997 was enhanced and
increased to more than $700 million, calls for a new 1,500-room "Marriott
Marquis"; expansion of the resort's casino capacity by nearly 20% to more than
200,000 square feet; a new "Mansion at the MGM Grand" offering 30 exclusive
suites and villas; a new 380,000 square foot state-of-the-art conference center;
a new 6.6 acre pool and spa complex; significantly expanded and
6
improved parking facilities; and an approximately 50-foot tall new polished
bronze lion sculpture on a 25-foot pedestal, which is the resort's signature
lion, adjoining a re-themed entertainment casino that includes a Rainforest Cafe
and Studio 54 nightclub. The Company also announced that by the year 2000, it
plans to begin construction of a 500-room Ritz-Carlton Hotel at MGM Grand Las
Vegas.
During the year ended December 31, 1997, capital expenditures totaled $227.8
million, consisting of $174.1 million related to the Master Plan project and
$35.3 million related to general property and equipment improvements at MGM
Grand Las Vegas. These improvements included new rooftop signage as well as the
recarpeting of the casino areas. MGM Grand Australia expended $1.9 million for
general property and equipment improvements. MGM Grand Atlantic City continued
the development of its planned new destination resort by expending $16.5 million
for land acquisitions and pre-construction activities.
The Company made a capital contribution of $7 million to NYNY LLC during 1997.
As a lender requirement for the project financing, both the Company and its
joint venture partner, Primadonna Resorts, Inc. ("Primadonna") were required to
enter into a joint and several Keep-Well Agreement (see Note 9). The Company
also received $15.2 million in distributions from NYNY LLC during 1997 to pay
taxes on its allocated share of income.
During the year ended December 31, 1996, the Company utilized operating cash
flow to fund capital expenditures of $84.8 million, including $16.1 million
related to the Master Plan project and $25.7 million for general property
enhancements and expansions at MGM Grand Las Vegas. Such property improvements
included suite and restaurant remodeling (Gatsby's and Brown Derby), various new
property signage, the acquisition of two land parcels, and the new "SkyScreamer"
thrill ride theme park attraction.
MGM Grand Australia expended $13.1 million related to its renovation program
which was completed on June 5, 1996, and which included substantive improvements
throughout the property, such as enhanced guest accommodations, casino and
restaurant remodels, and other upgrades to public areas. MGM Grand Atlantic
City commenced the assemblage of acreage for its new destination resort by
expending $29.7 million for land acquisitions and pre-construction activities.
Also during 1996, the Company contributed additional capital investment of $22.5
million to the NYNY project (see Note 9).
Capital expenditures are expected to significantly increase in 1998 to
approximately $616.1 million as a result of the continuing transformation of MGM
Grand Las Vegas into "The City of Entertainment," as well as the Company's
development of premier, emotionally engaging destination resorts in Detroit and
Atlantic City. MGM Grand Las Vegas expenditures for 1998 are expected to be
approximately $444.3 million, consisting of $391.3 million related to the Master
Plan project, and approximately $53 million for general property improvements
including room refurbishments. MGM Grand Australia plans to expend
approximately $2 million for general property and equipment improvements.
Approximately $169.7 million is anticipated to be expended for land acquisition
and pre-construction activities relating to the Company's planned development of
hotel/casino and entertainment facilities, including $154 million for the MGM
Grand Detroit project and $15.7 million for the MGM Grand Atlantic City project.
On July 1, 1996, the Company secured a $500 million Senior Reducing Revolving
Credit Facility with BA Securities (the "Facility"), an affiliate of Bank of
America NT&SA. In August 1996, the Facility was increased to $600 million. In
July 1997, the Facility was amended, extended and increased to $1.25 billion
(the "New Facility"), with provisions to allow an increase of the New Facility
to $1.5 billion as well as to allow additional pari passu debt financing up to
$500 million. As a result of the New Facility,
7
the Company recognized an extraordinary loss of approximately $4.2 million, net
of tax benefits, due to the write-off of unamortized debt costs from the
Facility during 1997. The New Facility contains various restrictive covenants on
the Company which include the maintenance of certain financial ratios and
limitations on additional debt, dividends, capital expenditures and disposition
of assets. The New Facility also restricts certain acquisitions and similar
transactions. Interest on the New Facility is based on the bank reference rate
or Eurodollar rate, and as of December 31, 1997, the Company's borrowing rate
was approximately 6.1%. The New Facility matures in December 2002, with the
opportunity to extend the maturity for successive one year periods. During 1997,
$15 million was drawn down and repaid against the Facility, $10.5 million was
drawn down and repaid against the New Facility, and no amounts remained
outstanding under the New Facility as of December 31, 1997.
During July 1997, the Company filed a Shelf Registration Statement with the
Securities and Exchange Commission which became effective on August 4, 1997,
allowing the Company to issue up to $600 million of debt and/or equity
securities. On February 2 and February 6, 1998, the Company completed public
offerings totaling $500 million of Senior Collateralized Notes in tranches of 7
and 10 years. The 7-year tranche of $300 million carries a coupon of 6.95%,
while the 10-year tranche of $200 million carries a coupon of 6.875% (see Note
9). The Company received net proceeds of approximately $294.1 million and
$197.1 million on the 7-year and 10-year tranches, respectively, after the
underwriters' discount and issuance costs.
On July 2, 1996, the Company completed a public offering (the "Offering") of 8.6
million shares of common stock (including an underwriters' over allotment option
to purchase 1.1 million shares of common stock). Based upon the Offering price
of $39.50 per share and associated costs incurred, the net proceeds were
approximately $327 million. On July 3, 1996, the Company drew down $40 million
(including loan origination fees) on the Facility (see Note 9), and used the net
proceeds of the Offering together with cash on hand of $161 million to fund the
defeasance of the MGM Grand Hotel Finance Corp FMN (see Note 9).
On September 15, 1995, NYNY LLC (see Note 1) completed its bank financing for up
to $225 million, which was increased to $285 million during September 1996. The
non-revolving construction line of credit converted to a five-year reducing
revolver upon completion of construction and commencement of operations of NYNY
on January 3, 1997. The Company and Primadonna (the "Partners") guaranteed
completion of the project as a condition to facility availability, and have
executed a joint and several unlimited Keep-Well Agreement, which provides that
in the event of insufficient cash flow from NYNY to comply with financial
covenants, the Partners will make cash infusions which are sufficient to bring
NYNY LLC into compliance with the financial covenants. During the year, $39.9
million in voluntary principal repayments were made by NYNY LLC. The first draw
down occurred on September 30, 1995, and as of December 31, 1997, $245.1 million
was outstanding under the Facility. On January 21, 1997, NYNY LLC completed an
additional $20 million equipment financing with a financial institution. As of
December 31, 1997, $17.5 million remained outstanding related to equipment
financing.
On September 7, 1995, the Company completed the acquisition of MGM Grand
Australia (formerly the Diamond Beach Hotel/Casino) in Darwin, Australia (see
Note 18). The acquisition cost was financed by an Australian bank facility which
provides a total availability of approximately $68.4 million (AUD$105 million)
and includes funding for general corporate purposes. The facility was reduced by
principal payments totaling $11.8 million (AUD$16.3 million) made in accordance
with the terms of the bank facility, and as of December 31, 1997, $57.8 million
(AUD$88.8 million) remained outstanding. Interest on the Australian facility is
based on the bank bill rate and was approximately 5.8% and 7.5% as of December
31, 1997 and 1996, respectively. The facility matures in December 2000, and the
indebtedness has been guaranteed by the Company.
MGM Grand Australia has a $13 million (AUD$20 million) uncommitted standby line
of credit, with a funding period of 91 days for working capital purposes. During
the year ended December 31, 1997, no amounts were borrowed under the line of
credit and no amounts were outstanding as of December 31, 1997, and 1996,
respectively.
The Company expects to finance capital expenditures and existing debt
obligations through cash flow from operations, cash on hand, the bank line of
credit, and the Shelf Registration Statement (see Note 9).
8
SAFE HARBOR PROVISION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Annual
Report and in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 contains statements that are forward-looking, such as
statements relating to plans for future expansion and other business development
activities, as well as other capital spending, financing sources, the effects of
regulation (including gaming and tax regulations) and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to development and construction activities,
dependence on existing management, leverage and debt service (including
sensitivity to fluctuations in interest rates), domestic or global economic
conditions (including sensitivity to fluctuations in foreign currencies),
changes in federal or state tax laws or the administration of such laws, changes
in gaming laws or regulations (including the legalization of gaming in certain
jurisdictions) and application for licenses and approvals under applicable
jurisdictional laws and regulations (including gaming laws and regulations).
9
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
(In thousands, except share data)
For the years ended December 31, 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------
Revenues:
Casino $ 457,206 $ 476,685 $ 401,680
Rooms 171,272 174,440 160,470
Food and beverage 92,594 78,438 89,299
Entertainment, retail and other 116,458 126,875 123,307
Income from unconsolidated affiliate 53,800 - -
-----------------------------------------
891,330 856,438 774,756
Less: Promotional allowances 63,733 56,249 55,975
-----------------------------------------
827,597 800,189 718,781
=========================================
EXPENSES:
Casino 225,896 221,268 196,665
Rooms 45,848 46,639 42,816
Food and beverage 55,124 46,590 57,516
Entertainment, retail and other 79,605 88,214 89,820
Provision for doubtful accounts and discounts 31,814 38,635 57,683
General and administrative 102,246 100,062 99,119
Restructuring costs - - 5,942
Depreciation and amortization 64,104 62,196 55,315
-----------------------------------------
604,637 603,604 604,876
=========================================
Operating Profit Before Master Plan Asset Disposition,
Preopening and Corporate Expense 222,960 196,585 113,905
Master Plan asset disposition 28,566 49,401 -
Preopening and other - unconsolidated affiliate - 7,868 -
Corporate expense 3,424 10,022 10,082
-----------------------------------------
Operating Income 190,970 129,294 103,823
=========================================
NONOPERATING INCOME (EXPENSE):
Interest income 1,268 4,247 2,896
Interest expense, net of amounts capitalized (1,242) (33,778) (59,329)
Interest expense from unconsolidated affiliate (9,891) - -
Other, net (804) (612) (825)
-----------------------------------------
(10,669) (30,143) (57,258)
-----------------------------------------
Income Before Income Taxes and Extraordinary Item 180,301 99,151 46,565
Provision for income taxes (65,045) (24,634) -
-----------------------------------------
Income Before Extraordinary Item 115,256 74,517 46,565
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, net of income tax benefits of
$2,333 and $17,710 (4,238) (30,811) -
-----------------------------------------
Net Income $ 111,018 $ 43,706 $ 46,565
=========================================
BASIC INCOME PER SHARE OF COMMON STOCK:
Income before extraordinary item $ 2.00 $ 1.41 $ 0.97
Extraordinary item - loss on early extinguishment of debt, net of
income tax benefit (0.07) (0.58) -
-----------------------------------------
Net Income per share $ 1.93 $ 0.83 $ 0.97
=========================================
WEIGHTED AVERAGE SHARES OUTSTANDING 57,475,000 52,759,000 48,076,000
=========================================
DILUTED INCOME PER SHARE OF COMMON STOCK:
Income before extraordinary item $ 1.96 $ 1.38 $ 0.96
Extraordinary item - loss on early extinguishment of debt, net of
income tax benefit (0.07) (0.57) -
-----------------------------------------
Net Income per share $ 1.89 $ 0.81 $ 0.96
=========================================
WEIGHTED AVERAGE SHARES OUTSTANDING 58,835,000 54,257,000 48,544,000
=========================================
The accompanying notes are an integral part of these consolidated financial
statements.
10
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
[Enlarge/Download Table]
As of December 31, 1997 1996
-------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,606 $ 61,412
Accounts receivable, net 78,977 80,529
Prepaid expenses 10,452 13,208
Inventories 16,462 13,520
Deferred tax asset 30,294 58,039
-------------------------------------
Total current assets 170,791 226,708
-------------------------------------
PROPERTY AND EQUIPMENT, NET 1,032,708 884,750
OTHER ASSETS:
Investment in unconsolidated affiliates 108,121 72,896
Deposits 255 15,255
Excess of purchase price over fair 38,598 39,622
market value of net assets acquired, net
Other assets, net 47,901 48,458
-------------------------------------
Total other assets 194,875 176,231
-------------------------------------
$1,398,374 $1,287,689
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 53,860 $ 32,995
Income taxes payable - 23,653
Current obligation, capital leases 6,088 2,769
Current obligation, long term debt 10,589 12,906
Other accrued liabilities 110,953 118,448
-------------------------------------
Total current liabilities 181,490 190,771
-------------------------------------
DEFERRED REVENUES 4,743 6,712
DEFERRED INCOME TAXES 58,831 38,477
LONG TERM OBLIGATION, CAPITAL LEASES 4,447 7,862
LONG TERM DEBT 47,241 70,485
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock ($.01 par value,
75,000,000 shares authorized,
57,984,873 and 57,883,766 shares issued) 580 579
Capital in excess of par value 966,487 963,688
Retained earnings 124,239 13,221
Currency translation adjustment 10,316 (4,106)
-------------------------------------
Total stockholders' equity 1,101,622 973,382
-------------------------------------
$1,398,374 $1,287,689
=====================================
The accompanying notes are an integral part of these consolidated financial
statements.
11
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
[Enlarge/Download Table]
For the years ended December 31 1997 1996 1995
----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 111,018 $ 43,706 $ 46,565
Adjustments to reconcile net income to net cash
from operating activities:
Loss on early extinguishment of debt 6,571 48,521 -
Master Plan asset disposition 28,566 49,401 -
Amortization of debt offering costs 1,127 2,191 3,308
Depreciation and amortization 64,244 62,323 55,419
Provision for doubtful accounts and discounts 31,814 38,635 57,683
Preopening and other - unconsolidated affiliate - 7,868 -
Earnings in excess of distributions - unconsolidated affiliate (28,749) - -
Change in assets and liabilities:
Accounts receivable (30,262) (40,605) (40,395)
Prepaid expenses 2,756 (551) 2,589
Inventories (4,035) (3,283) (3,784)
Income taxes payable (23,653) 21,302 -
Deferred income taxes 48,100 (27,696) (2,034)
Accounts payable, accrued liabilities, and other (24,185) 43,209 (5,863)
Currency translation adjustment 700 130 1,056
----------------------------------------
Net cash from operating activities 184,012 245,151 114,544
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (227,756) (84,775) (37,447)
Acquisition of MGM Grand Australia - - (71,942)
Dispositions of property and equipment, net 202 322 488
Change in construction payables 32,418 (809) (3,915)
Note receivable - 529 13,796
Investment in unconsolidated affiliates (7,190) (27,153) (36,500)
Deposits and other assets 548 (8,929) (30,514)
----------------------------------------
Net cash from investing activities (201,778) (120,815) (166,034)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Defeasance of First Mortgage Notes - (523,231) -
Borrowings from (repayments to) banks and others (11,839) - 78,099
Borrowings under lines of credit 25,500 65,262 15,000
Repayments of lines of credit (25,500) (65,262) (15,000)
Issuance of common stock 2,799 350,290 7,549
----------------------------------------
Net cash from financing activities (9,040) (172,941) 85,648
----------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (26,806) (48,605) 34,158
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 61,412 110,017 75,859
----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 34,606 $ 61,412 $ 110,017
========================================
The accompanying notes are an integral part of these consolidated financial
statements.
12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
(Dollar amounts in thousands) COMMON CAPITAL IN RETAINED TOTAL
For the years ended December 31, STOCK COMMON EXCESS OF TREASURY EARNINGS STOCKHOLDERS'
1997, 1996, and 1995 OUTSTANDING STOCK PAR VALUE STOCK (DEFICIT) OTHER EQUITY
------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 47,924,510 $507 $663,186 $(57,264) $(77,050) $ - $ 529,379
Issuance of common stock for
note receivable 618,557 - - 15,000 - (15,000) -
Payment received from note
receivable - - - - - 5,000 5,000
Issuance of common stock pursuant
to employee stock options 231,789 2 2,546 - - - 2,548
Retirement of treasury stock - (21) (42,243) 42,264 - - -
Net income - - - - 46,565 - 46,565
Currency translation adjustment - - - - - 1,056 1,056
----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 48,774,856 488 623,489 - (30,485) (8,944) 584,548
Payment received from note
receivable - - - - - 10,000 10,000
Issuance of common stock pursuant
to employee stock options 413,670 4 4,929 - - - 4,933
Issuance of common stock 8,625,000 86 326,735 - - - 326,821
Employee stock incentive accrual 70,240 1 2,817 - - - 2,818
Tax benefit from stock option
exercises - - 5,718 - - - 5,718
Net income - - - - 43,706 43,706
Currency translation adjustment - - - - - (5,162) (5,162)
----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 57,883,766 579 963,688 - 13,221 (4,106) 973,382
Issuance of common stock
Issuance of common stock pursuant
to employee stock options 72,302 1 1,093 - - - 1,094
Employee stock incentive issuance 28,805 - 1,142 - - - 1,142
Tax benefit from stock option
exercises - - 564 - - - 564
Net income - - - - 111,018 - 111,018
Currency translation adjustment - - - - - 14,422 14,422
----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 57,984,873 $580 $966,487 $ - $124,239 $ 10,316 $1,101,622
==============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
MGM Grand, Inc. (the "Company") is a Delaware corporation incorporated on
January 29, 1986. As of December 31, 1997, approximately 62.5% of the
outstanding shares of the Company's common stock were owned by Kirk Kerkorian
and Tracinda Corporation ("Tracinda"), a Nevada corporation wholly owned by Kirk
Kerkorian.
Through its wholly-owned subsidiary, MGM Grand Hotel, Inc., the Company owns and
operates the MGM Grand Hotel/Casino ("MGM Grand Las Vegas"), a hotel/casino and
entertainment complex in Las Vegas, Nevada. MGM Grand Hotel Finance Corp. ("MGM
Finance"), a wholly-owned subsidiary of the Company, was formed to issue First
Mortgage Notes ("FMN") to the public, to incur bank debt and to lend the
aggregate proceeds thereof to MGM Grand Hotel, Inc. to finance the construction
and opening of MGM Grand Las Vegas. See Note 9 regarding defeasance of the FMN.
Through its wholly-owned subsidiary, MGM Grand Australia Pty Ltd., the Company
owns and operates the MGM Grand Hotel/Casino in Darwin, Australia ("MGM Grand
Australia"), which is located on 18 acres of beachfront property on the north
central coast of Australia. The results of operations of MGM Grand Australia are
included from September 7, 1995, the date of acquisition (see Note 18).
The Company and Primadonna Resorts, Inc. ("Primadonna") each own 50% of New
York-New York Hotel and Casino, LLC ("NYNY LLC"), which completed development of
the $460 million themed destination resort called New York-New York Hotel/Casino
in Las Vegas, Nevada ("NYNY") in December 1996. NYNY commenced operations on
January 3, 1997, and is located on approximately 20 acres at the northwest
corner of Tropicana Avenue and Las Vegas Boulevard, across from MGM Grand Las
Vegas.
Through its wholly-owned subsidiary, MGM Grand South Africa, Inc., the Company
manages a casino in Nelspruit, in the Mpumalanga Province of the Republic of
South Africa, which began operations on October 15, 1997. The Company receives
development and management fees from its partner, Tsogo Sun Gaming &
Entertainment who is responsible for providing all project costs.
Through its wholly-owned subsidiary, MGM Grand Detroit, Inc., the Company and
its local partners in Detroit, Michigan formed MGM Grand Detroit, LLC ("MGM
Grand Detroit"), to develop a hotel/casino and entertainment complex at a
minimum approximate cost of $700 million. On November 20, 1997, MGM Grand
Detroit was chosen as a finalist for a development agreement to construct, own
and operate one of Detroit's three new casinos pending negotiation of a
development agreement with City of Detroit and subject to approval by
governmental authorities. The plans for MGM Grand Detroit call for an 800-room
hotel, a 100,000 square-foot casino, signature restaurants and retail outlets,
showroom and other entertainment venues.
Through its wholly-owned subsidiary, MGM Grand Atlantic City, Inc., the Company
intends to construct, own and operate a destination resort hotel/casino,
entertainment and retail facility in Atlantic City, New Jersey, at a minimum
approximate cost of $700 million, on approximately 35 acres of land on the
Atlantic City Boardwalk. Construction of the project is subject to the receipt
of various governmental approvals. On July 24, 1996, the Company was found
suitable for licensing by the New Jersey Casino Control Commission.
14
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of the Company and its subsidiaries. Investments in unconsolidated
affiliates which are 50% or less owned are accounted for under the equity
method. All significant intercompany balances and transactions have been
eliminated in consolidation.
b. MANAGEMENT'S USE OF ESTIMATES -- The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles. Those
principles require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
c. CASH AND CASH EQUIVALENTS -- Cash and cash equivalents consist of
investments in bank certificates of deposit and other interest bearing
instruments with initial maturities of three months or less. Such investments
are carried at cost which approximate market value.
d. RECEIVABLES -- Receivables are due within one year and are recorded net of
amounts estimated to be uncollectible.
e. INVENTORIES -- Inventories are stated at the lower of cost or market. Cost
is determined by the first-in, first-out method.
f. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Maintenance and repairs that neither materially add to the value of the property
nor appreciably prolong its life are charged to expense as incurred. Gains or
losses on dispositions of property and equipment are included in the
determination of income. Depreciation and amortization are provided on a
straight-line basis over the estimated useful lives of the assets as follows:
Buildings and improvements 15 to 40 years
Equipment, furniture and fixtures 3 to 7 years
Land improvements 10 years
Leasehold improvements 5 to 20 years
g. EXCESS OF PURCHASE PRICE OVER FAIR MARKET VALUE OF NET ASSETS ACQUIRED --
The excess of purchase price over fair market value of net assets acquired is
amortized on a straight-line basis over 40 years.
h. OTHER ASSETS -- The cost of normal hotel operating quantities of china,
silverware, glassware, and utensils is recorded as an asset and is depreciated.
Direct costs related to the debt offering and bank financing are being deferred
and amortized over the debt repayment periods. Organizational costs are
amortized on a straight-line basis over 60 months.
15
i. CASINO REVENUES AND PROMOTIONAL ALLOWANCES -- Casino revenue is the
aggregate of gaming wins and losses. The retail value of accommodations, food
and beverage, and other services furnished to hotel/casino guests without charge
is included in gross revenue and then deducted as promotional allowances. The
estimated retail value of these promotional allowances was $63.7 million, $56.2
million and $56 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The estimated cost of providing such promotional allowances was
included in casino expenses as follows:
[Download Table]
PROMOTIONAL ALLOWANCES
(In thousands)
Years Ended December 31, 1997 1996 1995
--------------------------------------------------------------------
Rooms $ 9,841 $ 9,487 $ 8,512
Food and beverage 28,436 23,224 23,588
Other 2,235 2,175 3,627
-----------------------------------------
$40,512 $34,886 $35,727
-----------------------------------------
j. CURRENCY TRANSLATION -- The Company accounts for currency translation in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation." The Australian results of operations and the balance
sheet are translated from Australian dollars to US dollars. Certain fixed
assets and intangibles are valued at historical exchange rates, while other
balance sheet accounts are translated at the exchange rate in effect at each
year end. Income accounts are translated at the average rate of exchange
prevailing during the year.
k. NET INCOME PER COMMON SHARE -- Basic income per share of common stock is
computed based on the weighted-average number of shares of common stock
outstanding during the period. Diluted income per share of common stock is
computed based on the assumption that options issued to employees are exercised
and repurchased at the average price for the periods presented (see Note 12).
l. CAPITALIZED INTEREST -- The Company capitalizes interest costs associated
with debt incurred in connection with major construction and development
projects. The Company capitalizes interest on amounts expended on the project
at the Company's weighted average cost of the borrowed funds (see Note 9), and
based upon the weighted average amount of the Company's outstanding borrowings.
Capitalization of interest ceases when the project is completed.
m. CORPORATE EXPENSE -- Corporate expense represents unallocated payroll costs,
professional fees, and various other expenses not directly related to the
Company's hotel/casino operations. In addition, corporate expense includes the
costs associated with the Company's evaluation and pursuit of new business
opportunities, which are expensed as incurred until development of a specific
project has become relatively certain.
n. RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130 (SFAS 130), "Reporting Comprehensive Income," which requires the display
of comprehensive income and its components in a financial statement with the
same prominence as the other financial statements. SFAS 130 is effective for
fiscal
16
years beginning after December 15, 1997, and management believes that the
adoption of SFAS 130 will not have a significant impact on the Company's
financial position or results of operations.
o. RECLASSIFICATIONS -- The consolidated financial statements for prior years
reflect certain reclassifications to conform with the current year presentation,
which have no effect on previously reported net income.
NOTE 3. STATEMENTS OF CASH FLOWS
The following supplemental disclosures are provided for the Consolidated
Statements of Cash Flows:
[Download Table]
(In thousands)
Years ended December 31, 1997 1996 1995
---------------------------------------------------------------------------
CASH PAYMENTS MADE FOR:
Interest, net of amounts capitalized $ 7,916 $48,155 $55,750
-----------------------------
State and federal income taxes $43,159 $ 3,660 $ 620
-----------------------------
During 1997, the Company completed equipment lease financings for approximately
$3.1 million at MGM Grand Las Vegas.
On June 5, 1995, the Company retired all shares of common stock held in
Treasury, which thereupon resumed the status of authorized unissued shares in a
non-cash transaction in the amount of approximately $42.3 million.
NOTE 4. ACCOUNTS RECEIVABLE
Components of accounts receivable were as follows:
[Download Table]
(In thousands)
At December 31, 1997 1996
--------------------------------------------------------------------
Casino $ 87,442 $102,408
Hotel 11,229 13,286
Income tax receivable 6,776 -
Other 553 267
------------------------
106,000 115,961
Less: Allowance for doubtful accounts
and discounts (27,023) (35,432)
------------------------
$ 78,977 $ 80,529
------------------------
17
Credit is issued in exchange for gaming chips at MGM Grand Las Vegas as
permitted by the regulations of the Nevada Gaming Commission and the Nevada
State Gaming Control Board. The Company extends credit, following an evaluation
of credit worthiness, to certain casino patrons, a substantial portion of whom
reside in countries other than the United States. The Company maintains an
allowance for doubtful accounts and discounts which is based on management's
estimate of the amount expected to be uncollectible considering historical
experience and the information management obtains regarding the credit
worthiness of the customer. The collectibility of these receivables could be
affected by future business or economic trends or other significant events in
the countries in which such customers reside. Although management believes the
allowance is adequate, it is possible that the estimated amount of cash
collections with respect to the casino accounts receivable could change.
NOTE 5. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
[Download Table]
(In thousands)
At December 31, 1997 1996
----------------------------------------------------------------------
Land $ 105,813 $ 102,290
Buildings and improvements 663,832 635,238
Equipment, furniture, fixtures and
leasehold improvements 217,723 220,379
Equipment under capital lease 18,053 18,054
Construction in progress 216,898 50,797
----------------------------
1,222,319 1,026,758
Less: Accumulated depreciation and
amortization (189,611) (142,008)
----------------------------
$1,032,708 $ 884,750
----------------------------
NOTE 6. DEVELOPMENT PROJECTS
The Company, along with its local partners in Detroit, Michigan, plans to
develop a hotel/casino and entertainment complex at a minimum approximate cost
of $700 million. On November 20, 1997, MGM Grand Detroit was chosen as a
finalist for a development agreement to construct, own and operate one of
Detroit's three new casinos pending negotiation of a development agreement with
the City of Detroit and subject to approval by governmental authorities. The
plans for MGM Grand Detroit call for an 800-room hotel, a 100,000 square-foot
casino, signature restaurants and retail outlets, a showroom, and other
entertainment venues. Through December 31, 1997, approximately $3.8 million was
expended and capitalized by the Company for licensing and design costs.
The Company plans to develop a hotel/casino and entertainment complex in
Atlantic City, New Jersey at a minimum approximate cost of $700 million, on
approximately 35 acres of land on the Atlantic City Boardwalk. Construction of
the project is subject to the receipt of various governmental approvals. On
July 24, 1996, the Company was found suitable for licensing by the New Jersey
Casino Control Commission. Through December 31, 1997, the Company has expended
and capitalized approximately $47.6 million, relating primarily to land
acquisition and pre-construction activities.
18
NOTE 7. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
On December 28, 1994, the Company and Primadonna formed a joint venture to
construct, own and operate the New York-New York Hotel and Casino (see Note 1).
The hotel/casino opened to the public on January 3, 1997. The Company holds a
50% interest in the joint venture. As of December 31, 1997, the Company has
contributed land on which the property is located and cash totaling $70.7
million which includes $7 million in capital contributions made in 1997. During
the year ended December 31, 1997, the Company received distributions of $15.2
million from the joint venture to pay taxes on its allocated share of income.
The joint venture secured bank financing of $285 million and term loan financing
of $20 million (see Note 9), and the joint venture Partners' executed Keep-Well
Agreements in conjunction with the financing.
Summary condensed financial information for New York-New York Hotel and Casino,
LLC is as follows:
[Download Table]
(In thousands)
Year ended December 31, 1997 1996
------------------------------------------------------------------------------------
Net Revenues $255,253 $ 345
======== ========
Operating Income (Loss) $107,431 $(15,830)
======== ========
Interest Expense, net $(19,425) $ 147
======== ========
Net Income (Loss) $ 88,006 $(15,683)
======== ========
(In thousands)
at December 31, 1997 1996
------------------------------------------------------------------------------------
Total Assets $470,252 $457,091
======== ========
Long-term Debt $246,403 $285,829
======== ========
Members' Equity $183,350 $111,664
======== ========
19
The Company has investments in unconsolidated affiliates that are accounted for
under the equity method. Under the equity method, original investments are
recorded at cost, and are adjusted by the Company's share of earnings, losses
and distributions received from and made to these companies. The investment
balance also includes interest capitalized during construction. Investments in
unconsolidated affiliates consisted of the following:
[Download Table]
(In thousands)
At December 31, 1997 1996
---------------------------------------------------------------
New York-New York Hotel and Casino, LLC $ 96,949 $60,943
MGM Grand - Bally's Monorail, LLC 11,172 11,953
-------- -------
$108,121 $72,896
-------- -------
The changes in the Company's investments in unconsolidated affiliates was as
follows:
[Download Table]
(In thousands)
New York-New York Hotel and Casino, LLC 1997 1996
---------------------------------------------------------------------
Investment at January 1 $ 60,943 $40,938
Earnings (losses) 44,003 (7,868)
Distributions received (15,160) -
Additional investments 7,000 22,500
Other, net 163 5,373
-------- -------
Investment at December 31 $ 96,949 $60,943
======== =======
(In thousands)
MGM Grand-Bally's Monorail, LLC 1997 1996
---------------------------------------------------------------------
Investment at January 1 $ 11,953 $12,673
Losses (808) (808)
Additional investments 27 88
-------- -------
Investment at December 31 $ 11,172 $11,953
======== =======
20
NOTE 8. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
[Download Table]
(In thousands)
At December 31, 1997 1996
------------------------------------------------------
Accrued salaries and related $ 35,115 $ 34,944
Casino front money 26,393 24,796
Casino chip liability 17,204 15,524
Other liabilities 32,241 43,184
-------- --------
$110,953 $118,448
-------- --------
NOTE 9. LONG TERM DEBT
Long term debt consisted of the following:
[Download Table]
(In thousands)
At December 31, 1997 1996
-------------------------------------------------------------------------
Australian Hotel/Casino Loan due
December 1, 2000 $ 57,830 $ 83,391
Bank Credit Facility - -
-------- --------
57,830 83,391
Less: Current Maturities (10,589) (12,906)
-------- --------
$ 47,241 $ 70,485
-------- --------
Total interest incurred during 1997, 1996 and 1995 was $9 million, $40.8 million
and $63.6 million, respectively, of which $7.8 million, $7 million and $4.3
million were capitalized in 1997, 1996 and 1995, respectively.
On July 3, 1996, the Company deposited $523.2 million (the "Defeasance Deposit")
with the Trustee, U.S. Trust of California, to fund the defeasance of MGM Grand
Hotel Finance Corp. FMN in accordance with the terms of the bond indenture. The
Defeasance Deposit was made in the form of U.S. Government securities and was
used to fund interest payments on the FMN through May 1, 1997, at which date the
11-3/4% and 12% FMN were called at 101.958% and 105.333% of their outstanding
principal, respectively. On October 29, 1996, the liens on the assets of MGM
Grand Hotel, Inc. were released and accordingly, the defeasance was finalized.
The early extinguishment of the FMN resulted in an extraordinary loss of
approximately $30.8 million, net of income tax benefits.
On July 1, 1996, the Company secured a $500 million Senior Reducing Revolving
Credit Facility with BA Securities (the "Facility"), an affiliate of Bank of
America NT&SA. In August 1996, the Facility was increased to $600 million. In
July 1997, the Facility was amended, extended and increased to $1.25 billion
(the "New Facility"), with provisions to allow an increase of the New Facility
to $1.5 billion as
21
well as to allow additional pari passu debt financing up to $500 million. As a
result of the New Facility, the Company recognized an extraordinary loss of
approximately $4.2 million, net of tax benefit, due to the write-off of
unamortized debt costs from the Facility during 1997. The New Facility contains
various restrictive covenants on the Company which include the maintenance of
certain financial ratios and limitations on additional debt, dividends, capital
expenditures and disposition of assets. The New Facility also restricts certain
acquisitions and similar transactions. Interest on the New Facility is based on
the bank reference rate or Eurodollar rate and as of December 31, 1997, the
Company's borrowing rate was approximately 6.1%. The New Facility matures in
December 2002, with the opportunity to extend the maturity for successive one
year periods. During the year ended December 31, 1997, $15 million was drawn
down and repaid against the Facility, $10.5 million was drawn down and repaid
against the New Facility, and no amounts remained outstanding under the New
Facility as of December 31, 1997.
The Company filed a Shelf Registration Statement with the Securities and
Exchange Commission which became effective on August 4, 1997. The Shelf
Registration Statement allows the Company to issue up to $600 million of debt
and equity securities. On February 2 and February 6, 1998, the Company completed
public offerings totaling $500 million of Senior Collateralized Notes in
tranches of 7 and 10 years. The 7-year tranche of $300 million carries a coupon
of 6.95%, while the 10-year tranche of $200 million carries a coupon of 6.875%.
Both tranches are initially secured equally and ratably with the New Facility
and security may be removed equally with the New Facility at the Company's
option, and upon the occurrence of certain events, including the maintenance of
investment grade ratings.
On September 7, 1995, the Company completed the acquisition of MGM Grand
Australia (formerly the Diamond Beach Hotel/Casino) in Darwin, Australia (see
Note 18). The acquisition cost was financed by an Australian bank facility which
provides a total availability of approximately $68.4 million (AUD$105 million)
and includes funding for general corporate purposes. The facility was reduced by
principal payments totaling $11.8 million (AUD$16.3 million) made in accordance
with the terms of the bank facility, and as of December 31, 1997, $57.8 million
(AUD$88.8 million) remained outstanding. Interest on the Australian facility is
based on the bank bill rate and was approximately 5.8% and 7.5% as of December
31, 1997 and 1996, respectively. The facility matures in December 2000, and the
indebtedness has been guaranteed by the Company.
MGM Grand Australia has a $13 million (AUD$20 million) uncommitted standby line
of credit, with a funding period of 91 days for working capital purposes. During
the year ended December 31, 1997, no amounts were borrowed under the line of
credit and no amounts were outstanding as of December 31, 1997, and 1996,
respectively.
22
Maturities of the Company's long term debt are as follows:
[Download Table]
(In thousands)
Year ending December 31,
----------------------------------
1998 $10,589
1999 13,847
2000 33,394
2001 -
Thereafter -
-------
Total $57,830
-------
On September 15, 1995, NYNY LLC (see Note 1) completed its bank financing for up
to $225 million, which was increased to $285 million during September 1996. The
non-revolving construction line of credit converted to a five-year reducing
revolver upon completion of construction and commencement of operations of NYNY
on January 3, 1997. The Company and Primadonna (the "Partners") guaranteed
completion of the project as a condition to facility availability, and have
executed a joint and several unlimited Keep-Well Agreement, which provides that
in the event of insufficient cash flow from NYNY to comply with financial
covenants, the Partners will make cash infusions which are sufficient to bring
NYNY LLC into compliance with the financial covenants. The first draw down
occurred on September 30, 1995, and as of December 31, 1997, $245.1 million was
outstanding under the facility. During 1997, $39.9 million in voluntary
principal repayments were made by NYNY LLC. On January 21, 1997, NYNY LLC
completed an additional $20 million equipment financing with a financial
institution. As of December 31, 1997, $17.5 million remained outstanding related
to the equipment financing.
The Company's $60 million bank line of credit for MGM Grand Las Vegas terminated
on October 29, 1996. No amounts were outstanding under the line of credit during
1996.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease buildings and equipment under non-
cancelable operating lease agreements which expire through the year 2027. The
leases generally provide that the Company pay taxes, insurance and maintenance
expenses related to the leased assets.
23
At December 31, 1997, the Company was obligated under non-cancelable operating
leases and capital leases to make future minimum lease payments as follows:
[Download Table]
(In thousands) OPERATING CAPITAL
Year ending December 31, LEASES LEASES
-------------------------------------------------------
1998 $ 1,653 $ 6,702
1999 604 2,175
2000 506 2,764
2001 416 -
2002 416 -
Thereafter 15,378 -
------- -------
Total Minimum $18,973 11,641
Lease Payment =======
Amount Representing Interest (1,106)
-------
Total Obligation Under Capital Leases 10,535
Less: Amount due within one year (6,088)
-------
Amount due after one year $ 4,447
=======
Rental expense on the non-cancelable operating leases was $2.5 million, $3.7
million and $3.6 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE 11. STOCKHOLDERS' EQUITY
On July 2, 1996, the Company completed a public offering (the "Offering") of 8.6
million shares of common stock (including an underwriter's over allotment option
to purchase 1.1 million shares of common stock). Based upon an Offering price of
$39.50 per share and associated costs incurred, the net proceeds were
approximately $327 million. The net proceeds from the Offering were used for the
defeasance of the MGM Grand Hotel Finance Corp. FMN (see Note 9).
On May 7, 1996, the Company made a commitment to grant 15 shares of Company
common stock to each of its employees in exchange for continued active
employment through the one year anniversary date of the commitment. As a result
of the stock grant commitment, deferred compensation was charged to
stockholders' equity and amortized monthly to compensation expense over the one
year commitment period. On May 7, 1997, 99,045 shares were issued to employees
as a result of the commitment. Over the life of the commitment, approximately $4
million was amortized to expense, of which $1.2 million and $2.8 million of such
expense were recognized during the years ended December 31, 1997 and 1996,
respectively.
On May 24, 1995, and as amended, the Company entered into an agreement with Don
King Productions Inc. ("DKP") to present six of Mike Tyson's fights. Pursuant to
the agreement, the Company made a non-interest bearing working capital advance
of $15 million to DKP, sold to DKP 618,557 treasury shares of the Company's
Common Stock (the "Shares") for $15 million in exchange for a non-interest
bearing promissory note which was repaid, and provided a guaranteed future share
price of $48.50. The original agreement was amended by a Trust Agreement dated
October 23, 1996, in which the Shares
24
were placed in the name of, and held by, an independent trustee, pending
disposition at the direction of the Company. The Company and DKP determined to
terminate the agreement, and on September 25, 1997, after solicitation of
competitive bids, the Shares held by the Trustee were sold to Tracinda at the
price of $44.50 per share for an aggregate consideration of $27.5 million, the
Company was repaid the $15 million working capital advance and the remaining
consideration in the amount of $12.5 million was paid to DKP. As a result of
this transaction, the Company reversed approximately $5.9 million of previously
expensed stock price guarantee amortization during 1997.
NOTE 12. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
superseded Accounting Principles Board Opinion 15, "Earnings per Share," and was
intended to simplify and harmonize the EPS calculations in the United States
with those common in other countries. SFAS 128 presents two EPS calculations:
(i) basic earnings per common stock which is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
periods presented, and (ii) diluted earnings per common share which is
determined on the assumption that options issued to employees are exercised and
repurchased at the average price for the periods presented. SFAS 128 became
effective for financial statements for the year ended December 31, 1997, and the
following reflects the effect of the Company's adoption of SFAS 128 for the
periods presented (in thousands except per share amounts):
[Download Table]
Year Ended December 31, 1997 1996 1995
----------------------------------------------------------
Net income $111,018 $43,706 $46,565
-------- ------- -------
Weighted Average Basic
Shares 57,475 52,759 48,076
-------- ------- -------
Basic Earnings per Share $ 1.93 $ 0.83 $ 0.97
-------- ------- -------
Weighted Average Diluted
Shares 58,835 54,257 48,544
-------- ------- -------
Diluted Earnings per
Share $ 1.89 $ 0.81 $ 0.96
-------- ------- -------
Weighted average diluted shares include the following: options to purchase
approximately 877,000, 962,000, and 411,000 shares issued to employees for the
years ended December 31, 1997, 1996 and 1995, respectively; employee grant
shares (see Note 11) of approximately 29,000 and 22,000 for the years ended
December 31, 1997 and 1996, respectively; and DKP shares (see Note 11) of
approximately 454,000, 514,000 and 57,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
25
NOTE 13. STOCK OPTION PLANS
The Company has adopted nonqualified stock option plans and incentive stock
plans which provide for the granting of stock options pursuant to the applicable
provisions of the Internal Revenue Code and regulations. The aggregate options
available under the plans are 6.5 million. The Company had granted options of
approximately 4.5 million shares through December 31, 1997.
The plans are administered by a compensation and stock option committee of the
Company's Board of Directors. Salaried officers and other key employees of the
Company and its subsidiaries are eligible to receive options. The exercise price
in each instance is 100% of the fair market value of the Company's common stock
on the date of grant. The options have ten-year terms and are exercisable in
four and five annual installments. On March 26, 1996, the Compensation and Stock
Option Committee of the Board of Directors determined to adjust the vesting
provision of the Company's Non-Qualified Stock Option Plan and Incentive Stock
Option Plan to provide for the vesting of future stock option grants under the
plans at 20% on each of the first four anniversary dates of the grant, with full
vesting on the fifth anniversary date of the grant. The Compensation and Stock
Option Committee also determined that pro-rata vesting at times other than
successive anniversary dates of the date of the grant are no longer applicable.
Stock option holders with grants dated prior to March 26, 1996 were given the
opportunity to accept or decline the new vesting provisions with regard to their
existing grants.
Had the Company accounted for these plans under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:
[Download Table]
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
NET INCOME:
As Reported $111,018 $43,706 $46,565
-------- ------- -------
Pro Forma $110,235 $34,981 $45,751
-------- ------- -------
BASIC EARNINGS PER
SHARE:
As Reported $ 1.93 $ 0.83 $ 0.97
-------- ------- -------
Pro Forma $ 1.92 $ 0.66 $ 0.95
-------- ------- -------
DILUTED EARNINGS
PER SHARE:
As Reported $ 1.89 $ 0.81 $ 0.96
-------- ------- -------
Pro Forma $ 1.87 $ 0.64 $ 0.94
-------- ------- -------
26
A summary of the status of the Company's fixed stock option plan for each of the
years in the period ended December 31, 1997, 1996 and 1995 is presented below
(there are no options outstanding under the Incentive Stock Option Plan):
[Enlarge/Download Table]
1997 1996 1995
---------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000's) PRICE (000'S) PRICE (000'S) PRICE
---------------------------------------------------------------------------------------
Outstanding at
Beginning of
the year 3,213 $27.26 3,102 $22.67 1,815 $16.94
Granted 727 $36.26 765 $35.12 3,261 $25.69
Exercised (72) $15.09 (414) $11.92 (232) $11.00
Forfeited (226) $35.19 (240) $26.35 (1,742) $26.32
Expired - $ - - $ - - $ -
Outstanding at End
of the Year 3,642 $28.82 3,213 $27.26 3,102 $22.67
----- ----- -----
Exercisable at End
of the Year 783 $24.24 220 $14.38 493 $11.76
----- ----- -----
Weighted Average
Fair Value
of Options Granted $16.98 $22.89 $13.74
------ ------ ------
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
PRICES AT 12/31/97 LIFE (YEARS) PRICE 12/31/97 PRICE
------------------------------------------------------------------------------------------
$10.25 - $20.00 242,000 3.6 $12.82 193,000 $11.84
$20.01 - $25.00 365,000 7.6 $24.40 72,000 $24.41
$25.00 - $30.00 1,876,000 7.9 $26.19 413,000 $26.16
$30.01 - $35.00 87,000 8.5 $33.87 18,000 $33.87
$35.01 - $40.00 603,000 9.3 $35.70 15,000 $38.66
$40.01 - $45.00 469,000 8.8 $41.26 72,000 $41.03
----------------------------------------------------------------------
3,642,000 8.0 $28.82 783,000 $24.24
----------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free
interest rates 6%, 6.1%, and 6.4% respectively; no expected dividend yields for
the years presented; expected lives of 6 years for all years; and expected
volatility of 38% for 1997 and 39% for 1996 and 1995.
The Company has agreements with 95 executives which provide that, upon a change
of control, any unvested stock options covered by such agreements become
exercisable. The total number of stock options subject to such agreements is 3.2
million, of which 3.1 million options become immediately exercisable, and the
remaining .1 million options become exercisable if employment status is
diminished within twelve months following a change in control.
27
Effective November 1996, the Company and MGM Grand Hotel, Inc. adopted an
Employee Stock Purchase Plan. The plan provides eligible employees the
opportunity to purchase shares of the Company's Common Stock via payroll
deductions. The price for each share of Common Stock is the weighted average
price paid for all shares purchased by the Plan Administrator on behalf of the
participating employees on the last trading day of each month. The Company and
MGM Grand Hotel, Inc. pay the administrative costs of the plan. The plan may be
amended or terminated at any time by the Company's Board of Directors or by a
committee designated by the Board of Directors.
NOTE 14. EMPLOYEE PENSION AND SAVINGS PLANS
Participation in the MGM Grand Hotel, Inc. 401(k) employee savings plan is
available for all full time employees. The savings plan allows participants to
defer, on a pretax basis, a portion of their salary and accumulate tax deferred
earnings as a retirement fund. MGM Grand Hotel, Inc. matches 25% of employee
contributions up to a maximum of 1% of participating employee's eligible gross
wages. Additionally, MGM Grand Hotel, Inc. makes contributions to the employees'
savings plan based on length of service, which vest over a five-year period. For
the periods ended December 31, 1997, 1996 and 1995, MGM Grand Hotel, Inc.
contributions under this arrangement were $3.4 million, $3.1 million, and $3.2
million, respectively.
Effective November 1994, the Company and MGM Grand Hotel, Inc. adopted a
Nonqualified Deferred Retirement Plan for certain key employees not a part of a
collective bargaining unit. The Nonqualified Deferred Retirement Plan allows
participants to defer, on a pretax basis, a portion of their salary and
accumulate tax deferred earnings, plus interest, as a retirement fund. These
deferrals are in addition to those allowed under the MGM Grand Hotel, Inc.
401(k) savings plan. All deferred amounts vest immediately. There are no
employer matching contributions made under this plan. The full amount vested in
a participant's account will be distributed to a participant following
termination of employment, normal retirement or in the event of disability or
death.
Effective with the September 1995 acquisition of MGM Grand Australia (see Notes
1 and 18), an Australian employee retirement fund was acquired. The fund is
subject to the Superannuation Industry (Supervision) Act of 1993, imposing a
legal obligation on MGM Grand Australia to contribute to all employees. MGM
Grand Australia maintains two categories for the plan, depending on employment
status: category (A) for executive employees and category (B) for staff. Death
and Disablement benefits are provided for all members; however, category (A)
members receive increased coverages under both benefits. MGM Grand Australia
contributes 6% of salary to satisfy the Superannuation Guarantee Legislation,
and allows participants to defer, on a pre-tax basis, a portion of their salary
and accumulate tax deferred earnings as a retirement fund. The full amount
vested in members' retirement accounts is payable to the member following
termination of employment, under certain circumstances or normal retirement.
During 1997, MGM Grand Australia contributed under these arrangements $154,000
and $458,000 for the executive employees and staff, respectively. During 1996,
MGM Grand Australia contributed under these arrangements $196,000 and $617,000
for the executive employees and staff, respectively. For the period from
acquisition on September 7, 1995 to December 31, 1995, MGM Grand Australia
contributions under these arrangements were $64,000 and $221,000 for the
executive employees and staff, respectively.
NOTE 15. MASTER PLAN ASSET DISPOSITION
During 1997, the Company enhanced and increased the Master Plan to more than
$700 million, and wrote off assets with a net book value of $28.6 million (pre-
tax) which included the original swimming
28
pool facility, to be replaced by the Mansion at the MGM Grand consisting of 30
exclusive suites and villas, and certain theme park assets to make way for a
500-room Ritz-Carlton Hotel. During September 1996, the Company determined to
write off various assets with a net book value of $49.4 million (pre-tax) as a
result of the MGM Grand Las Vegas $250 million Master Plan property construction
enhancements associated with the transformation of the facility into "The City
of Entertainment." The affected areas included certain assets related to the
theme park which totaled approximately $39.6 million to make way for a 380,000
square-foot conference center and a 6.6 acre pool and spa complex; approximately
$8.6 million related to the removal of the lion entrance and Emerald City which
has been replaced with a new mezzanine entry, a Rainforest Cafe, a Studio 54
nightclub and a remodeled Entertainment casino among other attractions; and
approximately $1.2 million representing certain food court and midway/arcade
areas which have been transformed into the Studio Walk, a replica of a sound
stage featuring Hollywood landmarks.
NOTE 16. COMPANY RESTRUCTURING PLAN
On August 1, 1995, the Company announced details of a comprehensive
restructuring plan designed to reduce costs and improve efficiency of operations
at MGM Grand Las Vegas. This restructuring resulted in a one-time charge against
earnings in the third quarter of 1995 totaling $5.9 million, primarily related
to employee severance payments.
NOTE 17. INCOME TAXES
The Company accounts for Income Taxes according to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires the recognition of deferred tax assets, net of applicable reserves,
related to net operating loss carryforwards and certain temporary differences.
The standard requires recognition of a future tax benefit to the extent that
realization of such benefit is more likely than not. Otherwise, a valuation
allowance is applied. At December 31, 1997, the Company believes that it is more
likely than not that its deferred tax assets are fully realizable because of the
future reversal of existing taxable temporary differences and future projected
taxable income. Accordingly, there is no valuation allowance at December 31,
1997.
The provision for income taxes and income from continuing operations before
extraordinary item for the years ended December 31, 1997, 1996 and 1995 is as
follows:
[Enlarge/Download Table]
(In thousands)
YEARS ENDED DECEMBER 31, 1997 1996 1995
----------------------------------------------------------------------------------------------------
Current - Federal (net of $9,935 and $18,013
tax benefit of operating loss carryforwards
for 1997 and 1996, respectively) $14,207 $31,014 $ 2,034
Deferred - Federal 50,838 (6,380) (2,034)
------- ------- -------
Provision for income taxes $65,045 24,634 $ -
------- ------- -------
29
Reconciliation of the Federal income tax rate and the Company's effective tax
rate is as follows:
[Download Table]
1997 1996 1995
---------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0 % 35.0 %
Permanent and other items 1.1 6.2 -
Changes in valuation allowance - (16.4) (35.0)
---- ----- -----
Effective tax rate 36.1% 24.8 % - %
---- ----- -----
As of December 31, 1997, the major tax effected components of the Company's net
deferred tax liability are as follows:
[Download Table]
(In thousands) 1997 1996
-----------------------------------------------------------------------------
DEFERRED TAX ASSETS
Net operating loss carryforward $ 1,929 $ 11,864
Bad debt reserve 6,586 9,123
Master Plan asset disposition - 16,639
Hotel preopening expenses 2,781 8,619
Loss on defeasance of debt - 12,180
Accruals, reserves and other - 4,643
Tax credit carryforwards 27,219 31,488
-------- --------
38,515 94,556
-------- --------
DEFERRED TAX LIABILITIES
Depreciation and amortization (65,144) (74,994)
Accruals, reserves and other (1,908) -
-------- --------
(67,052) (74,994)
-------- --------
NET DEFERRED TAX (LIABILITY) ASSET $(28,537) $ 19,562
-------- --------
The Company has an Australian tax loss of $5.4 million which does not expire.
For U.S. Federal income tax return purposes, the Company has an alternative
minimum tax credit carryforward of $24.3 million which does not expire, and a
general business tax credit carryforward of $2.9 million which expires in
different periods through 2012.
30
NOTE 18. AUSTRALIAN CASINO ACQUISITION
On September 7, 1995, the Company, through its wholly-owned subsidiary, MGM
Grand Australia, Pty Ltd., completed the acquisition of MGM Grand Australia, for
approximately U.S. $76 million. The acquisition costs include approximately $60
million for the purchase of stock and approximately $14.2 million of debt
assumption, and debt and organization costs of approximately $1.8 million. In
addition, on October 24, 1995, the Company expended approximately $3.8 million
to acquire the remaining 14.3% interest not already owned in the Territory
Property Trust, which owns the land and buildings of MGM Grand Australia. MGM
Grand Australia is located on 18 acres of beachfront property on the north
central coast of Australia. The resort includes a public and private casino, 96
rooms and suites, restaurants and other facilities. The Company financed the
acquisition through an Australian bank facility (see Note 9). The acquisition
was accounted for using the purchase method, whereby the assets acquired were
recorded at their fair market values. The purchase price allocation was as
follows:
[Download Table]
(In thousands)
--------------------------------------------
Cash $ 7,803
Property, plant and equipment 36,088
Excess of purchase price over
fair market value of
net assets acquired 40,980
Deferred income taxes (4,226)
Net liabilities (900)
-------
$79,745
=======
Concurrent with the closing of the transaction on September 7, 1995, the Company
granted to certain of the sellers an option to acquire 22.5% of the stock of the
Company's Australian subsidiary. The option, which was granted for a nominal
consideration, is exercisable at any time during the third and fourth years
following the closing, at an exercise price of approximately $14.4 million
subject to certain adjustments. The option holders also granted to the Company a
two-year option to purchase 25% interests in each of Aspinall's Club in London,
U.K., and Aspinall Casino SA in Le Touquet, France, with an exercise price in
each case based on the amount of the owners' respective investments in such
casinos; the Company allowed its option to expire during 1997.
NOTE 19. RELATED-PARTY TRANSACTIONS
In conjunction with the Company's 50% interest in the MGM Grand-Bally's
Monorail, LLC, the Company, through its wholly-owned subsidiary, MGM Grand
Hotel, Inc., contributed approximately $1.5 million, $1.3 million, and $.8
million to the joint venture as part of its operating contribution during 1997,
1996 and 1995, respectively.
In August 1995, the Company made a $5 million working capital advance to NYNY.
The $5 million advance, together with interest, was repaid during September
1995. The Company, through its wholly-owned subsidiary MGM Grand Hotel, Inc.,
has entered into an agreement to lease space in NYNY to operate a race book and
sports pool. The terms of the lease are for ten years from the commencement date
of January 3, 1997, with an option for an additional term of ten years. MGM
Grand Hotel, Inc. is obligated to pay to NYNY the greater of a minimum annual
rent of $.2 million or percentage rent based
31
upon gross revenue, as defined by the Nevada Gaming Authorities. The percentage
rent is based on a graduated scale of gross revenue at percentages ranging from
12% to 15%. During 1997, approximately $.5 million was paid under this
agreement. Additionally, MGM Grand Hotel, Inc. leased office facilities to NYNY
during 1996 for which it received rental payments of approximately $.1 million,
and provided various other hotel goods and services for which NYNY paid
approximately $.2 million and $.1 million during 1997 and 1996, respectively. On
September 4, 1996, the Company also entered into an agreement with NYNY to
provide exclusive floral services through its wholly-owned subsidiary, MGM Grand
Merchandising, Inc., at rates generally comparable to those offered by third
parties. Payments were made by NYNY totaling $.1 million under the floral
service contract during 1997. The Company and NYNY have entered into various
other transactions and arrangements which, individually and in the aggregate,
are not material.
For the years ended December 31, 1997, and 1996, the Company and its
subsidiaries rented aircraft from Tracinda for various business purposes. The
aggregate amount of rental payments were $.5 million and $1 million,
respectively, and the rent payments were at rates which management believes are
generally below those offered by third parties. During 1995, MGM Grand Las Vegas
leased an aircraft from Tracinda, with total lease payments of approximately $.2
million. MGM Grand Las Vegas also leased Tracinda's Challenger aircraft through
a third party operator for approximately $.2 million during 1995. The Company
and Tracinda have entered into various other transactions and arrangements
which, individually and in the aggregate, are not material.
The Company was granted a no-cost option from Tracinda, with an expiration date
of September 1, 1995, to purchase approximately 18 acres of undeveloped land
across the Las Vegas Strip from MGM Grand Las Vegas. The option, which gave the
Company the right to acquire the property at Tracinda's purchase cost of $31.5
million, together with its actual costs incurred in connection with the
ownership of the property, plus interest, was exercised on January 5, 1995, for
a total cost of approximately $36.5 million. On January 6, 1995, the Company
contributed the property to NYNY as its share of the initial capital
contribution to the hotel/casino construction project (see Notes 1 and 7).
During 1997, the Company contributed an additional $7 million to NYNY LLC along
with $22.5 million during 1996. The Company received approximately $15.2 million
in distributions from NYNY LLC during 1997 to pay taxes on its allocated share
of income.
Pursuant to an agreement dated December 23, 1996, between MGM Grand Hotel, Inc.
and MGM/UA Home Entertainment, Inc. ("MGM/UA"), a California based motion
picture studio in which Tracinda has an approximate 65% ownership interest, MGM
Grand Hotel, Inc. can utilize key art and still photographs from certain Metro-
Goldwyn-Mayer Inc. and United Artists Corporation motion pictures for the period
commencing on December 27, 1996 and ending on July 1, 1997, which was
subsequently extended to December 31, 1997. In exchange, MGM Grand Hotel, Inc.
agreed to promote MGM/UA motion picture video cassettes for availability in one
or more retail venues. During 1997, MGM Grand Hotel, Inc. purchased video
cassettes and other MGM/UA merchandise of approximately $.3 million at rates
which management believes are generally comparable to those offered to third
parties. In addition, MGM Grand Hotel, Inc. provided various goods and services
during 1997 for which MGM/UA paid approximately $.5 million.
Pursuant to a License Agreement between a predecessor in interest to the Company
and Metro-Goldwyn-Mayer Film Co. dated February 29, 1980, the Company has an
exclusive royalty-free license in perpetuity to use certain trademarks, trade
names and logos in and in connection with the Company's hotel/gaming business
and other businesses, excluding the film entertainment business.
32
During the three year periods ended December 31, 1997, 1996 and 1995, the
Company and MGM/UA have entered into various other transactions and arrangements
which, individually and in the aggregate, are not material.
Note 20. Industry Segments
The Company operates in the hotel/casino industry segment through the operations
of MGM Grand Las Vegas, which commenced operations on December 18, 1993, MGM
Grand Australia, which was acquired on September 7, 1995 (see Note 18), its 50%
interest in NYNY LLC, which commenced operations on January 3, 1997 (see Note
1), and the management of a casino in Nelspruit, South Africa, which commenced
operations on October 15, 1997 (see Note 1). Sales between industry segments are
immaterial and generally at prices approximately equal to those charged to
unaffiliated customers.
[Enlarge/Download Table]
(In thousands)
For the Years Ended December 31, 1997 1996 1995
------------------------------------------------------------------------------------------------------
NET REVENUES:
Hotel/Casino $ 773,797 $ 800,189 $ 718,781
Income from unconsolidated affiliate 53,800 - -
---------- ---------- ----------
$ 827,597 $ 800,189 $ 718,781
========== ========== ==========
OPERATING INCOME (LOSS):
Hotel/Casino $ 169,160 $ 196,585 $ 119,847
Income from unconsolidated affiliate 53,800 - -
Master Plan asset disposition (28,566) (49,401) -
Corporate expense (3,424) (10,022) (10,082)
Restructuring costs - - (5,942)
Preopening and other - unconsolidated affiliate - (7,868) -
---------- ---------- ----------
$ 190,970 $ 129,294 $ 103,823
========== ========== ==========
IDENTIFIABLE ASSETS:
Hotel/Casino $1,390,215 $1,254,602 $1,250,771
Corporate 8,159 33,087 31,451
---------- ---------- ----------
$1,398,374 $1,287,689 $1,282,222
========== ========== ==========
CAPITAL EXPENDITURES:
Hotel/Casino $ 227,658 $ 84,544 $ 37,371
Corporate 98 231 76
---------- ---------- ----------
$ 227,756 $ 84,775 $ 37,447
========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Hotel/Casino $ 64,104 $ 62,196 $ 55,315
Corporate 140 127 104
---------- ---------- ----------
$ 64,244 $ 62,323 $ 55,419
========== ========== ==========
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of MGM Grand, Inc.:
We have audited the accompanying consolidated balance sheets of MGM Grand, Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MGM Grand, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
January 28, 1998
34
[Enlarge/Download Table]
SELECTED QUARTERLY FINANCIAL RESULTS
(In thousands except share data)
For the years ended December 31, 1997 and 1996
(Unaudited)
QUARTER
--------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
--------------------------------------------------------------------
1997
Net revenues $197,498 $209,085 $208,399 $212,615 $827,597
Operating profit before
non-recurring items
and corporate expense 53,038 57,368 56,419 56,135 222,960
Operating income 51,549 54,079 31,319 54,023 190,970
Income before income taxes
and extraordinary item 48,077 51,437 28,984 51,803 180,301
Net income 30,150 32,999 14,456 33,413 111,018
Basic income per share
of common stock:
Income before
extraordinary item $ 0.52 $ 0.57 $ 0.32 $ 0.58 $ 2.00
Extraordinary item - - (0.07) - (0.07)
--------------------------------------------------------------------
Net income $ 0.52 $ 0.57 $ 0.25 $ 0.58 $ 1.93
--------------------------------------------------------------------
Diluted income per share
of common stock:
Income before
extraordinary item $ 0.51 $ 0.56 $ 0.32 $ 0.57 $ 1.96
Extraordinary item - - (0.07) - (0.07)
--------------------------------------------------------------------
Net income $ 0.51 $ 0.56 $ 0.25 $ 0.57 $ 1.89
--------------------------------------------------------------------
1996
Net revenues $207,996 $189,237 $197,388 $205,568 $800,189
Operating profit before
non-recurring items
and corporate expense 50,615 50,097 46,262 49,611 196,585
Operating income (loss) 49,223 48,615 (4,808) 36,264 129,294
Income (loss) before
income taxes and
extraordinary item 34,528 34,331 (6,804) 37,096 99,151
Net income (loss) 34,528 20,635 (35,488) 24,031 43,706
Basic income per share
of common stock:
Income (loss) before
extraordinary item $ 0.71 $ 0.43 $ (0.08) $ 0.42 $ 1.41
Extraordinary item - - (0.54) - (0.58)
--------------------------------------------------------------------
Net income (loss) $ 0.71 $ 0.43 $ (0.62) $ 0.42 $ 0.83
--------------------------------------------------------------------
Diluted income per share
of common stock:
Income (loss) before
extraordinary item $ 0.70 $ 0.41 $ (0.08) $ 0.41 $ 1.38
Extraordinary item - - (0.54) - (0.57)
--------------------------------------------------------------------
Net income (loss) $ 0.70 $ 0.41 $ (0.62) $ 0.41 $ 0.81
--------------------------------------------------------------------
35
CORPORATE INFORMATION
DIRECTORS AND OFFICERS
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------------------------
J. Terrence Lanni Terry N. Christensen Kirk Kerkorian Jerome B. York
Director Director Director Director
Chairman of the Board Partner, Christensen, President and Vice Chairman
and Chief Executive Miller, Fink, Jacobs, Chief Executive Officer Tracinda Corporation
Officer Glaser, Weil & Shapiro, Tracinda Corporation
LLP
Alex Yemenidjian Glenn A. Cramer Frank Mancuso Scott Langsner
Director Director Director Secretary/Treasurer
President and Former Chairman, Chairman
Chief Operating Transamerica Airlines Metro-Goldwyn-Mayer Inc.
Officer Retired
Fred Benninger Willie D. Davis James J. Murren Edward J. Jenkins
Director Director Director Vice President
Vice Chairman President and Director, Executive Vice President and
All-Pro Broadcasting, Inc. Chief Financial Officer
James D. Aljian Alexander M. Haig, Jr. Walter M. Sharp Jim Fox
Director Director Director Vice President
Executive, Tracinda Chairman President,
Corporation Worldwide Associates, Inc. Walter M. Sharp Company
MGM GRAND HOTEL SENIOR OFFICERS
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------------------------
Daniel M. Wade Lyn H. Baxter Tom Peterman Corey Sanders
President and Senior Vice President Senior Vice President Senior Vice President and
Chief Operating Operations General Counsel Chief Financial Officer
Officer
William Hornbuckle Cynthia Kiser Murphey Greg W. Saunders Richard A. Sturm
Executive Vice Senior Vice President Senior Vice President Senior Vice President
President Human Resources and Hotel Operations Marketing and Entertainment
Operations Administration
[Enlarge/Download Table]
MGM GRAND MARKETING MGM GRAND DEVELOPMENT
------------------------------------------------------------------------------------------------------------------------------------
Robert V. Moon Kenneth A. Rosevear
President President and
Chief Operating Officer
[Enlarge/Download Table]
MGM GRAND AUSTRALIA MGM GRAND MERCHANDISING
------------------------------------------------------------------------------------------------------------------------------------
J. D. Clayton Bob Bowman
General Manager President
New York-New York Hotel and Casino
-------------------------------------------------------------------------------
David Cacci
President and Chief Operating Officer
36
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Investor Information
---------------------
[Download Table]
1997 1996
For the year ended December 31, HIGH LOW HIGH LOW
----------------------------------------------------------------------------
First Quarter $41 $32 3/8 $39 3/4 $22 3/4
Second Quarter $40 3/8 $32 1/8 $47 7/8 $38 3/8
Third Quarter $44 $32 3/8 $43 1/4 $35 1/2
Fourth Quarter $46 11/16 $34 $45 5/8 $34
The Company's Common Stock is listed on the New York Stock Exchange. Its symbol
is MGG.
[Download Table]
TRANSFER AGENT AND INDEPENDENT PUBLIC
REGISTRAR FOR COMMON STOCK ACCOUNTANTS
--------------------------------------------------------------------------------
ChaseMellon Shareholders Services, LLC Arthur Andersen LLP
Overpeck Centre 3773 Howard Hughes Parkway, Suite 500
85 Challenger Road South
Ridgefield Park, NJ 07660 Las Vegas, NV 89109
www.chasemellon.com
FORM 10-K
A copy of the Company's annual report on Form 10-K, as filed with the Securities
and Exchange Commission, will be furnished without charge to any stockholder
upon written request to: Mr. Scott Langsner, Secretary/Treasurer, MGM Grand,
Inc., 3799 Las Vegas Boulevard South, Las Vegas, Nevada 89109
37
Dates Referenced Herein and Documents Incorporated by Reference
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