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 29K
2: EX-99.(A)(1) Form of Offer to Purchase Dated June 17, 1999 36 174K
3: EX-99.(A)(2) Form of Letter of Transmittal 12 55K
4: EX-99.(A)(3) Notice of Guaranteed Delivery 2 16K
5: EX-99.(A)(4) Form of Letter to Brokers 2 14K
6: EX-99.(A)(5) Form of Letter to Clients 2 13K
7: EX-99.(A)(6) Press Release by Mgm Grand Dated June 10, 1999 2 13K
8: EX-99.(A)(7) Form of Summary Advertisement Dated June 17, 3± 18K
1999
9: EX-99.(A)(8) Substitute Form W-9 Tax Guidelines 4± 16K
10: EX-99.(A)(9) Form of Memorandum Dated June 17, 1999 9 34K
11: EX-99.(G)(1) Pgs 29-49 of Ex. 13 to Mgm Grand's AR on Form 21 128K
10-K
12: EX-99.(G)(2) Pgs 2-14 of Mgm Grand's Quarterly Report 13 67K
13: EX-99.(G)(3) Consent of Independent Public Accountants 1 7K
EX-99.(G)(1) — Pgs 29-49 of Ex. 13 to Mgm Grand’s AR on Form 10-K
Exhibit Table of Contents
EXHIBIT (g)(1)
Consolidated Statements
-----------------------
of Operations
-------------
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(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
Revenues:
CASINO ............................................................. $ 410,605 $ 457,206 $ 476,685
ROOMS .............................................................. 171,292 171,272 174,440
FOOD AND BEVERAGE .................................................. 105,875 92,594 78,438
ENTERTAINMENT, RETAIL AND OTHER .................................... 113,948 116,458 126,875
INCOME FROM UNCONSOLIDATED AFFILIATE ............................... 38,362 53,800 -
----------- ----------- -----------
840,082 891,330 856,438
LESS: PROMOTIONAL ALLOWANCES ....................................... 66,219 63,733 56,249
----------- ----------- -----------
773,863 827,597 800,189
----------- ----------- -----------
Expenses:
CASINO ............................................................. 221,439 225,896 221,268
ROOMS .............................................................. 47,767 45,848 46,639
FOOD AND BEVERAGE .................................................. 67,101 55,124 46,590
ENTERTAINMENT, RETAIL AND OTHER .................................... 75,192 79,605 88,214
PROVISION FOR DOUBTFUL ACCOUNTS AND DISCOUNTS ...................... 40,455 31,814 38,635
GENERAL AND ADMINISTRATIVE ......................................... 103,362 102,246 100,062
DEPRECIATION AND AMORTIZATION ...................................... 76,284 64,104 62,196
----------- ----------- -----------
631,600 604,637 603,604
----------- ----------- -----------
OPERATING PROFIT BEFORE MASTER PLAN ASSET DISPOSITION,
PREOPENING AND CORPORATE EXPENSE ........................... 142,263 222,960 196,585
MASTER PLAN ASSET DISPOSITION ...................................... - 28,566 49,401
PREOPENING AND OTHER - UNCONSOLIDATED AFFILIATE .................... - - 7,868
CORPORATE EXPENSE .................................................. 10,689 3,424 10,022
----------- ----------- -----------
OPERATING INCOME ........................................... 131,574 190,970 129,294
----------- ----------- -----------
Nonoperating Income (Expense):
INTEREST INCOME .................................................... 12,997 1,268 4,247
INTEREST EXPENSE, NET OF AMOUNTS CAPITALIZED ....................... (24,613) (1,242) (33,778)
INTEREST EXPENSE FROM UNCONSOLIDATED AFFILIATE ..................... (8,376) (9,891) -
OTHER, NET ......................................................... (2,054) (804) (612)
----------- ----------- -----------
(22,046) (10,669) (30,143)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM .............. 109,528 180,301 99,151
PROVISION FOR INCOME TAXES ......................................... (40,580) (65,045) (24,634)
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM ............................... 68,948 115,256 74,517
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 ......................................................... $ 68,948 $ 111,018 $ 43,706
=========== =========== ===========
Basic Income Per Share of Common Stock:
INCOME BEFORE EXTRAORDINARY ITEM ................................... $ 1.24 $ 2.00 $ 1.41
EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF INCOME TAX BENEFIT ............................. - (0.07) (0.58)
----------- ----------- -----------
NET INCOME PER SHARE ............................................... $ 1.24 $ 1.93 $ 0.83
=========== =========== ===========
Weighted Average Shares Outstanding .................................... 55,678,000 57,475,000 52,759,000
=========== =========== ===========
Diluted Income Per Share of Common Stock:
INCOME BEFORE EXTRAORDINARY ITEM ................................... $ 1.22 $ 1.96 $ 1.38
EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENT
OF DEBT, NET OF INCOME TAX BENEFIT ............................. - (0.07) (0.57)
----------- ----------- -----------
NET INCOME PER SHARE ............................................... $ 1.22 $ 1.89 $ 0.81
=========== =========== ===========
Weighted Average Shares Outstanding .................................... 56,342,000 58,835,000 54,257,000
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
29
Consolidated Balance
--------------------
Sheets
------
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(IN THOUSANDS, EXCEPT SHARE DATA)
AS OF DECEMBER 31, 1998 1997
----------- -----------
ASSETS
Current Assets:
CASH AND CASH EQUIVALENTS ...................................... $ 81,956 $ 34,606
ACCOUNTS RECEIVABLE, NET ....................................... 69,116 78,977
PREPAID EXPENSES ............................................... 11,829 10,452
INVENTORIES .................................................... 11,081 16,462
DEFERRED TAX ASSET ............................................. 34,098 30,294
----------- -----------
TOTAL CURRENT ASSETS ................................... 208,080 170,791
----------- -----------
Property and Equipment, net ............................................ 1,327,722 1,032,708
Other Assets:
INVESTMENT IN UNCONSOLIDATED AFFILIATES ........................ 134,025 108,121
EXCESS OF PURCHASE PRICE OVER FAIR MARKET VALUE
OF NET ASSETS ACQUIRED, NET ............................ 37,574 38,598
DEPOSITS AND OTHER ASSETS, NET ................................. 66,393 48,156
----------- -----------
TOTAL OTHER ASSETS ..................................... 237,992 194,875
----------- -----------
$ 1,773,794 $ 1,398,374
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
ACCOUNTS PAYABLE ............................................... $ 23,931 $ 20,484
CONSTRUCTION PAYABLE ........................................... 17,403 33,376
INCOME TAXES PAYABLE ........................................... 2,457 --
CURRENT OBLIGATION, CAPITAL LEASES ............................. 5,086 6,088
CURRENT OBLIGATION, LONG TERM DEBT ............................. 10,077 10,589
ACCRUED INTEREST ............................................... 14,630 --
OTHER ACCRUED LIABILITIES ...................................... 115,781 110,953
----------- -----------
TOTAL CURRENT LIABILITIES .............................. 189,365 181,490
----------- -----------
Deferred Revenues ...................................................... 5,219 4,743
Deferred Income Taxes .................................................. 77,165 58,831
Long Term Obligation, Capital Leases ................................... 2,867 4,447
Long Term Debt ......................................................... 534,797 47,241
Commitments and Contingencies
Stockholders' Equity:
COMMON STOCK ($.01 PAR VALUE, 75,000,000 SHARES AUTHORIZED,
58,033,094 AND 57,984,873 SHARES ISSUED AND OUTSTANDING) 580 580
CAPITAL IN EXCESS OF PAR VALUE ................................. 968,199 966,487
TREASURY STOCK, AT COST (6,000,000 SHARES) ..................... (210,589) --
RETAINED EARNINGS .............................................. 193,187 124,239
OTHER COMPREHENSIVE INCOME ..................................... 13,004 10,316
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ............................. 964,381 1,101,622
----------- -----------
$ 1,773,794 $ 1,398,374
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
30
Consolidated Statements of
--------------------------
Cash Flows
----------
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(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
--------- --------- ---------
Cash Flows from Operating Activities:
NET INCOME .......................................................................... $ 68,948 $ 111,018 $ 43,706
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 ................................. 1,849 1,127 2,191
DEPRECIATION AND AMORTIZATION ....................................... 76,712 64,244 62,323
PROVISION FOR DOUBTFUL ACCOUNTS AND DISCOUNTS ....................... 40,455 31,814 38,635
PREOPENING AND OTHER - UNCONSOLIDATED AFFILIATE ..................... -- -- 7,868
DEFERRED INCOME TAXES ............................................... 14,530 48,100 (27,696)
UNCONSOLIDATED AFFILIATE, EARNINGS IN EXCESS OF DISTRIBUTIONS........ (25,866) (28,749) --
CHANGE IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE ......................................... (30,594) (30,262) (40,605)
PREPAID EXPENSES ............................................ (1,377) 2,756 (551)
INVENTORIES ................................................. 4,314 (4,035) (3,283)
INCOME TAXES PAYABLE ........................................ 2,457 (23,653) 21,302
ACCOUNTS PAYABLE, ACCRUED LIABILITIES, AND OTHER............. 20,799 (24,185) 43,209
CURRENCY TRANSLATION ADJUSTMENT ............................. (547) 700 130
--------- --------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES ......................... 171,680 184,012 245,151
--------- --------- ---------
Cash Flows from Investing Activities:
PURCHASES OF PROPERTY AND EQUIPMENT ......................................... (361,942) (227,756) (84,775)
DISPOSITIONS OF PROPERTY AND EQUIPMENT, NET ................................. 599 202 322
CHANGE IN CONSTRUCTION PAYABLES ............................................. (15,973) 32,418 (809)
INVESTMENT IN UNCONSOLIDATED AFFILIATES ..................................... (800) (7,190) (27,153)
DEPOSITS AND OTHER ASSETS ................................................... (27,617) 548 (8,400)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............................... (405,733) (201,778) (120,815)
--------- --------- ---------
Cash Flows from Financing Activities:
DEFEASANCE OF FIRST MORTGAGE NOTES .......................................... -- -- (523,231)
ISSUANCE OF LONG TERM DEBT .................................................. 500,000 -- --
REPAYMENTS TO BANKS AND OTHERS .............................................. (9,720) (11,839) --
BORROWINGS UNDER LINES OF CREDIT ............................................ 31,000 25,500 65,262
REPAYMENTS OF LINES OF CREDIT ............................................... (31,000) (25,500) (65,262)
PURCHASE OF TREASURY STOCK .................................................. (210,589) -- --
ISSUANCE OF COMMON STOCK .................................................... 1,712 2,799 350,290
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................... 281,403 (9,040) (172,941)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ................................ 47,350 (26,806) (48,605)
Cash and Cash Equivalents at Beginning of Year ...................................... 34,606 61,412 110,017
--------- --------- ---------
Cash and Cash Equivalents at End of Year ............................................ $ 81,956 $ 34,606 $ 61,412
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
31
Consolidated Statements
-----------------------
of Stockholders' Equity
-----------------------
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(DOLLAR AMOUNTS IN THOUSANDS) COMMON CAPITAL IN RETAINED TOTAL
FOR THE YEARS ENDED DECEMBER 31, STOCK COMMON EXCESS OF TREASURY EARNINGS STOCKHOLDERS'
1998, 1997, AND 1996 OUTSTANDING STOCK PAR VALUE STOCK (DEFICIT) OTHER EQUITY
----------- ------ ---------- --------- ---------- -------- ------------
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 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
ISSUANCE OF COMMON STOCK PURSUANT TO
EMPLOYEE STOCK OPTIONS................. 48,221 - 1,315 - - - 1,315
TREASURY STOCK............................. - - - (210,589) - - (210,589)
TAX BENEFIT FROM STOCK OPTION EXERCISES.... - - 397 - - - 397
NET INCOME................................. - - - - 68,948 - 68,948
CURRENCY TRANSLATION ADJUSTMENT............ - - - - - 2,688 2,688
----------- ------ ---------- --------- ---------- -------- ------------
Balance at December 31, 1998............... 58,033,094 $ 580 $ 968,199 $(210,589) $ 193,187 $ 13,004 $ 964,381
=========== ====== ========== ========= ========== ======== ============
The accompanying notes are an integral part of these consolidated financial
statements.
32
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, 1998, approximately 73% 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 Company acquired MGM Grand Australia on
September 7, 1995.
The Company and Primadonna Resorts, Inc. ("Primadonna") each owned 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 and Casino ("NYNY") in Las Vegas, Nevada 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 three temporary casinos throughout various provinces of the
Republic of South Africa. The casino in Nelspruit began operations on October
15, 1997, the casino in Witbank began operations on March 10, 1998 and the
casino in Johannesburg began operations on September 28, 1998. The Company
receives development and management fees from its partner, Tsogo Sun Gaming &
Entertainment, which 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 to
develop a hotel/casino and entertainment complex at an approximate cost of $800
million. On November 20, 1997, MGM Grand Detroit, LLC was chosen as a finalist
for a development agreement to construct, own and operate one of Detroit's three
new casinos. On April 9, 1998, the Detroit City Council approved MGM Grand
Detroit LLC's development agreement with the City of Detroit. Construction of
the project is subject to the receipt of various governmental approvals. The
plans for the permanent facility call for an 800-room hotel, a 100,000 square-
foot casino, signature restaurants and retail outlets, a showroom and other
entertainment venues. On July 22, 1998, the Michigan Gaming Control Board
adopted a resolution which allows the issuance of casino licenses to conduct
gaming operations in temporary facilities. Pending receipt of a license, MGM
Grand Detroit, LLC anticipates the opening of the temporary gaming facility,
which will contain approximately 73,000 square feet of casino space, 2,300 slot
machines, 80 table games and signature restaurants and bars, in the third
quarter of 1999.
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 an
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.
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
33
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. Accounts Receivable-- Accounts receivable 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.
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 $66.2 million, $63.7
million and $56.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The estimated cost of providing such promotional allowances was
included in casino expenses as follows:
PROMOTIONAL ALLOWANCES
[Download Table]
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998 1997 1996
------- ------- -------
ROOMS ............................................ $11,304 $ 9,841 $ 9,487
FOOD AND BEVERAGE ................................ 26,826 28,436 23,224
OTHER ............................................ 4,011 2,235 2,175
------- ------- -------
$42,141 $40,512 $34,886
======= ======= =======
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
34
issued to employees are exercised and repurchased at the average price for the
periods presented (see Note 13).
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. 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.
o. Recently issued Statement of Position - In April 1998, the American
Institute of Certified Public Accountants issued SOP 98-5, "Reporting on the
Costs of Start-up Activities." The new standard requires that all companies
expense costs of start-up activities as those costs are incurred. The term
"start-up" includes pre-opening, pre-operating and organization activities.
Previously, the Company had capitalized these items until the development of the
property was substantially complete and ready to open, at which time the
cumulative costs were expensed. As of December 31, 1998, the Company capitalized
"start-up" costs of $.7 million related to Atlantic City and $11.6 million
related to Detroit. The Company will adopt SOP 98-5 in the first quarter of
fiscal year 1999.
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, ........................ 1998 1997 1996
------- ------- -------
Cash payments made for:
INTEREST, NET OF AMOUNTS CAPITALIZED ....... $23,680 $ 7,916 $48,155
======= ======= =======
STATE AND FEDERAL INCOME TAXES ............. $15,900 $43,159 $ 3,660
======= ======= =======
During 1997, the Company completed equipment lease financing for approximately
$3.1 million at MGM Grand Las Vegas.
NOTE 4. ACCOUNTS RECEIVABLE
---------------------------
Components of accounts receivable were as follows:
(IN THOUSANDS)
AT DECEMBER 31,
[Download Table]
1998 1997
------- -------
CASINO .................................................... $89,681 $87,442
HOTEL ..................................................... 12,679 11,229
INCOME TAX RECEIVABLE ..................................... - 6,776
OTHER ..................................................... 3,587 553
------- -------
105,947 106,000
LESS: ALLOWANCE FOR DOUBTFUL ACCOUNTS AND DISCOUNTS ....... (36,831) (27,023)
------- -------
$69,116 $78,977
======= =======
35
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:
[Enlarge/Download Table]
(IN THOUSANDS)
AT DECEMBER 31, 1998 1997
---------- ----------
LAND.............................................................. $ 107,613 $ 105,813
BUILDINGS AND IMPROVEMENTS........................................ 929,980 663,832
EQUIPMENT, FURNITURE, FIXTURES AND LEASEHOLD IMPROVEMENTS......... 304,239 217,723
EQUIPMENT UNDER CAPITAL LEASE..................................... 18,053 18,053
CONSTRUCTION IN PROGRESS.......................................... 223,772 216,898
---------- ----------
1,583,657 1,222,319
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION................... (255,935) (189,611)
---------- ----------
$1,327,722 $1,032,708
========== ==========
NOTE 6. DEVELOPMENT PROJECTS
----------------------------
The Company, along with its local partners in Detroit, Michigan, plans to
develop a permanent hotel/casino and entertainment complex at an approximate
cost of $800 million. On November 20, 1997, MGM Grand Detroit, LLC was chosen as
a finalist for a development agreement to construct, own and operate one of
Detroit's three new casinos. On April 9, 1998, the Detroit City Council approved
MGM Grand Detroit, LLC's development agreement with the City of Detroit.
Construction of the project is subject to the receipt of various governmental
approvals. The plans for the permanent facility call for an 800-room hotel, a
100,000 square-foot casino, signature restaurants and retail outlets, a showroom
and other entertainment venues. On July 22, 1998, the Michigan Gaming Control
Board adopted a resolution which allows the issuance of casino licenses to
conduct gaming operations in temporary facilities. During November 1998, MGM
Grand Detroit, LLC commenced construction activities on its temporary casino
which will consist of approximately 73,000 square feet of casino space, 2,300
slot machines, 80 table games, as well as signature restaurants and bars at an
approximate cost of $200 million. Pending the receipt of its license, MGM Grand
Detroit, LLC anticipates the opening of the temporary facility in the third
quarter of 1999. Through December 31, 1998, approximately $26.3 million was
expended and capitalized by the Company for licensing, design and construction
costs for the permanent and temporary facilities.
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, 1998, the Company has expended and
capitalized approximately $53.1 million relating primarily to land acquisition
and pre-construction activities.
36
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 (see Note 20). As of December 31, 1998, the
Company has contributed land valued at $41.2 million with a cost basis of $37.6
million on which the property is located and cash totaling $29.5 million. During
the years ended December 31, 1998, and December 31, 1997, the Company received
distributions of $4.1 million and $15.2 million, respectively from the joint
venture to pay taxes on its allocated share of income. The joint venture secured
bank financing of $285 million, which was subsequently amended and reduced to
$210 million, and term loan financing of $20 million (see Note 9). In addition,
the joint venture Partners' executed a joint and several unlimited Keep-Well
Agreement 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)
YEARS ENDED DECEMBER 31, 1998 1997
-------- --------
NET REVENUES................................................... $219,107 $255,253
======== ========
OPERATING INCOME............................................... $ 76,628 $107,431
======== ========
INTEREST EXPENSE, NET.......................................... $(16,562) $(19,425)
======== ========
NET INCOME..................................................... $ 60,066 $ 88,006
======== ========
(IN THOUSANDS)
AT DECEMBER 31, 1998 1997
-------- --------
TOTAL ASSETS................................................... $451,496 $470,252
======== ========
LONGTERM DEBT.................................................. $189,361 $246,403
======== ========
MEMBERS' EQUITY................................................ $235,176 $183,350
======== ========
Effective December 10, 1993, the Company through its wholly owned subsidiary,
MGM Grand Hotel, Inc., and Bally's Grand Inc. ("Bally's") formed a 50/50 joint
venture, MGM Grand-Bally's Monorail, LLC. The joint venture was intended to
construct, own and operate the MGM Grand-Bally's Monorail. The Company
contributed $2 million, $1.5 million, and $1.3 million to the joint venture as
part of its operating contribution during 1998, 1997 and 1996, respectively.
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 and certain development costs capitalized during
construction. Investments in unconsolidated affiliates consisted of the
following:
(IN THOUSANDS)
AT DECEMBER 31,
[Download Table]
1998 1997
-------- --------
NEW YORK - NEW YORK HOTEL AND CASINO, LLC........................ $122,861 $ 96,949
MGM GRAND - BALLY'S MONORAIL, LLC................................ 11,164 11,172
-------- --------
$134,025 $108,121
======== ========
37
The changes in the Company's investments in unconsolidated affiliates were as
follows:
(IN THOUSANDS)
New York - New York Hotel and Casino, LLC 1998 1997
---------- ---------
INVESTMENT AT JANUARY 1,............................ $ 96,949 $ 60,943
EARNINGS............................................ 30,032 44,003
DISTRIBUTIONS RECEIVED.............................. (4,120) (15,160)
ADDITIONAL INVESTMENTS.............................. - 7,000
OTHER, NET.......................................... - 163
---------- ---------
INVESTMENT AT DECEMBER 31,.......................... $ 122,861 $ 96,949
========== =========
(IN THOUSANDS)
MGM Grand-Bally's Monorail, LLC 1998 1997
---------- ---------
INVESTMENT AT JANUARY 1,............................ $ 11,172 $ 11,953
COSTS OF OPERATIONS................................. (808) (808)
ADDITIONAL INVESTMENT............................... 800 27
---------- ---------
INVESTMENT AT DECEMBER 31,.......................... $ 11,164 $ 11,172
========== =========
NOTE 8. OTHER ACCRUED LIABILITIES
---------------------------------
Other accrued liabilities consisted of the following:
(IN THOUSANDS)
AT DECEMBER 31, 1998 1997
---------- ---------
ACCRUED SALARIES AND RELATED........................ $ 38,422 $ 35,115
CASINO FRONT MONEY.................................. 24,945 26,393
CASINO CHIP LIABILITY............................... 12,198 17,204
OTHER LIABILITIES................................... 40,216 32,241
---------- ---------
$ 115,781 $ 110,953
========== =========
NOTE 9. LONG TERM DEBT
-----------------------
Long term debt consisted of the following:
(IN THOUSANDS)
AT DECEMBER 31, 1998 1997
-------- --------
6.95% SENIOR COLLATERALIZED NOTES DUE FEBRUARY 1, 2005.... $300,000 $ -
6.875% SENIOR COLLATERALIZED NOTES DUE FEBRUARY 6, 2008... 200,000 -
AUSTRALIAN HOTEL/CASINO LOAN DUE DECEMBER 1, 2002......... 44,874 57,830
SENIOR REDUCING REVOLVING CREDIT FACILITY................. - -
-------- --------
544,874 57,830
LESS: CURRENT MATURITIES.................................. (10,077) (10,589)
-------- --------
$534,797 $ 47,241
======== ========
Total interest incurred during 1998, 1997 and 1996 was $40.1 million, $9 million
and $40.8 million, respectively, of which $15.5 million, $7.8 million and $7
million were capitalized in 1998, 1997 and 1996, 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
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 11.75% 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
38
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 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 income
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, 1998, the Company's borrowing rate was
approximately 5.8%. 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, 1998, $31 million was drawn down and repaid against the
New Facility and no amounts remained outstanding as of December 31, 1998.
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. These Senior Collateralized Notes are pari passu with
the New Facility and contain various restrictive covenants as does the New
Facility. The Senior Collateralized Notes and the New Facility are
collateralized by substantially all the assets of the Company except for assets
of certain unrestricted subsidiaries. Based on the quoted market value of the
Senior Collateralized Notes at December 31, 1998, the fair value of the 7-year
and 10-year tranches were $280.5 million and $179.9 million, respectively.
On September 7, 1995, the Company completed the acquisition of MGM Grand
Australia (formerly the Diamond Beach Hotel/Casino) in Darwin, Australia. The
acquisition cost was financed by an Australian bank facility which provided a
total availability of approximately $64.4 million (AUD $105 million) and
includes funding for general corporate purposes. During 1998, the facility was
reduced by principal payments totaling $9.7 million (AUD $15.6 million) made in
accordance with the terms of the bank facility, and as of December 31, 1998,
$44.9 million (AUD $73.2 million) remained outstanding. Interest on the
Australian facility is based on the bank bill rate and was approximately 5.3%
and 5.8% as of December 31, 1998 and 1997, respectively. The facility matures in
December 2002, and the indebtedness has been guaranteed by the Company.
MGM Grand Australia has a $12.3 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, 1998, no amounts were borrowed
under the line of credit and no amounts were outstanding as of December 31,
1998, and 1997, respectively. Maturities of the Company's long-term debt are as
follows:
(IN THOUSANDS)
YEARS ENDING DECEMBER 31
1999.................................. $ 10,077
2000.................................. 10,077
2001.................................. 10,151
2002.................................. 14,569
THEREAFTER............................ 500,000
--------
TOTAL................................. $544,874
========
39
On September 15, 1995, NYNY LLC completed its bank financing for up to $225
million (see Note 1), 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. On October 8, 1998, the NYNY LLC five-year reducing revolver
was amended and reduced to $210 million. 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, 1998,
$178.5 million was outstanding under the facility. During 1998, $66.6 million in
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, 1998, $14.4 million remained outstanding related
to the equipment financing.
As of December 31,1998, the Company was in compliance with all covenant
provisions associated with the aforementioned obligations.
NOTE 10. COMMITMENTS AND CONTINGENCIES
---------------------------------------
The Company and its subsidiaries lease buildings and equipment under non-
cancelable operating lease agreements which expire at various times through the
year 2003. The leases generally provide that the Company pay taxes, insurance
and maintenance expenses related to leased assets.
At December 31, 1998, the Company was obligated under non-cancelable
operating leases and capital leases to make future minimum lease payments as
follows:
[Download Table]
(IN THOUSANDS)
YEARS ENDING DECEMBER 31, OPERATING CAPITAL
LEASES LEASES
--------- ----------
1999................................................ $ 643 $ 5,372
2000................................................ 519 3,047
2001................................................ 429 -
2002................................................ 429 -
2003................................................ 429 -
THEREAFTER - -
--------- ----------
TOTAL MINIMUM LEASE PAYMENT......................... $ 2,449 8,419
=========
AMOUNT REPRESENTING INTEREST........................................ (466)
----------
TOTAL OBLIGATION UNDER CAPITAL LEASES............................... 7,953
LESS: AMOUNT DUE WITHIN ONE YEAR................................... (5,086)
----------
AMOUNT DUE AFTER ONE YEAR........................................... $ 2,867
==========
Rental expense on the non-cancelable operating leases was $1.7 million, $2.5
million and $3.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
40
NOTE 11. STOCKHOLDERS' EQUITY
------------------------------
On July 2, 1996, the Company completed a public offering (the "Offering") of 8.6
million shares of commom stock (including an underwriter's over allotment option
to purchase 1.1 million shares of commom stock). Based on 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 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.
On June 23, 1998, the Company announced a $35.00 per share cash tender
offer for up to 6 million shares of Company commom stock as part of a 12 million
share repurchase program. The offer commenced on July 2, 1998 and expired on
July 31, 1998. Based upon final results, 10.8 million shares of the Company's
common stock were tendered, and accordingly, the shares were prorated. The total
acquisition cost of the tendered shares was approximately $210.6 million. The
company anticipates that, depending on market conditions, the remaining 6
million shares in the repurchase program may be acquired in the open market, in
private transactions, through a tender offer, offers otherwise.
NOTE 12. COMPREHENSIVE INCOME
------------------------------
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income, requires that the Company disclose comprehensive income
and its components. The objective of SFAS 130 is to report a measure of all
changes in equity of a company that result from transactions and other economic
events of the period other than transactions with stockholders. Comprehensive
income is the total of net income and all other non-stockholder changes in
equity ("Other Comprehensive Income").
The Company has recorded currency translation adjustments as Other
Comprehensive Income in the accompanying financial statements. Comprehensive
income is calculated as follows:
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998 1997
--------- ---------
NET INCOME ................................. $ 68,948 $ 111,018
CURRENCY TRANSLATION ADJUSTMENT ............ 2,688 14,422
--------- ---------
COMPREHENSIVE INCOME ....................... $ 71,636 $ 125,440
========= =========
41
NOTE 13. EARNINGS PER SHARE
----------------------------
The Company accounts for Earnings per Share according to Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). 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
pursuant to the Company's stock option plans (see Note 14) are exercised and
repurchased at the average price for the periods presented.
(IN THOUSANDS EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1998 1997 1996
--------- --------- ---------
NET INCOME ............................... $ 68,948 $ 111,018 $ 43,706
========= ========= =========
WEIGHTED AVERAGE BASIC SHARES ............ 55,678 57,475 52,759
========= ========= =========
BASIC EARNINGS PER SHARE ................. $ 1.24 $ 1.93 $ 0.83
========= ========= =========
WEIGHTED AVERAGE DILUTED SHARES .......... 56,342 58,835 54,257
========= ========= =========
DILUTED EARNINGS PER SHARE ............... $ 1.22 $ 1.89 $ 0.81
========= ========= =========
Weighted average diluted shares include the following: options to purchase
approximately 664,000, 877,000, and 962,000 shares issued pursuant to the
Company's stock option plans (see Note 14) for the years ended December 31,
1998, 1997 and 1996, respectively; employee grant shares of approximately 29,000
and 22,000 for the years ended December 31, 1997 and 1996, respectively (see
Note 11); and DKP shares of approximately 454,000 and 514,000 for the years
ended December 31, 1997 and 1996, respectively (see Note 11).
NOTE 14. 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 shares. The Company had granted
options of approximately 5.6 million shares through December 31, 1998.
The plans are administered by the Compensation and Stock Option
Committee of the 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.
On June 22, 1998, the Compensation and Stock Option Committee of the
Board of Directors approved an offer to employees to reprice their out-of-the-
money options (covering an aggregate of 1,820,950 shares). The original options
had exercise prices ranging from $33.1875 to $44.125, and the new options have
an exercise price of $26.625. For holders who accepted the new price, certain
conditions were adopted including (1) commencement of a new holding period for
vesting of options (whether or not the initial options had vested) and (2) a
one-year extension of employee employment contracts, at the Company's option,
where applicable. The repricing offer was not made to the Company's outside
directors. Such repricing did not affect options held by the Chairman or the
President of the Company.
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:
42
(IN THOUSANDS) 1998 1997 1996
---------- ----------- ----------
Net income:
AS REPORTED ................. $ 68,948 $ 111,018 $ 43,706
========= ========== ==========
PRO FORMA ................... $ 66,047 $ 110,235 $ 34,981
========= ========== ==========
Basic earnings per share:
AS REPORTED ................. $ 1.24 $ 1.93 $ 0.83
========= ========== ==========
PRO FORMA ................... $ 1.19 $ 1.92 $ 0.66
========= ========== ==========
Diluted earnings per share:
AS REPORTED ................. $ 1.22 $ 1.89 $ 0.81
========= ========== ==========
PRO FORMA ................... $ 1.17 $ 1.87 $ 0.64
========= ========== ==========
A summary of the status of the Company's fixed stock option plan for each of the
years in the period ended December 31, 1998, 1997 and 1996 is presented below
(there are no options outstanding under the Incentive Stock Option Plan):
[Enlarge/Download Table]
1998 1997 1996
-------------------------- --------------------------- -----------------------
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.. 3,642 $28.82 3,213 $27.26 3,102 $22.67
GRANTED....................... 3,167 $29.21 727 $36.26 765 $35.12
EXERCISED..................... (49) $27.11 (72) $15.09 (414) $11.92
FORFEITED..................... (2,059) $36.41 (226) $35.19 (240) $26.35
EXPIRED....................... - $ - - $ - - $ -
------- ----- -----
OUTSTANDING AT END OF THE YEAR........ 4,701 $25.78 3,642 $28.82 3,213 $27.26
======= ===== =====
EXERCISABLE AT END OF THE YEAR........ 1,359 $23.89 783 $24.24 220 $14.38
======= ===== =====
WEIGHTED AVERAGE FAIR VALUE
OF OPTIONS GRANTED............ $13.61 $16.98 $22.89
====== ====== ======
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/1998 LIFE (YEARS) PRICE AT 12/31/1998 PRICE
-------------- ------------ --------- ------------- ----------
$10.25 -$20.00 ........... 241,700 2.5 $ 12.82 233,700 $ 12.61
$20.01 -$25.00 ........... 626,350 8.0 $ 24.41 144,900 $ 24.40
$25.01 -$30.00 ........... 3,639,800 8.2 $ 26.39 945,100 $ 26.09
$30.01 -$35.00 ........... 109,100 8.6 $ 32.99 4,000 $ 34.25
$35.01 -$40.00 ........... 56,425 7.9 $ 35.49 14,825 $ 35.63
$40.01 -$45.00 ........... 27,400 6.1 $ 40.84 16,200 $ 40.95
---------- -------- -------- --------- --------
4,700,775 7.9 $ 25.78 1,358,725 $ 23.89
========== -------- ======== ========= ========
43
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 1998, 1997 and 1996, respectively; risk-free
interest rates 6%, 6%, and 6.1%, respectively; no expected dividend yields for
the years presented; expected lives of 6 years for all years; and expected
volatility of 36% for 1998, 38% for 1997, and 39% for 1996.
The Company has agreements with 138 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 4.7 million, of which 4.6 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.
NOTE 15. 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 pre-tax 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, 1998, 1997 and 1996, MGM Grand Hotel, Inc.
contributions under this arrangement were $4.1 million, $3.4 million, and $3.1
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 pre-tax 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 Note 1), 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 1998, MGM Grand Australia contributed under these arrangements $269,000
and $547,000 for the executive employees and staff, respectively. 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.
44
NOTE 16. MASTER PLAN ASSET DISPOSITION
--------------------------------------
During 1997, the Company enhanced and increased the Master Plan to approximately
$570 million, and wrote off assets with a net book value of $28.6 million (pre-
tax) which included the original swimming pool facility, to be replaced by the
Mansion at the MGM Grand consisting of 29 exclusive suites and villas, and
certain theme park assets. 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 the newly
completed Conference Center and 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, 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 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, 1998, 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,
1998.
The provision for income taxes and income from continuing operations
before extraordinary item for the years ended December 31, 1998, 1997 and 1996
is as follows:
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998 1997 1996
---------- ----------- ----------
CURRENT - FEDERAL.................. $ 24,791 $ 14,207 $ 31,014
DEFERRED - FEDERAL................. 15,789 50,838 (6,380)
---------- ----------- ----------
PROVISION FOR INCOME TAXES..... $ 40,580 $ 65,045 $ 24,634
========== =========== ==========
Reconciliation of the Federal income tax rate and the Company's effective tax
rate is as follows:
YEARS ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
FEDERAL INCOME TAX RATE ........... 35.0% 35.0% 35.0%
PERMANENT AND OTHER ITEMS.......... 2.0 1.1 6.2
CHANGES IN VALUATION ALLOWANCE..... - - (16.4)
---- ---- ----
EFFECTIVE TAX RATE................. 37.0% 36.1% 24.8%
==== ==== ====
45
As of December 31, 1998, the major tax affected components of the Company's net
deferred tax liability are as follows:
(IN THOUSANDS) 1998 1997
------ --------
Deferred Tax Assets
NET OPERATING LOSS CARRYFORWARD.... $ - $ 1,929
BAD DEBT RESERVE................... 12,234 6,586
HOTEL PREOPENING EXPENSES.......... - 2,781
TAX CREDIT CARRYFORWARDS........... 29,492 27,219
-------- --------
41,726 38,515
-------- --------
Deferred Tax Liabilities
DEPRECIATION AND AMORTIZATION...... (75,532) (65,144)
ACCRUALS, RESERVES AND OTHER....... (9,261) (1,908)
-------- --------
(84,793) (67,052)
-------- --------
Net Deferred Tax (Liability) Asset......... $(43,067) $(28,537)
======== ========
For U.S. Federal income tax return purposes, the Company has an alternative
minimum tax credit carryforward of $26 million which does not expire, and a
general business tax credit carryforward of $3.5 million which expires in
different periods through 2012.
NOTE 18. 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 $2 million, $1.5 million, and $1.3
million to the joint venture as part of its operating contribution during 1998,
1997 and 1996, respectively.
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 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 1998 and 1997,
approximately $.4 million and $.5 million, respectively, were 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 $.1 million and $.2 million during 1998 and 1997, 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 for each of 1998 and 1997. The Company and NYNY have entered
into various other transactions and
46
arrangements which, individually and in the aggregate, are not material.
For the years ended December 31, 1998, and 1997, the Company and its
subsidiaries rented aircraft from Tracinda for various business purposes. The
aggregate amount of rental payments were $.3 million and $.5 million,
respectively, and the rent payments were at rates which management believes are
generally below those offered by third parties. The Company and Tracinda have
entered into various other transactions and arrangements which, individually and
in the aggregate, are not material.
During 1998, the Company made no additional contributions to NYNY LLC,
compared with $7 million during 1997. The Company received approximately $4.1
million and $15.2 million in distributions from NYNY LLC during 1998 and 1997,
respectively, to pay taxes on its allocated share of income.
In August 1998, Tracinda agreed to sell its building and land
(approximately .56 acre located in Las Vegas, Nevada) to the Company's
subsidiary, MGM Grand Hotel, Inc., for $1.8 million. The Company, based on
appraisals it received, believes that this purchase was on terms comparable to
what it could have obtained for the land and building on an arms-length basis in
an equivalent transaction with a third party.
Pursuant to an agreement dated December 23, 1996, between MGM Grand Hotel,
Inc. and MGM Home Entertainment, Inc. ("MGM-HE"), a California-based motion
picture studio in which Tracinda has an approximate 89.6% 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-HE motion picture video cassettes for availability in one
or more retail venues. During 1998 and 1997, MGM Grand Hotel, Inc. purchased
video cassettes and other MGM-HE merchandise of approximately $.1 million and
$.3 million, respectively, 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 1998 to MGM-HE which, individually
and in the aggregate, are not material.
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.
During the three-year periods ended December 31, 1998, 1997 and 1996, the
Company and MGM-HE have entered into various other transactions and arrangements
which, individually and in the aggregate, are not material.
NOTE 19. PROPERTY PERFORMANCE
-----------------------------
The Company operates in the hotel/casino industry 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 1), its 50%
interest in NYNY LLC, which commenced operations on January 3, 1997 (see Notes 1
and 20), MGM Grand South Africa manages three temporary casinos one each in
Nelspruit (opened on October 15, 1997), Witbank (opened on March 10, 1998) and
Johannesburg (opened on September 28, 1998) (see Note 1). Sales between
properties are immaterial and generally at prices approximately equal to those
charged to unaffiliated customers.
47
[Enlarge/Download Table]
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
----------- ----------- -----------
Net revenues:
HOTEL/CASINO............................................ $ 735,501 $ 773,797 $ 800,189
INCOME FROM UNCONSOLIDATED AFFILIATE.................... 38,362 53,800 -
----------- ----------- -----------
$ 773,863 $ 827,597 $ 800,189
=========== =========== ===========
Operating income (loss):
HOTEL/CASINO............................................ $ 103,901 $ 169,160 $ 196,585
INCOME FROM UNCONSOLIDATED AFFILIATE.................... 38,362 53,800 -
MASTER PLAN ASSET DISPOSITION........................... - (28,566) (49,401)
CORPORATE EXPENSE....................................... (10,689) (3,424) (10,022)
PREOPENING AND OTHER - UNCONSOLIDATED AFFILIATE......... - - (7,868)
----------- ----------- -----------
$ 131,574 $ 190,970 $ 129,294
=========== =========== ===========
Identifiable assets:
HOTEL/CASINO............................................ $ 1,719,436 $ 1,390,215 $ 1,254,602
CORPORATE............................................... 54,358 8,159 33,087
----------- ----------- -----------
$ 1,773,794 $ 1,398,374 $ 1,287,689
=========== =========== ===========
Capital expenditures:
HOTEL/CASINO............................................ $ 349,131 $ 227,658 $ 84,544
CORPORATE............................................... 12,811 98 231
----------- ----------- -----------
$ 361,942 $ 227,756 $ 84,775
=========== =========== ===========
Depreciation and amortization:
HOTEL/CASINO............................................ $ 76,284 $ 64,104 $ 62,196
CORPORATE............................................... 428 140 127
----------- ----------- -----------
$ 76,712 $ 64,244 $ 62,323
=========== =========== ===========
NOTE 20. SUBSEQUENT EVENTS (UNAUDITED)
--------------------------------------
During December 1998, the Company and Primadonna entered into a definitive
merger agreement whereby MGM Grand, Inc. would acquire Primadonna in an all
stock transaction plus the assumption of debt. The terms of the merger provided
for Primadonna's stockholders to receive 0.33 shares of the Company's common
stock for each share of Primadonna stock held, or a total of approximately 9.5
million shares of MGM Grand, Inc. common stock.
On March 1, 1999, the merger with Primadonna was completed making
Primadonna a wholly-owned subsidiary of the Company. Primadonna owns and
operates three hotel/casino resorts on both sides of Interstate 15 at the
California/Nevada border in Primm, Nevada (Whiskey Pete's, Buffalo Bill's and
the Primm Valley Resort), a 50% interest in NYNY LLC (which now becomes 100%
owned by the Company) and two championship golf courses located four miles south
of Primm in California. The Primm, Nevada hotel/casinos are located on
approximately 143 acres of leased land. Primadonna owns approximately 16 acres
of land in Nevada immediately north of Buffalo Bill's and approximately 573
acres of land in California where the golf courses are located. Approximately
125 of these acres are available for future development.
As of March 1, 1999, the Company assumed approximately $315 million of long
term debt related to the Primadonna acquisition, which includes Primadonna's 50%
share of NYNY LLC's long-term debt.
On February 24, 1999, the Company, along with its Detroit partners,
received commitments from a consortium of banks for a new five-year $230 million
credit facility. Approximately two-thirds of the commitments are from Michigan-
based banks, mostly from the greater metropolitan Detroit area. The facility may
be increased to $250 million at the Company's discretion. Proceeds from the new
facility will be used to finance the development and construction of the
temporary and permanent casino complexes and for general working capital. The
facility will be secured by substantially all of the assets of MGM Grand
Detroit, LLC's temporary facility and will be guaranteed by the Company.
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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, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
February 1, 1999
49
Dates Referenced Herein and Documents Incorporated by Reference
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