MGM GRAND INC.
1996 ANNUAL REPORT
MGM Grand, Inc. is an entertainment, hotel and gaming company
headquartered in Las Vegas, Nevada.
The Company owns and operates the MGM Grand Hotel/Casino in Las
Vegas; MGM Grand Australia, a hotel and casino in the city
of Darwin; and owns a 50% interest in New York-New York, a
2,033-room hotel and casino which opened in Las Vegas on
January 3, 1997.
MGM Grand, Inc. is listed on the New York Stock Exchange. Its
trading symbol is MGG.
TO OUR STOCKHOLDERS/OWNERS:
By any measure, 1996 was a great year for your Company!
MGM Grand's 1996 results set several Company records: Total net revenues were
$805 million, an 11% increase over 1995; gaming revenues were $482 million, a
19% increase over 1995; room revenues were $174 million, a 9% increase over
1995; EBITDA (earnings before interest, taxes, depreciation and amortization)
was $259 million, a 52% increase over 1995; and, despite having 18.7% more
shares outstanding, earnings per share (before one-time charges and on a fully-
taxed adjusted basis) reached $1.86, an increase of 200% over 1995. In addition
to accomplishing these record results, the Company's EBITDA margin (the most
frequently used yardstick to measure operating efficiency in our industry)
soared from 23.5% in 1995 to 32.2% in 1996. It is now among the highest in
our industry.
These results were achieved by redefining our core values and by creating an
organization-wide focus on earnings. We were still managing the same physical
assets, but challenges can turn people into superb innovators. Mae West was
right when she said: "It's not what you've got, it's what you do with what
you've got."
The Company's dramatic earnings results afforded us the opportunity to
refinance our entire capital structure. In June of 1996, we raised $327 million
of net equity proceeds. Together with free cash flow from operations, the
equity proceeds were used to defease $473 million of high yield bonds. A
consortium of 28 banks provided us with a $600 million credit line (which has
since been increased to $1 billion) at just over a 6% interest rate. The
result of this financial reengineering is that by the end of the year we had
almost $1 billion in equity, virtually no debt, and a $1 billion unused credit
line to finance your Company's growth. The nation's leading rating agencies have
recognized these financial improvements. Moody's upgraded our credit line rating
to investment grade (Baa3), and Standard & Poor's raised the Company's overall
credit rating to BB+ (just one level below investment grade).
There was substantial other good news at MGM Grand in 1996. In April, we
announced a master plan for the transformation of the MGM Grand Hotel/Casino,
our flagship 113-acre complex in Las Vegas, into "The City of Entertainment."
In July, there were several significant developments. We announced an agreement
to acquire an interest in 30 acres of prime property on the Atlantic City
Boardwalk, with the intention of developing it into a world-class destination
resort. A few weeks later the Company was found suitable for licensing by the
New Jersey Casino Control Commission. Also late that month, we announced an
agreement with South African partners, including one of the largest public
companies in the Republic of South Africa, to jointly bid for approximately 15
casino gaming licenses in that country. So far we have applied for two of those
licenses, and we are pleased to report that we have been selected for both!
In November 1996, the voters in Michigan surprised many people by narrowly
passing a referendum for the development of three casinos in the City of
Detroit. Since we are strong believers in the demographics and psychographics of
the Detroit market, in February of this year we announced the
3
formation of a joint venture between MGM Grand and a distinguished group of
civic, community and business leaders in Detroit to jointly pursue a license to
own and operate a casino in this dynamic marketplace.
One of the most significant developments for our Company occurred in Las Vegas
on January 3, 1997, when we opened New York-New York Hotel & Casino, of which
MGM Grand owns a 50% interest. The opening was highly successful, and the
initial operating results have exceeded even the most optimistic expectations.
All of these accomplishments are significant events in laying the foundation for
the implementation of your Company's growth strategy.
As great as 1996 was, not everything went as planned. Our property in Darwin,
Australia is not yet generating an acceptable return on our investment.
Although the Australian gaming market overall has suffered dramatically since we
acquired the property, our focus is on making progress, not excuses.
We are disappointed to report that Lee Iacocca, a distinguished member of our
Board of Directors, chose to not stand for reelection in 1997 due to his
significantly increased time commitments to other business interests and
charitable activities. We will surely miss Lee's insights and marketing genius.
Our Company's fundamental objective, of course, continues to be the enhancement
of shareholder value. In order to accomplish this objective, we believe that
there are three indispensable ingredients - continued strong and predictable
earnings; a well articulated and properly executed growth strategy;
[PHOTO]
Alex Yemenidjian, left, and J. Terrence Lanni with two new cast members at the
MGM Grand Hotel/Casino in Las Vegas.
and the creation of high performance teams with a dedication to a common
purpose.
Energized by a sense of commitment, we are setting more ambitious performance
goals. Every product, every service, every cause that has a competitor is a
brand that needs to define and defend its uniqueness. We intend to differentiate
the MGM Grand brand by focusing on our financial assets, our physical assets,
and our human assets.
The Company's financial assets consist of our own capacity to earn, our ability
to continue to achieve profit margins among the highest in the industry, and our
ability to further reduce the cost of capital. Our commitment to you is that the
MGM Grand team will retain its performance ethic and continue to excel in all
these areas.
In our physical assets, the goal is to have a growing collection of gems. We
already have the MGM Grand Hotel/Casino, our City of Entertainment, and
New York-New York in Las Vegas. The future promises to bring MGM Grand
Atlantic City and, hopefully, another gem in Detroit. The objective is to create
environments that have an ambiance and a glow that are irresistible. Yale's
Robert Venturi once called it "the architecture of persuasion."
Our human assets - comprising thousands of dedicated people - are responsible
for the creation of the Company's financial and physical assets. We thank all of
them for our success. Money does not think, and buildings do not create. To
paraphrase Warren Buffet, a business without good management is like the Eiffel
Tower without an elevator. On various occasions, publicly and privately, we have
said we would not trade our management team for any other in the industry, bar
none. Our management makes up your Company's intellectual capital and
consistently delivers the ultimate winning formula - a superior customer
experience.
What we are committed to - and what we promise you - is that the Company's
fortunes are aligned with yours. We also intend to heed the advice of Aristotle:
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."
Sincerely,
/s/ J. Terrence Lanni
J. Terrence Lanni
Chairman of the Board &
Chief Executive Officer
/s/ Alex Yemendijian
Alex Yemendijian
President, Chief Operating Officer &
Chief Financial Officer
March 20, 1997
New York-New York Hotel & Casino opened to worldwide acclaim in January 1997.
The resort, 50%-owned by MGM Grand, Inc., recreates the classic Manhattan
skyline, complete with 12 skyscrapers housing 2,033 guest rooms and suites. The
Empire State Building, the tallest hotel tower, rises 47 stories. Among the many
New York icons depicted at this unique resort are a 150 foot-tall Statue of
Liberty and a Coney Island-style roller coaster. Located across the famed Las
Vegas Strip at the city's busiest four corners, New York-New York is directly
attached to the MGM Grand Hotel/Casino via a pedestrian walkway.
Lift Page at Right
[PHOTO]
The spires of the Brooklyn Bridge provide another nostalgic scene at New
York-New York. The resort's replica of the famous span is 300 feet long.
[PHOTO]
Celebrated actor George Hamilton has created a specialty cigar shop - Hamiltons
Las Vegas - evoking the spirit of the past as well as present.
[PHOTO]
The New York-New York limousines have the flavor of the yellow Checker cabs made
famous on the streets of Manhattan.
[PHOTO]
The 84,000-square-foot New York-New York casino is nearly the size of two
football fields and features some 2,400 slot machines and 71 gaming tables.
Central Park and other Big Apple landmarks are featured in the resort's
interior.
[PHOTO]
The music, magic and memories of Motown are captured in The Motown Cafe at New
York-New York.
[PHOTO]
Gallagher's Steakhouse, a New York City landmark since 1927, is now a fixture at
New York-New York as well.
[PHOTO]
The Manhattan Express roller coaster circling the resort rises as high as 20
stories with a maximum drop of 144 feet. It is the first ride in history to
feature a "heartline twist and dive maneuver" which has drawn coaster
aficionados from around the world.
The Brown Derby, world-famous gathering spot for Hollywood celebrities during
the golden era of motion pictures, is today replicated on the MGM Grand's new
Studio Walk. Aside from the Derby's renowned Cobb salad, the restaurant offers
the best steaks and convivial atmosphere in town, and is decorated with
celebrity portraits that adorned the walls of the original Brown Derby.
Lift Page at Right
[PHOTO]
Among the new retail outlets along Studio Walk is Peruzzi, featuring high
fashion jewelry for men and women.
[PHOTO]
The Studio Walk at the MGM Grand is themed to portray a studio setting with a
klieg-lighted ceiling and facades of retail stores and fine restaurants designed
to provide an entertainment ambiance. Many of the facades depict Hollywood
landmarks.
[PHOTO]
The Art of Entertainment, a Company-owned eclectic gallery, provides
discriminating buyers an opportunity to acquire works by leading contemporary
artists, including many from the world of entertainment.
[PHOTO]
The MGM Grand Athletic Club retail store offers casual and athletic apparel for
the entire family as well as a variety of sports collectibles and memorabilia.
[PHOTO]
Gatsby's, above, MGM Grand's newest gourmet restaurant, serves a blend of
French cuisine with a California flair. The restaurant also has three separate
wine cellars, temperature controlled for whites, reds and champagnes, with more
than 600 collections representing every wine region in the world.
The City of Entertainment once again lived up to its star-studded billing during
1996. At right is a backstage view of the $45 million stage spectacular "EFX,"
starring David Cassidy (shown above). Superstars of both stage and sport graced
MGM Grand showrooms and arena during the year. To name a few: Gloria Estefan,
Jimmy Buffett, KISS, The Who, Sting, Bob Seger, Rod Stewart, Rodney Dangerfield,
Wayne Newton, the Righteous Brothers, the Four Tops, Carrot Top, Stomp, Evander
Holyfield and Mike Tyson.
Lift Page at Right
[PHOTO]
In November 1996, more than 16,000 fans as well as news media from throughout
the world jammed the MGM Grand Garden Arena to watch Evander Holyfield knock out
Mike Tyson for
[PHOTO]
the heavyweight championship of the world, one of the biggest upsets in the
history of boxing. Holyfield-Tyson II will again attract international attention
on May 3, 1997.
[PHOTO]
Neil Diamond made his first Las Vegas appearance in more than 20 years with a
three-night engagement at the MGM Grand Garden Arena in late 1996.
[PHOTO]
Gladys Knight
[PHOTO]
SkyScreamer, above, the world's largest Skycoaster, provides unique, thrilling
entertainment for those MGM Grand guests who are especially stout of heart. In
this Grand Adventures ride which opened in September 1996, one-to-three flyers
are lifted 220 feet into the air. They then pull their own ripcord which turns
into a freefall of approximately 10 stories followed by a swing at speeds up to
70 miles per hour.
[PHOTO]
Tom Jones, left, and Gladys Knight, above, are among the regulars in the
Hollywood Theatre. The Tonight Show with Jay Leno returned to the MGM Grand
early this year with a week of telecasts originating from the Hollywood Theatre.
MGM Grand is dedicated to enhancing its operations through the revitalization of
existing properties as well as seeking opportunities in emerging or potential
markets. During the past year the Company announced plans to build a destination
resort in Atlantic City, New Jersey; formulated plans to seek a gaming license
in Detroit, Michigan; and is actively involved with a joint venture pursuing
licenses in the Republic of South Africa.
Lift Page at Right
[PHOTO]
The famed Atlantic City Boardwalk, shown in this vintage photograph (left) first
gained prominence as a summer resort in the mid-1800s. The Boardwalk was
revitalized in the late 1970's and has since become a major attraction as a
year-round gaming resort.
[PHOTO]
A joint venture involving the Company and South African partners was selected
for licensing in the cities of Nelspruit and Witbank (red dots at right), in the
northeastern portion of the country. MGM Grand
[PHOTO]
will be responsible for development and management of casino projects undertaken
by the joint venture which plans to apply for approximately 15 gaming licenses
in all nine provinces of South Africa.
[MAP OF SOUTH AFRICA]
MAJOR CITIES IN SOUTH AFRICA
1 Nelspruit
2 Witbank
3 Sandton - Johannesburg
4 Pretoria
5 Durban
6 Pietermaritzburg
7 Bloemfontein
8 Cape Town
9 Port Elizabeth
10 East London
11 Kimberley
12 Pietersburg
[PHOTO]
The Company has announced plans to build a world-class destination resort on a
parcel of land, shaded in red above, at the southeast end of the famed Boardwalk
in Atlantic City. MGM Grand, Inc. was found
[PHOTO]
suitable for licensing by the New Jersey Gaming Control Commission during 1996
and has subsequently been acquiring property in this area.
Performance at a Glance:
Net Revenues Cash Flow from Operating Activities Debt to Equity Percentage
In thousands In thousands
$850,000 $250,000
1994 742,195 1994 94,461 1994 47.2%
1995 721,843 1995 114,544 1995 48.5%
1996 804,814 1996 245,151 1996 7.9%
EBITDA* EBITDA* Margin Percentage Coverage Ratio
(EBITDA*/Interest Charges)
In thousands
$300,000
1994 181,827 1994 24.5% 1994 2.9
1995 169,837 1995 23.5% 1995 2.7
1996 259,072 1996 32.2% 1996 6.3
Adjusted Earnings Per Share**
1994 0.97%
1995 0.62%
1996 1.86%
* EBITDA consists of net income plus net interest expense, taxes, depreciation
and amortization, one-time charges (which consists of Master Plan asset
disposition, Preopening, Discontinued Operations and Extraordinary Item) and
Corporate expense.
**Adjusted earnings per share is derived using an assumed 36.5% tax rate and
excludes one-time charges related to the Master Plan asset disposition,
Discontinued Operations and Extraordinary Item.
[PHOTO] MGM GRAND, INC.
3799 Las Vegas Blvd. South
Las Vegas, Nevada 89109
(702) 891-3333
[PHOTO] MGM GRAND HOTEL/CASINO
3799 Las Vegas Blvd. South
Las Vegas, Nevada 89109
(702) 891-1111
Reservations
(702) 891-7777
(800) 929-1111 (outside
Nevada)
[PHOTO] MGM GRAND AUSTRALIA
Gilruth Avenue
Mindil Beach
Darwin, Northern Territory
0801 Australia
International Number
011-61-8-89438888
[PHOTO] NEW YORK-NEW YORK
3790 Las Vegas Blvd. South
Las Vegas, Nevada 89109
(702) 740-6969
Reservations
(702) 740-6900
(800) 693-6763
[LOGO OF MGM GRAND]
MGM GRAND, INC
3799 Las Vegas Blvd. South
Las Vegas, Nevada 89109
(702) 891-3333
Five-year Financial Highlights
(In thousands except share data)
For the Years Ended December 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
Net revenues $ 804,814 $ 721,843 $ 742,195 $ 37,016 $ --
Operating profit before non-recurring
items and corporate expense 196,876 114,522 137,481 6,124 --
Operating income (loss) 129,294 103,823 129,715 (44,546) (4,873)
Income (loss) before income taxes,
discontinued operations and
extraordinary item 99,151 46,565 73,540 (38,895) (6,340)
Net income (loss) 43,706 46,565 74,576 (117,586) (20,072)
Earnings (loss) per share:
Income (loss) before income taxes,
discontinued operations and
extraordinary item $ 1.37 $ 0.96 $ 1.50 $ (0.82) $ (0.15)
Discontinued operations -- -- 0.02 (1.65) (0.33)
Extraordinary item - loss on
defeasance of debt, net of
income tax benefit (0.57) -- -- -- --
Net income (loss) per share $ 0.80 $ 0.96 $ 1.52 $ (2.47) $ (0.48)
---------------------------------------------------------------------------
Average number of shares 54,235,000 48,544,000 48,988,000 47,587,000 42,254,000
At Year End
Total assets $ 1,287,689 $ 1,282,222 $ 1,153,511 $ 1,160,123 $ 1,063,486
Total debt 83,391 551,099 473,000 483,000 473,000
Stockholders' equity 973,382 584,548 529,379 481,755 526,782
Stockholders' equity per share $ 16.82 $ 11.98 $ 11.05 $ 9.86 $ 11.26
Number of shares at year end 57,884,000 48,775,000 47,925,000 48,845,000 46,803,000
The selected financial data above includes information for MGM Grand Las Vegas
which commenced operations on December 18, 1993, and MGM Grand Air until
December 31, 1994, when the company was sold.
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 Diamond Beach Hotel/Casino in
Darwin, Australia ("MGM Grand Australia"), which was acquired on September 7,
1995 (see Notes 1 and 16). Additionally, the Company's wholly-owned subsidiary
MGM Grand Atlantic City in Atlantic City, New Jersey is in the development stage
(see Note 1) and New York-New York Hotel and Casino in Las Vegas, Nevada
("NYNY"), owned by the Company's 50% joint venture partnership, was completed
prior to December 31, 1996 and commenced operations on January 3, 1997 (see Note
1). Airline operations have been reclassified for the years presented to
Discontinued Operations as a result of the sale of the airline on December 31,
1994 (see Note 17).
1996 Compared with 1995
Consolidated net revenues for the year ended December 31, 1996 were
$804,814,000, representing an increase of $82,971,000 (11.5%) when compared with
$721,843,000 for 1995. MGM Grand Las Vegas accounted for a majority of the
improved 1996 revenues, providing growth in every revenue segment over the prior
year, excluding food and beverage, due to the Company's 1995 restructuring plan
which included the conversion of three Company operated restaurants into leased
facilities (see Note 14). 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 16). Promotional allowances remained consistent
between years, reflecting management's focus on diversifying its customer mix.
Consolidated casino revenues were $481,710,000 for the year ended December 31,
1996, reflecting an increase of $76,968,000 (19.0%) compared with $404,742,000
for the prior year. MGM Grand Las Vegas primarily accounted for the increase,
where casino revenues of $450,402,000 were $52,954,000 (13.3%) above the prior
year of $397,448,000, reflecting improved win and win percentages in table
games, baccarat and slots. MGM Grand Australia casino revenues were $31,308,000
for 1996, reflecting a significant increase of $24,014,000 above the prior year,
which included shortened operating results due to the acquisition on September
7, 1995 (see Note 16).
Consolidated room revenues were $174,440,000 for 1996, reflecting an increase of
$13,970,000 (8.7%) above the prior year of $160,470,000. MGM Grand Las Vegas
reported room revenues of $172,447,000 for 1996, which were $12,395,000 (7.7%)
above the prior year of $160,052,000. This improvement reflected increased
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 $2,121,000, which were above the prior year by
$1,507,000, reflecting the shortened 1995 operating period.
Consolidated food and beverage revenues of $78,438,000 for the year ended
December 31, 1996 were $10,861,000 (12.2%) below the prior year of $89,299,000.
MGM Grand Las Vegas accounted for the reduction, where revenues of $71,974,000
for the 1996 year were $15,384,000 (17.6%) below the prior year of $87,358,000,
reflecting the effect of the conversion of three Company operated restaurants to
tenancies during the last half of 1995. MGM Grand Australia revenues of
$6,528,000 for the year ended December 31, 1996 were above the 1995 year by
$4,444,000, reflecting the shortened prior year operating results.
Consolidated entertainment, retail and other revenues for 1996 were
$126,475,000, representing an increase of $3,168,000 (2.6%) above the prior year
of $123,307,000. 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 MGM Grand
Adventures 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 of $607,938,000 for the year ended December 31,
1996 increased $617,000 when compared with the prior year of $607,321,000. MGM
Grand Las Vegas operating expenses for 1996 were $571,277,000, or $27,949,000
(4.7%) below the prior year of $599,226,000. Operating expenses as a percentage
of net revenues were
23 MGM Grand, Inc. and Subsidiaries
reduced from 84.1% in 1995 to 75.5% 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 $5,942,000
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 $37,352,000 for
the year ended December 31, 1996, representing a $28,634,000 increase above the
prior year of $8,718,000 as a result of the reduced 1995 operating period.
Consolidated operating profit (before non-recurring charges and Corporate
expense) was $196,876,000 for the year ended December 31, 1996, reflecting an
increase of $82,354,000 (71.9%) over $114,522,000 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 $195,558,000, representing an
increase of $81,996,000 (72.2%) over $113,562,000 in 1995. MGM Grand Australia
had operating income of $1,320,000 for the 1996 period, representing an increase
when compared with the prior year operating income of $936,000, 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 relates to 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 one-time pretax charge of $49,401,000 in the
1996 period (see Note 13).
Preopening and other - unconsolidated affiliate represents the Company's 50%
share of NYNY preopening expenses, which included direct salaries, marketing and
other costs incurred during the period through December 31, 1996, at which time
the hotel/casino was substantially complete. NYNY commenced operations on
January 3, 1997 (see Note 1).
Interest income and other. Interest income and other was $3,635,000 for the year
ended December 31, 1996, reflecting an increase of $1,564,000 (75.5%) from
$2,071,000 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 MGM Grand Hotel Finance Corp. First Mortgage Notes -
see Note 8), reflecting the higher operating cash flow when compared with the
prior year.
Interest expense. Interest expense (net of capitalized interest) for the year
ended December 31, 1996 was $33,778,000, reflecting a decrease of $25,551,000
(43.1%) when compared with $59,329,000 for 1995. The significant decrease
resulted from a combination of the defeasance of the MGM Grand Hotel Finance
Corp. First Mortgage Notes (see Note 8) 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.
Income taxes. The Company recorded an income tax provision of $24,634,000 at a
rate of 24.8% for the year ended December 31, 1996, compared with the prior year
when there was no provision due to the benefit resulting from the reduction of
the valuation allowance (see Note 15).
Extraordinary item. The Company recorded an extraordinary loss of $30,811,000,
net of income tax benefit of $17,710,000, reflecting the defeasance of the MGM
Grand Hotel Finance Corp. First Mortgage Notes (see Note 8).
1995 Compared with 1994
Consolidated net revenues for the year ended December 31, 1995 were
$721,843,000, representing a decrease of $20,352,000 (2.7%) compared with
$742,195,000 for the year ended December 31, 1994. The decrease in revenue was
primarily due to a reduction in casino revenues, offset by an increase in room
revenues.
MGM Grand, Inc. and Subsidiaries 24
Consolidated casino revenues for the year ended December 31, 1995 were
$404,742,000 compared with $434,297,000 for the year ended December 31, 1994,
representing a decrease of $29,555,000 (6.8%). MGM Grand Las Vegas casino
revenues were $397,448,000 for the year ended December 31, 1995 compared with
$434,297,000 in 1994, reflecting a decrease of $36,849,000 (8.5%). This decrease
in casino revenue was primarily due to an unusually high table game hold
percentage in 1994 and a marginal decrease in 1995 slot revenues, offset by an
increase in table game drop (excluding baccarat) for the year ended December 31,
1995. The 1995 period reflected the Company's strategy to emphasize the middle
market customer activity and reduce overall gaming volatility. MGM Grand
Australia casino revenues were $7,294,000 for the period since the acquisition
on September 7, 1995.
Consolidated room revenues for the year ended December 31, 1995 were
$160,470,000, compared with $145,196,000 for the year ended December 31, 1994,
representing an increase of $15,274,000 (10.5%). MGM Grand Las Vegas room
revenues were $160,052,000 for the year ended December 31, 1995, reflecting an
increase of $14,522,000 (10.0%) from $145,530,000 in 1994. The increase in room
revenue was primarily due to the increase in the average daily room rate from
$86 in 1994 to $98 in 1995, partially offset by a slightly lower occupancy
percentage of 90.6% for the year ended December 31, 1995 compared with 92.0% for
the year ended December 31, 1994. MGM Grand Australia room revenues were
$614,000 for the period since the acquisition on September 7, 1995.
Consolidated food and beverage revenues were $89,299,000 for the year ended
December 31, 1995, representing a decrease of $2,267,000 (2.5%) from $91,566,000
in 1994. MGM Grand Las Vegas food and beverage revenues were $4,207,000 (4.6%)
lower for the year ended December 31, 1995 when compared with 1994. This
decrease was attributable to the Company's restructuring plan which converted
three restaurants into leased facilities during the last half of 1995. MGM Grand
Australia food and beverage revenues were $2,084,000 for the period since
acquisition on September 7, 1995.
Consolidated entertainment, retail and other revenues were $123,307,000 for the
year ended December 31, 1995, reflecting an increase of $549,000 (.4%) from
$122,758,000 in 1994. MGM Grand Las Vegas entertainment, retail and other
revenues increased $811,000 (.7%) for the year ended December 31, 1995 when
compared with 1994, due to the opening of the EFX production show and the
addition of the Star Lane Shops retail mall, offset by lower revenue from the
Theme Park as well as fewer entertainment and sporting events in the MGM Grand
Garden arena. As part of its restructuring plan and in an effort to reduce
volatility at the MGM Grand Garden arena, the Company decreased the number of
self-sponsored events during 1995 in favor of "four-wall" venues, which
transfers the operating risk to the outside show producers.
Consolidated operating expenses were $607,321,000 for the year ended December
31, 1995, compared with $604,714,000 for the year ended December 31, 1994,
reflecting an increase of $2,607,000 (.4%). MGM Grand Las Vegas operating
expenses improved by $8,105,000 (1.3%) in 1995 when compared with 1994,
reflecting among other things, the outsourcing of three Company operated
restaurants in the second half of 1995, decreased room expenses due to the
Company's continuing cost containment efforts, lower Theme Park expenses and
fewer MGM Grand Garden arena events. The 1995 cost reductions were partially
offset by higher casino expenses reflecting increased national marketing
efforts, costs related to the Mike Tyson boxing events held at the MGM Grand
Garden arena, expenses related to the EFX production show which opened during
March 1995, and an increased provision for doubtful accounts and discounts on
reserves for specific customer accounts based on aging of casino receivable
balances. The reduction in 1995 operating expenses was also partially offset by
an increase in depreciation and amortization as a result of the additional EFX
production show equipment in the 1995 period, as well as the completion of the
Star Lane Shops retail mall and general property improvements. For the year
ended December 31, 1995, the Company incurred a one-time restructuring charge
against earnings of $5,942,000. This restructuring charge consisted primarily of
employee severance payments related to the Company's overall plan to reduce
costs and improve operating efficiencies at MGM Grand Las Vegas. MGM Grand
Australia operating expenses were $8,718,000 for the period from the acquisition
on September 7, 1995 through December 31, 1995.
Consolidated operating profit (before Corporate expense) was $114,522,000 for
the year ended December 31, 1995 compared with $137,481,000 for the year ended
December 31, 1994, representing a decrease of $22,959,000 (16.7%). The decrease
was primarily attributable to MGM Grand Las Vegas, where operating profit of
$113,562,000 for the 1995 period fell by $21,633,000 (16.0%) when compared with
$135,195,000 for 1994. MGM Grand Australia had an operating profit of $936,000
for the period from the acquisition on September 7, 1995 to December 31, 1995.
25 MGM Grand, Inc. and Subsidiaries
Interest income and other. Interest income and other was $2,071,000 for the 1995
year versus $5,752,000 for 1994. Interest income was higher during 1994 as a
result of the short term investment of undistributed construction funds.
Interest expense. Interest expense (net of capitalized interest) was $59,329,000
for 1995, compared with $61,927,000 for 1994. The reduction in interest expense
in 1995 was a result of increased 1995 interest capitalization of $4,317,000,
offset by an increase in interest expense of $2,307,000 related to MGM Grand
Australia.
Income taxes. The Company has not recorded a provision for income taxes due to
the utilization of tax benefits not realized in prior years, which have offset
any provision for the 1995 and 1994 periods (see Note 15).
Liquidity and Capital Resources
As of December 31, 1996 and 1995, the Company held cash and cash equivalents of
$61,412,000 and $110,017,000, respectively. Cash provided by operating
activities for 1996 was $245,151,000, compared with $114,544,000 for 1995.
During the year ended December 31, 1996, the Company utilized operating cash
flow to fund capital expenditures of $84,775,000, including $16,055,000 related
to the Master Plan project (see below) and $25,699,000 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 "Skycoaster"
theme park attraction. MGM Grand Australia expended $13,063,000 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 $29,727,000 for land acquisitions and
pre-construction activities. Also during 1996, the Company contributed
additional capital investment of $22,500,000 to the NYNY project (see below).
On May 6, 1996, the Company announced details for a 30-month, $250,000,000
Master Plan designed to transform MGM Grand Las Vegas into "The City of
Entertainment." The Master Plan features a series of integral additions and
improvements throughout the 113-acre destination resort property, including
refurbishment of the lion entry, the porte cochere, casino areas, luxury suites,
parking facilities, and the theme park. In addition, new facilities include a
convention center, additional entertainment/retail facilities and a second porte
cochere entrance. Approximately $16,055,000 has been expended through December
31, 1996 related to the Master Plan.
Capital expenditures in 1995 were $37,447,000, consisting of $30,441,000 for
expenditures related to MGM Grand Las Vegas for general property improvements
and construction of the Star Lane Shops retail mall, $6,881,000 at MGM Grand
Australia for upgraded accommodations, casino and restaurant remodels, and other
improvements, and $125,000 related to furniture, fixtures and equipment. Also
during 1995, the Company expended $3,050,000 on the MGM Grand - Bally's monorail
project, $36,500,000 on the NYNY project and $79,745,000 for the acquisition of
MGM Grand Australia (see Note 16). During 1995, MGM Grand Las Vegas also
expended $11,409,000 on the EFX production show.
Capital expenditures for 1997 are expected to be approximately $203,190,000. MGM
Grand Las Vegas expenditures for 1997 are expected to be approximately
$98,500,000 related to the Master Plan project and $55,135,000 for general
property and equipment improvements. MGM Grand Australia plans to expend
approximately $585,000 for general property and equipment improvements. MGM
Grand Atlantic City expenditures for 1997 are anticipated to be approximately
$48,970,000 for land acquisitions and initial construction activities.
On July 2, 1996, the Company completed a public offering (the "Offering") of
8,625,000 shares of common stock (including underwriters' over allotment option
to purchase 1,125,000 shares of common stock). Based upon the Offering price of
$39.50 per share and associated costs incurred, the net proceeds were
approximately $327,000,000. On July 3, 1996, the Company drew down $40,000,000
(including loan origination fees) on the Senior Reducing Revolving Credit
Facility (see Note 8), and used the net proceeds of approximately $327,000,000
from the Offering together with cash on hand of $161,000,000 to fund the
defeasance of the MGM Grand Hotel Finance Corp. First Mortgage Notes (see Note
8).
On September 20, 1995, bank financing of up to $225,000,000 was completed by New
York-New York Hotel and Casino, LLC. ("NYNY LLC"), and in August 1996, the
facility was increased to $285,000,000. The first draw down occurred on
MGM Grand, Inc. and Subsidiaries 26
September 30, 1995, and as of December 31, 1996, $285,000,000 was outstanding
under the facility. On January 21, 1997, NYNY LLC completed equipment financing
of $20,000,000 with a financial institution. The Company made capital
contributions totaling $22,500,000 to NYNY LLC during the 1996 period, and will
contribute additional equity as its share of the amount necessary to fund the
remaining construction liabilities, which may be up to approximately $7,000,000.
As a lender requirement for the project financing, both the Company and its
joint venture partner Primadonna Resorts, Inc. were required to enter into a
joint and several completion guarantee, as well as a Keep-Well Agreement (see
Note 8).
In June 1995, the Company and Bally's completed their joint development of the
elevated monorail linking MGM Grand Las Vegas with the corner of Flamingo Road
and the Las Vegas Strip. The monorail is a one-mile, high-capacity, transit
grade system which cost approximately $25,000,000. The costs were shared equally
with Bally's, and each partner contributed approximately $12,500,000 to the
joint venture.
The Company expects to finance operations and capital expenditures through cash
flow from operations, cash on hand, and the bank lines of credit.
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 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).
27 MGM Grand, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share data)
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Revenues:
Casino $ 481,710 $ 404,742 $ 434,297
Rooms 174,440 160,470 145,196
Food and beverage 78,438 89,299 91,566
Entertainment, retail and other 126,475 123,307 122,758
-------------------------------------------------
861,063 777,818 793,817
Less: Promotional allowances 56,249 55,975 51,622
-------------------------------------------------
804,814 721,843 742,195
-------------------------------------------------
Expenses:
Casino 220,870 195,140 183,514
Rooms 48,032 44,195 45,303
Food and beverage 47,206 57,293 65,043
Entertainment, retail and other 89,801 92,667 115,443
Provision for doubtful accounts and discounts 38,635 57,683 44,181
General and administrative 101,198 99,086 106,884
Restructuring costs -- 5,942 --
Depreciation and amortization 62,196 55,315 44,346
-------------------------------------------------
607,938 607,321 604,714
-------------------------------------------------
Operating Profit Before Master Plan Asset Disposition,
Preopening and Corporate Expense 196,876 114,522 137,481
Master Plan asset disposition 49,401 -- --
Preopening and other - unconsolidated affiliate 7,868 -- --
Corporate expense 10,313 10,699 7,766
-------------------------------------------------
Operating Income 129,294 103,823 129,715
-------------------------------------------------
Nonoperating Income (Expense):
Interest income 4,247 2,896 5,544
Interest expense, net of amounts capitalized (33,778) (59,329) (61,927)
Other, net (612) (825) 208
-------------------------------------------------
(30,143) (57,258) (56,175)
-------------------------------------------------
Income Before Income Taxes, Discontinued Operations and
Extraordinary Item 99,151 46,565 73,540
Provision for income taxes (24,634) -- --
-------------------------------------------------
Income Before Discontinued Operations and
Extraordinary Item 74,517 46,565 73,540
Discontinued Operations:
Loss from discontinued operations -- -- (7,012)
Gain on disposal of discontinued operations -- -- 8,048
Extraordinary Item:
Loss on defeasance of debt, net of income tax benefit of $17,710 (30,811) -- --
-------------------------------------------------
Net Income $ 43,706 $ 46,565 $ 74,576
-------------------------------------------------
Per Share of Common Stock:
Income before discontinued operations and extraordinary item $ 1.37 $ 0.96 $ 1.50
Discontinued operations -- -- 0.02
Extraordinary item - loss on defeasance of debt, net of income
tax benefit (0.57) -- --
-------------------------------------------------
Net Income per share $ 0.80 $ 0.96 $ 1.52
-------------------------------------------------
Weighted Average Shares Outstanding 54,235,000 48,544,000 48,988,000
-------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
MGM Grand, Inc. and Subsidiaries 28
Consolidated Balance Sheets
(In thousands, except share data)
As of December 31, 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 61,412 $ 110,017
Accounts receivable, net 80,529 78,559
Prepaid expenses 13,208 12,657
Inventories 13,520 10,982
Deferred tax asset 58,039 --
Notes receivable -- 529
-------------------------------
Total current assets 226,708 212,744
-------------------------------
Property and Equipment, net 884,750 903,906
-------------------------------
Other Assets:
Investment in unconsolidated affiliates 72,896 53,611
Deposits 15,255 16,340
Excess of purchase price over fair market value of net assets acquired, net 39,622 40,662
Other assets, net 48,458 54,959
-------------------------------
Total other assets 176,231 165,572
-------------------------------
$ 1,287,689 $ 1,282,222
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 32,995 $ 20,746
Income taxes payable 23,653 2,351
Current obligation, capital leases 2,769 2,170
Current obligation, long term debt 12,906 --
Accrued interest on long term debt -- 9,368
Other accrued liabilities 118,448 84,795
-------------------------------
Total current liabilities 190,771 119,430
-------------------------------
Deferred Revenues 6,712 8,568
Deferred Income Taxes 38,477 8,134
Long Term Obligation, Capital Leases 7,862 10,443
Long Term Debt 70,485 551,099
Commitments and Contingencies
Stockholders' Equity:
Common Stock ($.01 par value, 75,000,000 shares authorized,
57,883,766 and 48,774,856 shares issued) 579 488
Capital in excess of par value 963,688 623,489
Note receivable stock sale -- (10,000)
Retained earnings (deficit) 13,221 (30,485)
Currency translation adjustment (4,106) 1,056
-------------------------------
Total stockholders' equity 973,382 584,548
-------------------------------
$ 1,287,689 $ 1,282,222
-------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
29 MGM Grand, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
For the years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 43,706 $ 46,565 $ 74,576
Adjustments to reconcile net income to net cash from
operating activities:
Loss on defeasance of First Mortgage Notes 48,521 -- --
Master Plan asset disposition 49,401 -- --
Gain on disposal of discontinued operations -- -- (8,048)
Amortization of debt offering costs 2,191 3,308 3,858
Depreciation and amortization 62,323 55,419 44,433
Provision for doubtful accounts and discounts 38,635 57,683 44,181
Preopening and other - unconsolidated affiliate 7,868 -- --
Change in assets and liabilities:
Accounts receivable (40,605) (40,395) (93,311)
Prepaid expenses (551) 2,589 (1,677)
Inventories (3,283) (3,784) (4,574)
Income taxes payable 21,302 -- --
Deferred income taxes (27,696) (2,034) --
Accounts payable, accrued liabilities, and other 43,209 (5,863) 35,023
Currency translation adjustment 130 1,056 --
------------------------------------------------
Net cash from operating activities 245,151 114,544 94,461
------------------------------------------------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (84,775) (37,447) (65,976)
Acquisition of MGM Grand Australia -- (71,942) --
Dispositions of property and equipment, net 322 488 691
Change in construction payables (809) (3,915) (92,740)
Note receivable 529 13,796 --
Investment in unconsolidated affiliates (27,153) (36,500) --
Deposits and other assets (8,929) (30,514) (34,930)
------------------------------------------------
Net cash from investing activities (120,815) (166,034) (192,955)
------------------------------------------------
Cash Flows from Financing Activities:
Defeasance of First Mortgage Notes (523,231) -- --
Borrowings from (repayments to) banks and others -- 78,099 (10,000)
Borrowings under lines of credit 65,262 15,000 --
Repayments of lines of credit (65,262) (15,000) --
Issuance of common stock 350,290 7,549 822
Repurchase of common stock -- -- (27,774)
------------------------------------------------
Net cash from financing activities (172,941) 85,648 (36,952)
------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (48,605) 34,158 (135,446)
Cash and Cash Equivalents at Beginning of Year 110,017 75,859 211,305
------------------------------------------------
Cash and Cash Equivalents at End of Year $ 61,412 $ 110,017 $ 75,859
------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
MGM Grand, Inc. and Subsidiaries 30
Consolidated Statements of Stockholders' Equity
(Dollar amounts in thousands) Common Capital in Retained Total
For the years ended December 31, Stock Common Excess of Treasury Earnings Stockholders'
1996, 1995 and 1994 Outstanding Stock Par Value Stock (Deficit) Other Equity
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 48,844,831 $ 506 $ 662,365 $ (29,490) $ (151,626) $ -- $ 481,755
Issuance of common stock
pursuant to employee
stock options 71,479 1 821 -- -- -- 822
Repurchase of common stock (991,800) -- -- (27,774) -- -- (27,774)
Net income -- -- -- -- 74,576 -- 74,576
-------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
31 MGM Grand, Inc. and Subsidiaries
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, 1996, approximately 61.6% 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 fully integrated
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 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 8 regarding defeasance
of MGM Finance First Mortgage Notes.
Through its wholly-owned subsidiary, MGM Grand Australia Pty Ltd., the Company
owns and operates the MGM Grand Diamond Beach Hotel/Casino in Darwin, Australia
("MGM Grand Australia"), a hotel/casino resort 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 16).
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 $460,000,000 themed destination resort called New York-New York Hotel and
Casino in Las Vegas, Nevada ("NYNY") in December 1996. NYNY commenced operations
on January 3, 1997. NYNY 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 Atlantic City, Inc., the Company
intends to construct and operate a destination resort hotel/casino,
entertainment and retail facility in Atlantic City, New Jersey, at an
approximate cost of at least $700,000,000. On July 9, 1996, the Company entered
into an agreement with FC Atlantic City Associates, L.P. (an affiliate of the
Forest City Ratner Company) to develop approximately 35 acres of land on the
Atlantic City Boardwalk. Construction of the project is subject to the receipt
of various governmental approvals. The plans for the hotel and casino resort
include, among other features, approximately 335,000 square feet of
entertainment and retail facilities. On July 24, 1996, the Company was found
suitable for licensing by the New Jersey Casino Control Commission.
The Company operated MGM Grand Air, a scheduled and charter airline service,
through its wholly-owned subsidiary, MGM Grand Air, Inc., from September 1987
until December 31, 1994, when MGM Grand Air was sold (see Note 17).
Note 2. Significant Accounting Policies
a. Principles of Consolidation -- The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. Investments in
unconsolidated affiliates which are 50% or less owned are accounted for under
the equity method. Significant intercompany accounts are eliminated in
consolidation.
b. Management's Use of Estimates -- The preparation of the consolidated
financial statements in conformity with generally accepted accounting principles
requires 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
original maturities of 90 days 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, which is
determined generally by the first-in, first-out method, or market.
MGM Grand, Inc. and Subsidiaries 32
f. Property and Equipment -- Property and equipment are stated at cost.
Maintenance, repairs and renewals that neither materially add to the value of
the property nor appreciably prolong its life are charged to expense as
incurred. The Company capitalized interest during the period that MGM Grand Las
Vegas was under construction, as well as during periods for other major
construction projects. 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 15 to 40 years
Furniture, fixtures and equipment 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 estimated cost of normal hotel operating quantities
(base-stock) of china, silverware, glassware, and utensils is recorded as an
asset and is not depreciated. Costs of base-stock replacements are expensed as
incurred. 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. Revenue Recognition -- Casino revenue is the aggregate of gaming wins less
losses.
j. Promotional Allowances -- 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 $56,249,000,
$55,975,000 and $51,622,000 for the years ended December 31, 1996, 1995 and
1994, respectively. The estimated cost of providing such promotional allowances
was included in casino expenses as follows:
(In thousands)
Years Ended December 31, 1996 1995 1994
-------------------------------------------------------------------------------------------------------------
Rooms $ 9,359 $ 8,512 $ 7,809
Food and beverage 22,688 23,588 24,115
Other 2,457 3,804 5,176
-----------------------------------------------
$ 34,504 $ 35,904 $ 37,100
-----------------------------------------------
k. 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,
and income accounts are translated at the average rate of exchange prevailing
during the year.
l. Net Income per Common Share -- Net income per common share has been computed
based upon the weighted average number of shares of common stock and common
stock equivalents, if dilutive, outstanding during each year (54,235,000 in
1996, 48,544,000 in 1995 and 48,988,000 in 1994).
m. Capitalized Interest -- The Company capitalizes interest costs associated
with debt incurred in connection with major construction projects. The Company
capitalizes interest on amounts expended on the project at the Company's
weighted average cost of the borrowed funds (see Note 8), and based upon the
weighted average amount of the Company's outstanding borrowings. Capitalization
of interest ceases when the project is substantially completed.
33 MGM Grand, Inc. and Subsidiaries
n. 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.
o. Reclassifications -- Certain reclassifications have been made to conform the
prior year with the current year presentation. These reclassifications had no
effect on net income.
Note 3. Statements of Cash Flows
The following supplemental disclosures are provided for the Consolidated
Statements of Cash Flows:
In thousands)
Years Ended December 31, 1996 1995 1994
-------------------------------------------------------------------------------------------------------------
Cash payments made for:
Interest, net of amounts capitalized $ 48,155 $ 55,750 $ 58,975
-----------------------------------------------
State and federal income taxes $ 3,660 $ 620 $ 755
-----------------------------------------------
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 $42,264,000.
Note 4. Accounts Receivable
Components of accounts receivable were as follows:
(In thousands)
At December 31, 1996 1995
-----------------------------------------------------------------------------------------
Casino $ 102,408 $ 98,878
Hotel 13,286 12,509
Other 267 246
----------------------------
115,961 111,633
Less: Allowance for doubtful accounts and discounts (35,432) (33,074)
----------------------------
$ 80,529 $ 78,559
----------------------------
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 to certain casino
patrons, a substantial portion of whom reside in countries other than the United
States, following evaluation of credit worthiness. 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.
MGM Grand, Inc. and Subsidiaries 34
Note 5. Property and Equipment
Property and equipment consisted of the following:
(In thousands)
At December 31, 1996 1995
-----------------------------------------------------------------------------------------
Land $ 102,290 $ 99,625
Buildings and improvements 635,238 669,227
Equipment, furniture, fixtures and leasehold improvements 220,379 202,508
Equipment under capital lease 18,054 17,836
Construction in progress 50,797 7,772
------------------------------
1,026,758 996,968
Less: Accumulated depreciation and amortization (142,008) (93,062)
------------------------------
$ 884,750 $ 903,906
------------------------------
Note 6. Investments in Unconsolidated Affiliates
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 contributions made to these companies. The
investment balance also includes interest capitalized during construction.
Investments in unconsolidated affiliates consisted of the following:
(In thousands)
At December 31, 1996 1995
-----------------------------------------------------------------------------------------
New York-New York Hotel and Casino, LLC $ 60,943 $ 40,938
MGM Grand - Bally's Monorail, LLC 11,953 12,673
---------------------------
$ 72,896 $ 53,611
---------------------------
Note 7. Other Accrued Liabilities
Other accrued liabilities consisted of the following:
(In thousands)
At December 31, 1996 1995
-----------------------------------------------------------------------------------------
Accrued salaries and related $ 34,944 $ 29,856
Casino front money 24,796 21,279
Casino chip liability 15,524 5,831
Advance deposits 4,331 5,113
Accrued gaming taxes 7,216 4,168
Other liabilities 31,637 18,548
----------------------------
$ 118,448 $ 84,795
----------------------------
35 MGM Grand, Inc. and Subsidiaries
Note 8. Long Term Debt
Long term debt consisted of the following:
(In thousands)
At December 31, 1996 1995
-----------------------------------------------------------------------------------------
Australian Hotel/Casino Loan due December 1, 2000 $ 83,391 $ 78,099
11 3/4% First Mortgage Notes due May 1, 1999 -- 220,000
12% First Mortgage Notes due May 1, 2002 -- 253,000
Bank Credit Facility -- --
---------------------------
83,391 551,099
Less: Current Maturities (12,906) --
---------------------------
$ 70,485 $ 551,099
---------------------------
Total interest incurred during 1996, 1995 and 1994 was $40,801,000, $63,646,000
and $61,927,000, respectively, of which $7,023,000 and $4,317,000 were
capitalized in 1996 and 1995, respectively. In 1994, the Company did not
capitalize any interest.
On July 3, 1996, the Company deposited $523,231,000 (the "Defeasance Deposit")
with the Trustee, U.S. Trust of California, to fund the defeasance of MGM Grand
Hotel Finance Corp. First Mortgage Notes ("FMN's") in accordance with the terms
of the bond indenture. The Defeasance Deposit was made in the form of U.S.
Government securities and will be used to fund interest payments on the FMN's
through May 1, 1997, the call as of such date of the 11 3/4% FMN's at 101.958%
of the outstanding principal, and the call as of such date of the 12% FMN's at
105.333% of the outstanding principal. 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's resulted in an
extraordinary loss of approximately $30,811,000, net of income tax benefits of
$17,710,000. The First Mortgage Notes Indenture contained various restrictive
covenants including the maintenance of certain financial ratios and limitations
on additional debt, dividends, stock repurchases, disposition of assets, mergers
and similar transactions. At December 31, 1995, MGM Grand Hotel, Inc. was
limited to dividend payments of approximately $51,000,000 to the Company under
the indenture.
On July 1, 1996, the Company secured a new $500,000,000 Senior Reducing
Revolving Credit Facility with BA Securities (the "Facility"), an affiliate of
Bank of America NT&SA ("BofA"). The Facility was subsequently increased to
$600,000,000 in August 1996, and contains various restrictive covenants on the
Company, including the maintenance of certain financial ratios and limitations
on additional debt, dividends, capital expenditures and disposition of assets.
It also restricts acquisitions and similar transactions. Interest on the
Facility is based on the bank reference rate or Eurodollar rate. The Facility
matures in December 2001. During the year ended December 31, 1996, $61,000,000
was drawn down against the Facility, with $40,000,000 (including loan
origination fees on the Facility) of such balance related to the defeasance of
the FMN's and $21,000,000 related to acquisitions of property for MGM Grand
Atlantic City. As of December 31, 1996, no amounts were outstanding under the
Facility. At December 31, 1996, the Company was limited to dividend payments of
approximately $100,369,000 under the Facility.
On September 7, 1995, the Company completed the acquisition of the Diamond Beach
Hotel/Casino in Darwin, Australia (see Note 16). The acquisition cost was
financed by an Australian bank facility which provides a total availability of
approximately $83,391,000 (AUD$105,000,000) and includes funding for general
corporate purposes. Interest on the Australian facility is based on the bank
bill rate. The loan agreement contains various restrictive covenants on MGM
Grand Australia and the Company, including the maintenance of certain financial
ratios and limitations on additional debt, dividends, and disposition of assets.
It also restricts acquisitions and similar transactions. The facility matures in
December 2000. The indebtedness has been wholly guaranteed by the Company.
MGM Grand Australia has a $15,884,000 (AUD$20,000,000) uncommitted standby line
of credit, with a funding period of 91 days for working capital purposes. During
the year ended December 31, 1996, $4,262,000 (AUD$5,387,000) was borrowed and
repaid. No amounts were outstanding under the line of credit as of December 31,
1996 and 1995, respectively.
MGM Grand, Inc. and Subsidiaries 36
Maturities of the Company's long term debt are as follows:
(In thousands)
Year Ending December 31,
-----------------------------------------------------
1997 $ 12,906
1998 12,906
1999 16,877
2000 40,702
Thereafter --
--------
$ 83,391
--------
On September 20, 1995, NYNY LLC (see Note 1) completed its bank financing for up
to $225,000,000, which was increased to $285,000,000 during August 1996. The
non-revolving construction line of credit converted to a five-year reducing
revolver upon 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, 1996, $285,000,000 was outstanding under the facility. On
January 21, 1997, NYNY LLC completed an additional $20,000,000 equipment
financing with a financial institution.
The Company's $60,000,000 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. During 1995, the Company borrowed and repaid $15,000,000, and as of
December 31, 1995, no amounts were outstanding under the line of credit.
Note 9. 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.
At December 31, 1996, the Company was obligated under non-cancelable operating
leases and capital leases to make future minimum lease payments as follows:
(In thousands) Operating Capital
Year Ending December 31, Leases Leases
-----------------------------------------------------------------------------------------
1997 $ 3,151 $ 3,556
1998 4,559 3,962
1999 604 2,187
2000 506 2,763
2001 416 --
Thereafter 15,793 --
---------------------------
Total Minimum Lease Payment $ 25,029 12,468
-------- --------
Amount Representing Interest (1,837)
--------
Total Obligation Under Capital Leases 10,631
Less: Amount due within one year (2,769)
--------
Amount due after one year $ 7,862
--------
Rental expense on the non-cancelable operating leases was $3,687,000, $3,552,000
and $12,225,000 for the years ending December 31, 1996, 1995 and 1994,
respectively. In December 1994 and January 1995, the Company terminated certain
operating leases at MGM Grand Las Vegas and purchased the equipment for
approximately $42,000,000.
37 MGM Grand, Inc. and Subsidiaries
Note 10. Stockholders' Equity
On July 2, 1996, the Company completed a public offering (the "Offering") of
8,625,000 shares of common stock (including an underwriter's over allotment
option to purchase 1,125,000 shares of common stock). Based upon an Offering
price of $39.50 per share and associated costs incurred, the net proceeds were
approximately $327,000,000. The net proceeds from the Offering were used for the
defeasance of the MGM Grand Hotel Finance Corp. FMN's (see Note 8).
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 in the amount of $4,982,000
was charged to stockholders' equity and is being amortized to compensation
expense monthly over the one year commitment period. As of December 31, 1996,
approximately $2,819,000 had been amortized to expense.
On May 24, 1995, and as amended on November 27, 1995, the Company and MGM Grand
Hotel, Inc. entered into a Promotion Agreement with Don King Productions, Inc.
("DKP"), pursuant to which, among other things: (i) MGM Grand Hotel, Inc. has
the exclusive right to present six of Mike Tyson's fights; (ii) MGM Grand Hotel,
Inc. made a non-interest bearing working capital advance of $15,000,000 to DKP,
to be repaid on January 28, 1998; (iii) the Company sold DKP 618,557 treasury
shares of the Company's Common Stock (the "Shares") for $15,000,000, evidenced
by a non-interest bearing promissory note which was repaid in three $5,000,000
installments from the proceeds of each of the first three Tyson fights which
occurred in the MGM Grand Garden arena; (iv) the Company guaranteed to DKP that
the market value of the Shares will equal or exceed $30,000,000 ($48.50 per
share) as of January 25, 1998; and (v) the Company and DKP entered into security
agreements and a registration rights agreement with respect thereto. The
Promotion Agreement has been amended by a Trust Agreement dated as of October
23, 1996, in which the Shares have been placed in the name of, and held by, an
independent trustee, pending disposition at the direction of the Company. The
Trust Agreement extends the payment date of the working capital advance and the
guaranteed share price of $48.50 to March 31, 1998. The Company expensed
approximately $2,988,000 and $2,629,000 for the years ended December 31, 1996
and 1995, respectively. At December 31, 1996, the total cash requirement of the
guarantee was approximately $8,425,000.
Note 11. Stock Option Plan
The Company has adopted a nonqualified stock option plan and an incentive stock
plan which provides 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 5,000,000. The Company had granted options on
approximately 4,016,000 shares through December 31, 1996.
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 Nonqualified 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 is 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.
MGM Grand, Inc. and Subsidiaries 38
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations for its plans. Accordingly, no compensation costs have been
recognized for its plans for 1996, 1995 and 1994. 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:
(In thousands) 1996 1995
------------------------------------------------------------------------
Net income:
As Reported $ 43,706 $ 46,565
---------------------------
Pro Forma $ 34,981 $ 45,751
---------------------------
Earnings per share:
As Reported $ 0.80 $ 0.96
---------------------------
Pro Forma $ 0.65 $ 0.94
---------------------------
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma net income may not be
representative of that to be expected in future years.
A summary of the status of the Company's Nonqualified stock option plan for each
of the years ended December 31, 1996, 1995 and 1994 is presented below (there
are no options outstanding under the Incentive Stock Option Plan):
1996 1995 1994
-----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
-------------------------------------------------------------------------------------------------------------
Outstanding Beginning of
the Year 3,102 $ 22.67 1,815 $ 16.94 1,790 $ 15.27
Granted 765 $ 35.12 3,261 $ 25.69 285 $ 28.14
Exercised (414) $ 11.92 (232) $ 11.00 (71) $ 11.50
Forfeited (240) $ 26.35 (1,742) $ 26.32 (189) $ 16.29
Expired -- $ -- -- $ -- -- $ --
------ ------ ------
Outstanding End of the Year 3,213 $ 27.26 3,102 $ 22.67 1,815 $ 16.94
------ ------ ------
Exercisable at End of Year 220 $ 14.38 493 $ 11.76 446 $ 11.10
------ ------ ------
Weighted Average Fair Value
of Options Granted 22.89 13.74 13.14
------ ------ ------
The following table summarizes information about the Nonqualified stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at Contractual Exercise at Exercise
Range of Exercise Prices 12/31/96 Life Price 12/31/96 Price
-------------------------------------------------------------------------------------------------------------
$10.25-$20.00 308,000 4.6 years $12.94 180,000 $11.83
$20.01-$25.00 378,000 8.6 $24.42 -- $ --
$25.01-$30.00 1,936,000 8.9 $26.17 40,000 $25.95
$30.01-$35.00 25,000 9.2 $34.25 -- $ --
$35.01-$40.00 123,000 9.5 $38.59 -- $ --
$40.01-$45.00 443,000 9.5 $40.98 -- $ --
--------- --------- ------ ------- ------
3,213,000 8.6 $27.28 220,000 $14.38
--------- --------- ------ ------- ------
39 MGM Grand, Inc. and Subsidiaries
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 1996 and 1995, respectively: risk-free interest
rates of 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
39% for all years presented.
The Company has agreements with seven 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
1,985,000, of which 1,850,000 options become immediately exercisable, and the
remaining 135,000 options become exercisable if employment status is diminished
within twelve months following a change in control.
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 12. Employee Pension and Savings Plans
Participation in the MGM Grand Hotel, Inc. 401(k) employee savings plan is
available for all full time employees not a part of a bargaining unit. 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,
1996 and 1995, MGM Grand Hotel, Inc. contributions under this arrangement were
$3,060,000 and $3,189,000, 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 16), 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 pretax 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 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 13. Master Plan Asset Disposition
During September 1996, the Company determined to write-off various assets with a
net book value of $49,401,000 as
a result of the MGM Grand Las Vegas Master Plan, associated with the
transformation of the facility into "The City of Entertainment." The affected
areas include approximately $39,564,000 of costs in MGM Grand Adventures Theme
Park to prepare for construction of additional entertainment/retail facilities
and a convention center, and approximately $8,580,000 related to the removal of
the lion entrance. In addition, the Company wrote off approximately $1,257,000
representing the cost of certain food court and midway/arcade areas which have
been converted into Studio Walk.
MGM Grand, Inc. and Subsidiaries 40
Note 14. 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 $5,942,000, primarily related to
employee severance payments.
Note 15. 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, 1996, 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, the valuation allowance of $18,013,000 at December
31, 1995, was completely reversed during 1996.
The provision (benefit) for income taxes on income from continuing operations
before extraordinary item for the years ended December 31, 1996, 1995 and 1994
is as follows:
(In thousands)
Years Ended December 31, 1996 1995 1994
-------------------------------------------------------------------------------------------------------------
Current - Federal (net of $18,013,000 tax benefit of
operating loss carryforwards) $ 31,014 $ 2,034 $ 575
Deferred - Federal (6,380) (2,034) (575)
-----------------------------------------------
Provision for income taxes $ 24,634 $ -- $ --
-----------------------------------------------
Reconciliation of the Federal income tax rate and the Company's effective tax
rate is as follows:
1996 1995 1994
-------------------------------------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
Permanent and other items 6.2 -- --
Changes in valuation allowance (16.4) (35.0) (35.0)
-----------------------------------------------
Effective tax rate 24.8% -- % -- %
-----------------------------------------------
As of December 31, 1996, the major tax effected components of the Company's net
deferred tax asset (liability) are as follows:
(In thousands) 1996 1995
-----------------------------------------------------------------------------------------
Deferred Tax Asset
Net operating loss carryforward $ 11,864 $ 45,871
Bad debt reserve 9,123 8,034
Master Plan asset disposition 16,639 --
Hotel preopening expenses 8,619 8,860
Loss on defeasance of debt 12,180 --
Accruals, reserves and other 4,643 3,479
Tax credit carryforwards 31,488 5,606
---------------------------
94,556 71,850
Less: Valuation allowance -- (18,013)
---------------------------
94,556 53,837
---------------------------
Deferred Tax Liability
Depreciation and amortization (74,994) (61,971)
---------------------------
Net Deferred Tax Asset (Liability) $ 19,562 $ (8,134)
---------------------------
41 MGM Grand, Inc. and Subsidiaries
At December 31, 1996, the Company had a United States tax return net operating
loss carryforward of approximately $27,900,000 which will expire as follows:
Net
(In thousands) Operating Loss
Year of Expiration Carryforward
-------------------------------------------------------------
2007 $ 5,000
2008 22,900
--------------
$ 27,900
--------------
In addition, the Company has an Australian tax loss of $5,861,000 which does not
expire.
The Company also has an alternative minimum tax credit carryforward of
$29,000,000 which does not expire, and a general business tax credit
carryforward of $2,488,000 which expires in different periods through 2011.
Note 16. 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. $75,971,000. The acquisition costs include $59,972,000 for
the purchase of stock and $14,200,000 of debt assumption, and debt and
organization costs of $1,799,000. In addition, on October 24, 1995, the Company
expended approximately $3,774,000 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, 97 rooms and suites, restaurants and other facilities. The
Company financed the acquisition through an Australian bank facility (see Note
8). 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:
(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 $14,400,000 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.
Note 17. Discontinued Operations/Sale of MGM Grand Air
On December 31, 1994, the Company completed the sale of MGM Grand Air for a note
receivable totaling approximately $14,325,000, realizing a pretax gain of
$8,048,000. As of December 31, 1996, the note had been repaid, and at December
31, 1995, the principal on the note had been reduced to approximately $432,000.
The 1994 operating results of MGM Grand Air have been accounted for as
discontinued operations, and the financial statements have been restated. For
the year ended December 31, 1994, operating results of discontinued operations,
excluding the above noted gain, included revenues of $19,535,000 and an
operating loss of $7,012,000.
MGM Grand, Inc. and Subsidiaries 42
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 $1,280,000 and $750,000 to the joint
venture as part of its operating contribution during 1996 and 1995,
respectively.
In August 1995, the Company made a $5,000,000 working capital advance to NYNY.
The $5,000,000 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 $200,000 or percentage rent based upon gross revenue, as defined by the
Nevada Gaming Commission and Nevada State Gaming Control Board. The percentage
rent is based on a graduated scale of gross revenue at percentages ranging from
12% to 15%. During 1996, no amounts 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 $56,000, and provided
various other hotel goods and services for which NYNY paid approximately
$85,000. 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 which management believes are generally
comparable to those offered by third parties. No payments were made by NYNY and
no services were rendered under the floral service contract during 1996. MGM
Grand Hotel, Inc. entered into an agreement with NYNY effective December 14,
1996, whereby it agreed to provide certain of its employees to perform services
at NYNY. In exchange, NYNY agreed to reimburse MGM Grand Hotel, Inc. for all
payroll and related costs arising from such services, which, during 1996, were
immaterial in amount.
For the year ended December 31, 1996, the Company and its subsidiaries rented
aircraft from Tracinda for various business purposes. The aggregate amount of
rental payments were $990,000, 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 $210,000. MGM Grand Las Vegas also leased Tracinda's Challenger
aircraft through a third party operator for $243,000 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
$31,500,000, 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 $36,500,000. On January 6, 1995, the Company
contributed the property to NYNY LLC as its share of the initial capital
contribution to the hotel/casino construction project (see Notes 1 and 6).
During 1996, the Company contributed an additional $22,500,000 to the NYNY
construction project.
On March 1, 1994, MGM Grand Hotel, Inc. sold to Tracinda two unused parcels of
land (approximately .56 acres total) for $272,950. The Company, based upon
appraisals it received, believes that this sale was on terms comparable to what
it could have obtained for the land on an arms length basis in an equivalent
transaction with a third party.
In 1994, MGM Grand Las Vegas reimbursed The Stars' Desert Inn, which was then
owned by Tracinda, for its estimated costs of the 1993 testing of a property
management computer software system and certain gaming equipment testing, which
was approximately $229,000. The Stars' Desert Inn did not exercise an option to
retain the computer software system, and retained all revenues generated by the
gaming equipment.
Pursuant to an agreement dated December 23, 1996, between MGM Grand Hotel, Inc.
and MGM/UA Home Entertainment, Inc. ("MGM/UA"), a wholly owned subsidiary of
Metro-Goldwyn-Mayer Inc., a California based motion picture studio in which
Tracinda has a 72% 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. In exchange, MGM Grand Hotel, Inc. agreed to promote
MGM/UA motion picture video cassettes for availability in one or more retail
venues. During December 1996, MGM Grand Hotel, Inc. purchased video cassettes in
amounts that are not material.
43 MGM Grand, Inc. and Subsidiaries
Pursuant to a License Agreement between the Company, Metro-Goldwyn-Mayer Inc.
and Metro-Goldwyn-Mayer Film Co. dated February 29, 1980, the Company has
exclusive rights in perpetuity to use certain trademarks, trade names and logos
in connection with the Company's hotel and gaming operations.
During the three year periods ended December 31, 1996, 1995 and 1994, the
Company and Tracinda have entered into various other transactions and
arrangements which, individually and in the aggregate, are not material.
Note 19. 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 16), and its
50% share in NYNY which commenced operations on January 3, 1997 (see Note 1).
Airline operations have been reclassified for the 1994 year to Discontinued
Operations as a result of the sale of the airline (see Note 17). Sales between
industry segments are immaterial and generally at prices approximately equal to
those charged to unaffiliated customers.
(In thousands)
For the Years Ended December 31, 1996 1995 1994
-------------------------------------------------------------------------------------------------------------
Net revenues:
Hotel/Casino $ 804,814 $ 721,843 $ 742,195
-----------------------------------------------------
Operating income (loss):
Hotel/Casino $ 196,876 $ 120,464 $ 137,481
Master Plan asset disposition (49,401) -- --
Corporate expense (10,313) (10,699) (7,766)
Restructuring costs -- (5,942) --
Preopening and other - unconsolidated affiliate (7,868) -- --
-----------------------------------------------------
$ 129,294 $ 103,823 $ 129,715
-----------------------------------------------------
Identifiable assets:
Hotel/Casino $ 1,254,602 $ 1,250,771 $ 1,088,767
Discontinued operations - airline -- -- 2,618
Corporate 33,087 31,451 62,126
-----------------------------------------------------
$ 1,287,689 $ 1,282,222 $ 1,153,511
-----------------------------------------------------
Capital expenditures:
Hotel/Casino $ 84,544 $ 37,371 $ 60,086
Discontinued operations - airline -- -- 5,552
Corporate 231 76 338
-----------------------------------------------------
$ 84,775 $ 37,447 $ 65,976
-----------------------------------------------------
Depreciation and amortization:
Hotel/Casino $ 62,196 $ 55,315 $ 44,346
Corporate 127 104 87
-----------------------------------------------------
$ 62,323 $ 55,419 $ 44,433
-----------------------------------------------------
MGM Grand, Inc. and Subsidiaries 44
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, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Las Vegas, Nevada
January 30, 1997
45 MGM Grand, Inc. and Subsidiaries
Selected Quarterly Financial Results
(In thousands except share data) Quarter
For the years ended December 31, 1996 and 1995 -------------------------------------------------------
(Unaudited) First Second Third Fourth Total
- ----------------------------------------------------------------------------------------------------------------------
1996
Net revenues $ 209,304 $ 190,485 $ 198,433 $ 206,592 $ 804,814
Operating profit before non-recurring items
and corporate expense 50,734 50,250 46,257 49,635 196,876
Operating income 49,223 48,615 (4,808) 36,264 129,294
Income (loss) before income taxes,
discontinued operations 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
Per share of common stock:
Income (loss) before extraordinary item $ 0.70 $ 0.41 $ (0.08) $ 0.49 $ 1.37
Extraordinary item -- -- (0.53) -- (0.57)
--------------------------------------------------------------------
Net income (loss) $ 0.70 $ 0.41 $ (0.61) $ 0.49 $ 0.80
--------------------------------------------------------------------
1995
Net revenues $ 161,885 $ 168,397 $ 198,281 $ 193,280 $ 721,843
Operating profit before non-recurring items
and corporate expense 22,333 11,419 33,388 47,382 114,522
Operating income 20,306 8,680 28,940 45,897 103,823
Income (loss) before income taxes,
discontinued operations and
extraordinary item 5,525 (6,637) 15,870 31,807 46,565
Net income (loss) 5,525 (6,637) 15,870 31,807 46,565
Per share of common stock:
Income (loss) before extraordinary item $ 0.11 $ (0.14) $ 0.33 $ 0.66 $ 0.96
Extraordinary item -- -- -- -- --
--------------------------------------------------------------------
Net income (loss) $ 0.11 $ (0.14) $ 0.33 $ 0.66 $ 0.96
--------------------------------------------------------------------
1996 1995
Common Stock Prices --------------------------------------------------------------------
For the year ended December 31, High Low High Low
- ----------------------------------------------------------------------------------------------------------------------
First quarter $ 39 3/4 $ 22 3/4 $ 30 3/4 $ 22 3/4
Second quarter 47 7/8 38 3/8 32 3/8 26 3/8
Third quarter 43 1/4 35 1/2 28 1/2 23
Fourth quarter 45 5/8 34 26 1/4 22 3/4
The Company's Common Stock is listed on the New York Stock Exchange. Its
symbol is MGG.
MGM Grand, Inc. and Subsidiaries 46
Corporate Information
Directors and Officers
J. Terrence Lanni
Director
Chairman of the Board
Chief Executive Officer
Alex Yemenidjian
Director
President
Chief Operating Officer
Chief Financial Officer
Fred Benninger
Director
Vice Chairman
James D. Aljian
Director
Executive,
Tracinda Corporation
Terry N. Christensen
Director
Partner, Christensen, Miller, Fink,
Jacobs, Glaser, Weil & Shapiro, LLP
Glenn A. Cramer
Director
Former Chairman,
Transamerica Airlines Retired
Willie D. Davis
Director
President and Director,
All-Pro Broadcasting, Inc.
Alexander M. Haig, Jr.
Director
Chairman
Worldwide Associates, Inc.
Kirk Kerkorian
Director
President and
Chief Executive Officer
Tracinda Corporation
Walter M. Sharp
Director
President,
Walter M. Sharp Company
Jerome B. York
Director
Vice Chairman
Tracinda Corporation
Scott Langsner
Secretary/Treasurer
Edward J. Jenkins
Vice President
Margaret G. Cooper
Vice President
47 MGM Grand, Inc. and Subsidiaries
MGM Grand Hotel Senior Officers
Daniel M. Wade
President
Chief Operating Officer
Lyn H. Baxter
Senior Vice President
Operations
Cynthia Kiser Murphey
Senior Vice President
Human Resources and Administration
Tom Peterman
Senior Vice President
General Counsel
Greg W. Saunders
Senior Vice President
Hotel Operations
Daniel H. Scott
Senior Vice President
Chief Financial Officer
Richard A. Sturm
Senior Vice President
Marketing and Entertainment
MGM Grand Marketing
Robert V. Moon
President
MGM Grand Development
Kenneth A. Rosevear
President
MGM Grand Merchandising
Bob Bowman
President
MGM Grand Australia
Patricia Johnson
General Manager
Chief Financial Officer
Gordon McIntosh
Senior Vice President
Casino Operations
MGM Grand, Inc. and Subsidiaries 48
Transfer Agent and
Registrar for Common Stock
ChaseMellon Shareholder Services, LLC
Shareholder Relations
400 S. Hope Street, 4th Floor
Los Angeles, CA 90071
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
Independent Public
Accountants
Arthur Andersen LLP
3320 W. Sahara Avenue
Las Vegas, Nevada 89102
49 MGM Grand, Inc. and Subsidiaries
MGM Grand, Inc.
3799 Las Vegas Blvd. South
Las Vegas, Nevada 89109
(702) 891-3333
MGM Grand Hotel/Casino
3799 Las Vegas Blvd. South
Las Vegas, Nevada 89109
(702) 891-1111
Reservations
(702) 891-7777
(800) 929-1111 (outside Nevada)
MGM Grand Australia
Gilruth Avenue
Mindil Beach
Darwin, Northern Territory
0801 Australia
International Number
011 61 89 462 666
MGM Grand, Inc. and Subsidiaries 50