Financial Highlights
The 1997 first quarter was the second best quarter in the Company's history, nearly equaling the previous record set in the first quarter of 1996. Earnings per share before an extraordinary charge were $0.30, versus $0.33 in the 1996 first quarter. Earnings in both quarters included non-recurring items. The 1997 quarter included a gain of $3.6 million ($2.4 million, or $0.01 per share, after tax) related to the sale and exchange of land in Las Vegas. The 1996 first quarter included a gain of $8.0 million ($5.2 million, or $0.03 per share, after tax) associated with the sale of the Company's interest in a small casino located near Iguazu Falls, Argentina. As discussed in Note 2 of Notes to Condensed Consolidated Financial Statements, during the 1997 first quarter the Company also incurred a $2.2 million, or $0.01 per share, extraordinary charge associated with amending and increasing its revolving bank credit facility.
The Company's four wholly owned resorts performed very well during the 1997 first quarter, albeit against difficult comparisons with the record results of the prior-year period. These strong results were achieved despite increased competition and a decline in the table games win percentage. The Company- wide table games win percentage was 20.0%, versus 21.5% during the 1996 first quarter. By comparison, for the full years 1995 and 1996, the Company-wide table games win percentage was 20.2% and 19.3%, respectively.
Excluding baccarat revenues in both quarters, combined net revenues at the Company's wholly owned resorts were relatively flat. Company-wide standard guest room occupancy was above 99% in both periods, while the average standard room rate was essentially unchanged.
The Mirage reported net revenues of $198.7 million - one of the strongest quarters in its seven years of operation. During the first quarter of 1996, The Mirage benefited from an above- average level of baccarat play with a significantly above- average win percentage. The 1997 quarter also experienced a strong level of baccarat play, but with a more normal win percentage. Excluding baccarat revenues in both periods, The Mirage's net revenues rose by 3% over the strong results of the prior-year quarter. Occupancy of The Mirage's standard guest rooms was over 99% during both quarters.
Treasure Island also had a strong 1997 first quarter, producing net revenues of $94.0 million and operating income of $22.5 million. These results were achieved despite the closure of a nearby casino in July 1996, the openings of additional mid- market competitors over the past year and construction underway on several improvements to the resort. These improvements include a new hotel lobby, a new Italian restaurant and lounge, additional retail space and a modest amount of additional gaming area. The construction will be completed in stages, beginning in July, at a total cost of approximately $25 million.
The Golden Nugget in downtown Las Vegas had a particularly tough comparison with the 1996 first quarter, which was the first full quarter of operation of the Fremont Street Experience. The 1997 quarter was also affected by the refurbishment of 1,382 of the facility's guest rooms. This $22 million refurbishment project was completed in late April and resulted in approximately 15% fewer available room nights in the 1997 first quarter versus the prior-year period. The resulting reduction in room revenues primarily led to a $2.4 million, or 13%, decline in net non- casino revenues. The reduction in the number of in-house guests also adversely impacted table games and slot play, contributing to a $4.5 million, or 13%, decline in casino revenues.
The Laughlin market continues to feel the effects of additional competition from neighboring casinos on Arizona and California Indian reservations, as well as the new resorts in Las Vegas. As a result, both gaming and non-gaming volume at the Company's small Golden Nugget property were lower in the 1997 first quarter, accounting for the decline in its revenues and profitability.
The 1997 quarter benefited from the Company's 50% interest in the earnings of Monte Carlo. This new facility continues to perform extremely well, producing gross revenues of $66.3 million and operating income of $18.5 million during the 1997 first quarter. Hotel room occupancy remained firm at 96%. The average room rate climbed to almost $79, versus $72 achieved during slightly over six months of operation in 1996. These strong results are particularly notable given the early first quarter opening of a major neighboring competitor. After deducting net interest expense, this unconsolidated joint venture contributed $7.4 million to the Company's 1997 first quarter operating income. Such amount is included in "Gross revenues" in the accompanying Condensed Consolidated Statements of Income.
Interest cost and interest capitalized each rose significantly over the 1996 first quarter. These increases primarily reflect funding for the Bellagio and Beau Rivage projects, as well as additional borrowings in the second half of 1996 resulting from repurchases of the Company's common stock.
CAPITAL RESOURCES, CAPITAL SPENDING AND LIQUIDITY
During the 1997 first quarter, the Company's growing capital expenditure requirements were funded principally by operating cash flow and bank credit facility and commercial paper borrowings. Net cash provided by operating activities (as shown in the accompanying Condensed Consolidated Statements of Cash Flows) was $86.1 million, up $5.9 million, or 7%, from the 1996 first quarter.
Capital expenditures during the 1997 quarter totaled $192.1 million. A significant portion of this amount relates to the construction of Bellagio and Beau Rivage. Including land, capitalized interest and preopening costs, Bellagio is expected to cost approximately $1.4 billion and Beau Rivage is expected to cost approximately $550 million. At March 31, 1997, the Company had incurred approximately $444 million associated with Bellagio and approximately $92 million associated with Beau Rivage. During the 1997 first quarter, the Company also acquired approximately $13 million of additional fine art to be displayed in Bellagio.
The Company's capital spending will increase further should it proceed with its planned develoment of a casino resort in Atlantic City, New Jersey. The Company and the City of Atlantic City have entered into a redevelopment agreement providing for the City to convey 150 acres located in the Marina area of Atlantic City to the Company in exchange for the Company agreeing to develop a casino-based destination resort on the site and undertaking certain other obligations. Closing under the agreement requires the satisfaction of a number of conditions. One such condition is the construction of certain major road improvements designed to improve access to the Marina area. The Company has entered into an agreement with the New Jersey Department of Transportation and South Jersey Transportation Authority with respect to the construction and joint funding of the road improvements. Selection of a contractor to design and build the road improvements will be determined by public bidding, and construction of the improvements will not proceed unless one or more bids within the available budget are submitted. Bids for the project are expected to be submitted by July 1997. On May 2, 1997, the Company filed applications for various permits necessary for development of a 2,000-guest room hotel-casino that would occupy a portion of the 150-acre site.
The required permits for the hotel-casino and the permits and bids for the road improvement project have not yet been received. The Company also has not yet submitted its plans for the hotel-casino to potential contractors. Furthermore, an existing Atlantic City hotel-casino operator and others have filed various lawsuits which seek to prevent construction of the road improvements and closing under the redevelopment agreement, thereby preventing the Company from developing a hotel-casino on the Marina site. As a result of the foregoing factors, there can be no assurance as to the timing, cost or certainty of construction by the Company in Atlantic City.
At year-end 1996, the Company had no bank credit facility or commercial paper borrowings outstanding. As discussed previously, on March 7, 1997, the availability under the Company's $1 billion bank credit facility was increased to $1.75 billion and the maturity date was extended from May 1999 to March 2002. During the 1997 first quarter, capital expenditure requirements exceeded the Company's operating cash flow, requiring net bank credit facility and commercial paper borrowings of $99.3 million, leaving approximately $1.65 billion available.
Management believes that existing cash balances, operating cash flow and available borrowings under the bank credit facility will provide the Company with sufficient resources to meet its existing debt obligations and foreseeable capital expenditure requirements, including those relating to the development of Bellagio and Beau Rivage and potential development in Atlantic City.
RECENTLY ISSUED ACCOUNTING STATEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 - Earnings Per Share ("SFAS 128"). SFAS 128 is effective for periods ending after December 15, 1997 and replaces currently reported earnings per share with "basic," or undiluted, earnings per share and "diluted" earnings per share. Undiluted earnings per share is computed by dividing reported earnings by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the additional dilution for all potentially dilutive securities such as stock options. Diluted earnings per share is similar to earnings per share currently reported by the Company, but includes the potential dilution of stock options that become exercisable more than five years from the date of the financial statements.
The Company will adopt the provisions of SFAS 128 in its 1997 annual financial statements and all previously reported earnings per share amounts will be restated. The following table discloses the Company's pro forma earnings per share for the three-month periods ended March 31, 1997 and 1996 as determined in accordance with SFAS 128.
CERTAIN FORWARD-LOOKING STATEMENTS
Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include information relating to plans for future expansion and other business development activities as well as other capital spending, financing sources and the effects of regulation (including gaming and tax regulation) 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, pending litigation, changes in federal or state tax laws or the administration of such laws and changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions).