MGM MIRAGE - 10-Q Quarterly Report

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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-16760

MGM MIRAGE
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		88-0215232 (I.R.S. Employer Identification No.)
3600 Las Vegas Boulevard South, Las Vegas, Nevada 89109 (Address of principal executive offices—Zip Code)
(702) 693-7120 (Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class
Common Stock, $.01 par value

Outstanding at August 6, 2002
159,299,659 shares

MGM MIRAGE AND SUBSIDIARIES

FORM 10-Q

I N D E X

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2002 and December 31, 2001	1
	Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 2002 and June 30, 2001	2
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and June 30, 2001	3
	Condensed Notes to Consolidated Financial Statements	4-12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13-17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits and Reports on Form 8-K	20-21
SIGNATURES		22

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MGM MIRAGE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

			June 30, 2002			December 31, 2001
			*(Unaudited)*
ASSETS
Current assets
	Cash and cash equivalents		$	213,200		$	208,971
	Accounts receivable, net			130,145			144,374
	Inventories			80,630			78,037
	Income tax receivable			7,142			12,077
	Deferred income taxes			117,159			148,845
	Prepaid expenses and other			71,045			69,623

		Total current assets		619,321			661,927

Property and equipment, net				8,821,828			8,891,645
Other assets
	Investment in unconsolidated affiliates			670,269			632,949
	Goodwill, net			105,445			103,059
	Deposits and other assets, net			207,343			207,863

		Total other assets		983,057			943,871

			$	10,424,206		$	10,497,443

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Accounts payable		$	66,194		$	75,787
	Current portion of long-term debt			6,980			168,079
	Accrued interest on long-term debt			81,520			78,938
	Other accrued liabilities			562,508			565,106

		Total current liabilities		717,202			887,910

Deferred income taxes				1,765,036			1,746,272
Long-term debt				5,172,435			5,295,313
Other long-term obligations				50,333			57,248
Commitments and contingencies
Stockholders' equity
	Common stock, $.01 par value: authorized 300,000,000 shares; issued 166,224,859 and 163,685,876 shares; outstanding 159,817,159 and 157,396,176 shares			1,662			1,637
	Capital in excess of par value			2,120,845			2,049,841
	Deferred compensation			(30,407	)		—
	Treasury stock, at cost (6,407,700 and 6,289,700 shares)			(145,797	)		(129,399	)
	Retained earnings			781,602			597,771
	Other comprehensive loss			(8,705	)		(9,150	)

		Total stockholders' equity		2,719,200			2,510,700

			$	10,424,206		$	10,497,443

The accompanying notes are an integral part of these consolidated financial statements.

MGM MIRAGE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Revenues
	Casino	$	534,682		$	549,685		$	1,102,071		$	1,124,433
	Rooms		224,316			228,915			430,815			461,114
	Food and beverage		194,229			191,024			382,409			383,068
	Entertainment, retail and other		184,095			171,071			341,559			336,950
	Income from unconsolidated affiliate		9,148			9,809			18,373			21,360

			1,146,470			1,150,504			2,275,227			2,326,925
	Less: promotional allowances		105,249			98,828			212,866			206,477

			1,041,221			1,051,676			2,062,361			2,120,448

Expenses
	Casino		271,588			275,542			553,192			569,869
	Rooms		58,526			62,625			112,479			121,780
	Food and beverage		106,753			109,917			204,338			213,067
	Entertainment, retail and other		109,361			110,138			213,705			218,553
	Provision for doubtful accounts		11,027			17,088			23,085			31,737
	General and administrative		147,971			151,539			295,454			297,005
	Corporate expense		10,930			10,375			21,565			21,199
	Preopening expenses		4,390			1,105			6,629			1,980
	Restructuring costs (credit)		(10,421	)		—			(10,421	)		—
	Depreciation and amortization		97,565			97,394			200,938			193,337

			807,690			835,723			1,620,964			1,668,527

Operating income			233,531			215,953			441,397			451,921

Non-operating income (expense)
	Interest income		1,223			1,748			2,463			3,780
	Interest expense, net		(69,117	)		(92,476	)		(141,714	)		(190,012	)
	Interest expense from unconsolidated affiliate		(311	)		(693	)		(588	)		(1,510	)
	Other, net		(2,911	)		(326	)		(5,534	)		(1,471	)

			(71,116	)		(91,747	)		(145,373	)		(189,213	)

Income before income taxes and extraordinary item			162,415			124,206			296,024			262,708
	Provision for income taxes		(60,540	)		(47,620	)		(112,193	)		(101,450	)

Income before extraordinary item			101,875			76,586			183,831			161,258
	Extraordinary item—loss on early extinguishment of debt, net of income tax benefit of $419		—			—			—			(778	)

Net income		$	101,875		$	76,586		$	183,831		$	160,480

Basic earnings per share of common stock
	Income before extraordinary item	$	0.64		$	0.48		$	1.16		$	1.01
	Extraordinary item, net		—			—			—			—

	Net income per share	$	0.64		$	0.48		$	1.16		$	1.01

Diluted earnings per share of common stock
	Income before extraordinary item	$	0.63		$	0.47		$	1.14		$	0.99
	Extraordinary item, net		—			—			—			—

	Net income per share	$	0.63		$	0.47		$	1.14		$	0.99

The accompanying notes are an integral part of these consolidated financial statements.

MGM MIRAGE AND SUBIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

					Six Months Ended June 30,
					2002			2001
Cash flows from operating activities
	Net income				$	183,831		$	160,480
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				200,938			193,337
		Amortization of debt discount and issuance costs				14,074			17,159
		Provision for doubtful accounts				23,085			31,737
		Loss on early extinguishment of debt				—			1,197
		Income from unconsolidated affiliate				(17,785	)		(19,850	)
		Distributions from unconsolidated affiliate				21,000			22,500
		Deferred income taxes				51,535			59,249
		Change in assets and liabilities:
			Accounts receivable			(9,049	)		11,565
			Inventories			(2,708	)		(1,417	)
			Income taxes receivable and payable			4,934			2,521
			Prepaid expenses			(372	)		8,530
			Accounts payable and accrued liabilities			(12,099	)		(43,469	)
		Other				15,277			7,751

				Net cash provided by operating activities		472,661			451,290

Cash flows from investing activities
	Purchases of property and equipment					(128,533	)		(144,013	)
	Dispositions of property and equipment					5,359			12,193
	Investment in joint venture					(36,814	)		—
	Change in construction payable					2,458			464
	Other					(10,652	)		(7,449	)

				Net cash used in investing activities		(168,182	)		(138,805	)

Cash flows from financing activities
	Net repayment under bank facilities					(304,050	)		(715,489	)
	Issuance of long-term debt					—			400,000
	Debt issuance costs					(811	)		(5,993	)
	Issuance of common stock					42,168			4,207
	Repurchase of common stock					(35,657	)		—
	Other					(1,900	)		(8,312	)

				Net cash used in financing activities		(300,250	)		(325,587	)

Cash and cash equivalents
	Net increase (decrease) for the period					4,229			(13,102	)
	Balance, beginning of period					208,971			227,968

	Balance, end of period				$	213,200		$	214,866

Supplemental cash flow disclosures
	Interest paid, net of amounts capitalized				$	125,058		$	165,872
	State and federal income taxes paid					30,009			25,771

The accompanying notes are an integral part of these consolidated financial statements.

MGM MIRAGE AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

MGM MIRAGE (the "Company"), formerly known as MGM Grand, Inc., is a Delaware corporation, incorporated on January 29, 1986. As of June 30, 2002, approximately 50.8% of the outstanding shares of the Company's common stock were owned by Tracinda Corporation, a Nevada corporation wholly owned by Kirk Kerkorian.

On May 31, 2000, the Company completed the acquisition (the "Mirage Acquisition") of Mirage Resorts, Incorporated ("Mirage"). Mirage, through wholly owned subsidiaries, owns and operates the following hotel, casino and entertainment resorts: Bellagio, a European-style luxury resort; The Mirage, a tropically-themed destination resort; Treasure Island at The Mirage, a Caribbean-themed hotel and casino resort; and the Boardwalk Hotel and Casino, all of which are located on the Las Vegas Strip. Mirage owns a 50% interest in the joint venture that owns and operates the Monte Carlo Resort & Casino, a palatial-style hotel and casino also located on the Las Vegas Strip. Mirage owns and operates Shadow Creek, an exclusive world-class golf course located approximately ten miles north of its Las Vegas Strip properties. Mirage also owns and operates the Golden Nugget, a hotel and casino in downtown Las Vegas, the Golden Nugget-Laughlin, located in Laughlin, Nevada and Beau Rivage, a beachfront resort located in Biloxi, Mississippi.

Through wholly owned subsidiaries, the Company owns and operates the MGM Grand Hotel and Casino ("MGM Grand Las Vegas"), a hotel, casino and entertainment complex, and New York-New York Hotel and Casino, a destination resort, both located on the Las Vegas Strip. The Company, through wholly owned subsidiaries, also owns and operates three resorts located in Primm, Nevada at the California/Nevada state line: Whiskey Pete's, Buffalo Bill's and the Primm Valley Resort (the "Primm Valley Resorts"), as well as two championship golf courses located near the Primm Valley Resorts.

The Company, through its wholly owned subsidiary, MGM Grand Detroit, Inc., and its local partners formed MGM Grand Detroit, LLC, to develop a hotel, casino and entertainment complex in Detroit, Michigan. On July 29, 1999, MGM Grand Detroit, LLC commenced gaming operations in an interim facility located directly off of the John C. Lodge Expressway in downtown Detroit. On August 2, 2002, the Detroit City Council approved a revised development agreement which allows MGM Grand Detroit, LLC (in which the Company holds a controlling interest) to operate the interim facility until a permanent facility is opened, and revises the requirements for the permanent facility, including the requirements relating to site selection. Among other provisions in the revised development agreement, we agreed to pay the City of Detroit $44 million in various installments through June 2004 and to make certain additional payments commencing in 2006. The Company has had stand-by letters of credit since 1999 totaling $50 million to secure principal and interest payments on bonds issued by the Economic Development Corporation of the City of Detroit. Each of the three Detroit casino developers has a similar obligation. The proceeds of the bonds were used to acquire land along the Detroit river where the permanent facilities were to be located. Under the revised development agreement, the Company and the other developers will forego their right to receive any of the land, but will remain obligated to repay the bonds. The Company's $50 million share of the obligation will be recorded as a liability in the Company's consolidated balance sheet.

A limited liability company owned 50-50 with Boyd Gaming Corporation is developing the Borgata, a hotel and casino resort on 27 acres at Renaissance Pointe, located in the Marina area of Atlantic City, New Jersey. The Company also owns approximately 95 development acres adjacent to the Borgata site.

Through its wholly owned subsidiary, MGM Grand Australia Pty Ltd., the Company owns and operates the MGM Grand Hotel and Casino in Darwin, Australia ("MGM Grand Australia"), which is located on 18 acres of beachfront property on the north central coast of Australia.

In the second quarter of 2002, the Company received proceeds of $11.4 million for agreeing to terminate management agreements covering four casinos in the Republic of South Africa. Prior to the termination, the Company managed three permanent casinos and one interim casino and received management fees from its partner, Tsogo Sun Gaming & Entertainment. The termination fee was recorded as part of entertainment, retail and other revenues in the accompanying consolidated statement of income.

As permitted by the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2001.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company's financial position as of June 30, 2002, and the results of its operations for the three month and six month periods ended June 30, 2002 and 2001. The results of operations for such periods are not necessarily indicative of the results to be expected for the full year.

Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation, which have no effect on previously reported net income.

NOTE 2—GOODWILL AND INTANGIBLE ASSETS

Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," was issued in June 2001 and adopted by the Company on January 1, 2002. The statement provides that goodwill and indefinite—lived intangible assets are no longer amortized effective January 1, 2002, but are instead reviewed for impairment within six months of adoption of the statement and at least annually thereafter. We completed the necessary impairment reviews in the second quarter of 2002 and, as a result of our review, did not record any impairment charges.

Amortization of goodwill and indefinite—lived intangible assets totaled $0.6 million and $1.1 million for the three and six months ended June 30, 2001, respectively. Had SFAS 142 been in effect in these periods, the Company's results would have been as follows:

	Three Months				Six Months
For the periods ended June 30, 2001	Three Months				Six Months
For the periods ended June 30, 2001	As Reported		Adjusted		As Reported		Adjusted
	*(In thousands, except per share amounts)*
Income before extraordinary item	$	76,586	$	77,145	$	161,258	$	162,282

Net income	$	76,586	$	77,145	$	160,480	$	161,504

Basic earnings per share	$	0.48	$	0.48	$	1.01	$	1.01

Diluted earnings per share	$	0.47	$	0.48	$	0.99	$	1.00

NOTE 3—LONG-TERM DEBT

Long-term debt consisted of the following:

	June 30, 2002			December 31, 2001
	*(In thousands)*
$2.0 Billion Revolving Credit Facility	$	1,825,500		$	1,949,800
$600 Million Revolving Credit Facility (previously $800 million)		—			207,000
Australian Bank Facility, due 2004		19,072			17,306
Other Note due to Bank		27,250			—
$300 Million 6.95% Senior Notes, due 2005, net		302,690			299,249
$200 Million 6.625% Senior Notes, due 2005, net		191,388			189,847
$250 Million 7.25% Senior Notes, due 2006, net		230,255			221,427
$710 Million 9.75% Senior Subordinated Notes, due 2007, net		703,831			703,204
$200 Million 6.75% Senior Notes, due 2007, net		177,860			176,196
$200 Million 6.75% Senior Notes, due 2008, net		176,024			174,426
$200 Million 6.875% Senior Notes, due 2008, net		198,362			198,215
$850 Million 8.50% Senior Notes, due 2010, net		845,863			845,610
$400 Million 8.375% Senior Subordinated Notes, due 2011		400,000			400,000
$100 Million 7.25% Senior Debentures, due 2017, net		80,267			79,982
Other Notes		1,053			1,130

		5,179,415			5,463,392
Less Current Portion		(6,980	)		(168,079	)

	$	5,172,435		$	5,295,313

Total interest incurred for the three-month periods ended June 30, 2002 and 2001 was $87 million and $112 million, respectively, of which $18 million and $20 million, respectively, was capitalized. Total interest incurred for the six-month periods ended June 30, 2002 and 2001 was $177 million and $233 million, respectively, of which $35 million and $43 million, respectively, was capitalized.

During January 2002, Moody's Investors Service lowered its rating on the Company's senior notes to one level below investment grade (Ba1). As a result, substantially all of the Company's assets other than assets of its foreign subsidiaries and certain assets in use at MGM Grand Detroit were pledged as collateral for the Company's senior notes (excluding subordinated notes) and the $2.0 billion and $800 million revolving credit facilities.

On April 5, 2002, the Company entered into an amendment to its $800 million revolving credit facility whereby the maturity date was extended to April 4, 2003 and the lending commitment was reduced to $600 million.

The Company's long-term debt obligations contain certain customary covenants. The Company's $2.0 billion and $600 million revolving credit facilities contain covenants that require the Company to maintain certain financial ratios. The Company must maintain a maximum leverage ratio (average debt to EBITDA, as defined) of 6.5:1, decreasing periodically to 4.5:1 in March 2004. The Company must also maintain a minimum coverage ratio (EBITDA to interest charges, as defined) of 2.15:1, increasing periodically to 3.0:1 in March 2004. As of June 30, 2002, the Company's leverage and interest coverage ratios were 4.88:1 and 3.15:1, respectively.

At March 31, 2002, the Company had interest rate swap agreements designated as fair value hedges covering $650 million of its fixed rate debt due in 2005 and 2006. In the second quarter of 2002, the Company terminated these interest rate swaps. The interest rate swap agreements q