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 March 31, 2003
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		88-0215232
(State or other jurisdiction of incorporation or organization)		(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 by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): 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		Outstanding at May 12, 2003
Common Stock, $.01 par value		151,830,689 shares

MGM MIRAGE AND SUBSIDIARIES

FORM 10-Q

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2003 and December 31, 2002	1
	Consolidated Statements of Income for the Three Months Ended March 31, 2003 and March 31, 2002	2
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and March 31, 2002	3
	Condensed Notes to Consolidated Financial Statements	4-13
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14-16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 6.	Exhibits and Reports on Form 8-K	17
SIGNATURES		18
CERTIFICATIONS		19-20

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

MGM MIRAGE AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

			March 31, 2003			December 31, 2002
			*(Unaudited)*
ASSETS
Current assets
	Cash and cash equivalents		$	172,134		$	211,234
	Accounts receivable, net			134,586			139,935
	Inventories			68,066			68,001
	Deferred income taxes			65,604			84,348
	Prepaid expenses and other			87,572			86,311

		Total current assets		527,962			589,829

Property and equipment, net				8,739,506			8,762,445
Other assets
	Investment in unconsolidated affiliates			713,682			710,802
	Goodwill and other intangible assets, net			257,351			256,108
	Deposits and other assets, net			192,835			185,801

		Total other assets		1,163,868			1,152,711

			$	10,431,336		$	10,504,985

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Accounts payable		$	75,168		$	69,959
	Income taxes payable			13,445			637
	Current portion of long-term debt			7,356			6,956
	Accrued interest on long-term debt			56,267			80,310
	Other accrued liabilities			567,665			592,206

		Total current liabilities		719,901			750,068

Deferred income taxes				1,761,541			1,769,431
Long-term debt				5,184,236			5,213,778
Other long-term obligations				112,594			107,564
Commitments and contingencies
Stockholders' equity
	Common stock, $.01 par value: authorized 300,000,000 shares; issued 166,399,089 and 166,393,025 shares; outstanding 152,021,689 and 154,574,225 shares			1,664			1,664
	Capital in excess of par value			2,125,999			2,125,626
	Deferred compensation			(25,195	)		(27,034	)
	Treasury stock, at cost (14,377,400 and 11,818,800 shares)			(384,172	)		(317,432	)
	Retained earnings			941,209			890,206
	Other comprehensive loss			(6,441	)		(8,886	)

		Total stockholders' equity		2,653,064			2,664,144

			$	10,431,336		$	10,504,985

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 March 31,
		2003			2002
Revenues
	Casino	$	545,343		$	567,389
	Rooms		225,539			206,499
	Food and beverage		201,937			188,180
	Entertainment, retail and other		162,049			152,955

			1,134,868			1,115,023
	Less: Promotional allowances		112,938			107,617

			1,021,930			1,007,406

Expenses
	Casino		287,405			281,604
	Rooms		63,137			53,953
	Food and beverage		113,946			97,585
	Entertainment, retail and other		108,259			99,835
	Provision for doubtful accounts		7,966			12,058
	General and administrative		150,256			147,483
	Corporate expense		13,746			10,635
	Preopening and start-up expenses		7,431			2,239
	Restructuring costs		605			—
	Property transactions, net		6,784			—
	Depreciation and amortization		105,613			103,373

			865,148			808,765

Income from unconsolidated affiliate			10,789			9,225

Operating income			167,571			207,866

Non-operating income (expense)
	Interest income		1,777			1,240
	Interest expense, net		(85,988	)		(72,597	)
	Interest expense from unconsolidated affiliate		—			(277	)
	Other, net		389			(2,623	)

			(83,822	)		(74,257	)

Income before income taxes			83,749			133,609
	Provision for income taxes		(32,746	)		(51,653	)

Net income		$	51,003		$	81,956

Basic earnings per share of common stock
	Net income per share	$	0.34		$	0.52

Diluted earnings per share of common stock
	Net income per share	$	0.33		$	0.51

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

MGM MIRAGE AND SUBIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

					Three Months Ended March 31,
					2003			2002
Cash flows from operating activities
	Net income				$	51,003		$	81,956
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				105,613			103,373
		Amortization of debt discount and issuance costs				8,505			7,174
		Provision for doubtful accounts				7,966			12,058
		Property transactions, net				6,784			—
		Income from unconsolidated affiliate				(10,789	)		(8,948	)
		Distributions from unconsolidated affiliate				10,500			11,000
		Deferred income taxes				10,894			17,933
		Tax benefit from stock option exercises				32			9,913
		Change in assets and liabilities:
			Accounts receivable			(2,617	)		(1,111	)
			Inventories			(65	)		(5,222	)
			Income taxes receivable and payable			12,808			17,392
			Prepaid expenses and other			(1,261	)		2,442
			Accounts payable and accrued liabilities			(51,105	)		(18,990	)
		Other				(612	)		(1,023	)

				Net cash provided by operating activities		147,656			227,947

Cash flows from investing activities
	Purchases of property and equipment					(86,445	)		(53,718	)
	Dispositions of property and equipment					334			5,339
	Investments in unconsolidated affiliates					(1,500	)		(36,814	)
	Change in construction payable					10,415			(1,996	)
	Other					(6,255	)		(10,652	)

				Net cash used in investing activities		(83,451	)		(97,841	)

Cash flows from financing activities
	Net repayments under bank credit facilities					(34,054	)		(151,500	)
	Issuance of common stock					80			24,985
	Purchase of treasury stock					(66,581	)		—
	Other					(2,750	)		(289	)

				Net cash used in financing activities		(103,305	)		(126,804	)

Cash and cash equivalents
	Net increase (decrease) for the period					(39,100	)		3,302
	Balance, beginning of period					211,234			208,971

	Balance, end of period				$	172,134		$	212,273

Supplemental cash flow disclosures
	Interest paid, net of amounts capitalized				$	101,869		$	90,531
	State and federal income taxes paid, net of refunds					6,576			1,895

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") is a Delaware corporation, incorporated on January 29, 1986. As of March 31, 2003, approximately 53% of the outstanding shares of the Company's common stock were owned by Tracinda Corporation, a Nevada corporation wholly owned by Kirk Kerkorian. MGM MIRAGE acts largely as a holding company and, through wholly-owned subsidiaries, operates hotel, casino and entertainment resorts.

The Company owns and operates the following hotel, casino and entertainment resorts on the Las Vegas Strip in Las Vegas, Nevada: Bellagio, MGM Grand Hotel and Casino—Las Vegas, The Mirage, Treasure Island, New York-New York and the Boardwalk Hotel and Casino. The Company also owns a 50% interest in the joint venture that owns and operates the Monte Carlo Resort & Casino, located on the Las Vegas Strip.

The Company owns the following resorts in other areas of Nevada: Golden-Nugget—Las Vegas, in downtown Las Vegas; Golden Nugget—Laughlin, in Laughlin, Nevada; and three resorts in Primm, Nevada at the California/Nevada state line—Whiskey Pete's, Buffalo Bill's and the Primm Valley Resort—as well as two championship golf courses located near the resorts. The Company also owns Shadow Creek, an exclusive world-class golf course located approximately 10 miles north of its Las Vegas Strip 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. See Note 8 for discussion of the revised development agreement with the City of Detroit.

The Company also owns and operates Beau Rivage, a beachfront resort located in Biloxi, Mississippi, and MGM Grand Hotel and Casino in Darwin, Australia.

A limited liability company owned 50-50 with Boyd Gaming Corporation is developing Borgata, a hotel and casino resort on 27 acres at Renaissance Pointe, located in the Marina area of Atlantic City, New Jersey. Borgata is expected to open this summer. The Company owns approximately 95 developable acres adjacent to Borgata, of which 75 acres are available for future development and 20 acres are for common landscaping and roadways on Renaissance Pointe.

PLAYMGMMIRAGE.com is the Company's online gaming website based in the Isle of Man, an independently governed British Crown dependency located in the Irish Sea off the coast of Great Britain. PLAYMGMMIRAGE.com became operational on September 26, 2002. It initially was not actively marketed, and was in the start-up phase through January 31, 2003. Because of the current state of the laws concerning Internet wagering, PLAYMGMMIRAGE.com has been designed to prevent the acceptance of wagers from the United States and many other jurisdictions.

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 Annual Report on Form 10-K for the year ended December 31, 2002.

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 March 31, 2003, and the results of its operations for the three-month periods ended March 31, 2003 and 2002. 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 2002 financial statements to conform to the 2003 presentation, which have no effect on previously reported net income. The income statement caption "Property transactions, net" includes impairments of long-lived assets, along with gains and losses on the sale or other disposal of fixed assets. Prior to January 1, 2003, the Company classified gains and losses on asset sales as a non-operating item at some of its resorts. Management believes that the presentation of these items as an element of operating income is a preferable presentation. Such transactions were not material in the prior periods, so prior period statements have not been reclassified.

NOTE 2—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company recorded its share of the results of operations of unconsolidated affiliates as follows:

Three months ended March 31,	2003			2002
	*(In thousands)*
Income from unconsolidated affiliate	$	10,789		$	9,225
Preopening and start-up expenses		(4,073	)		(1,869	)
Interest expense from unconsolidated affiliate		—			(277	)
Other non-operating income (expense)		(152	)		595

	$	6,564		$	7,674

NOTE 3—LONG-TERM DEBT

Long-term debt consisted of the following:

	March 31, 2003			December 31, 2002
	*(In thousands)*
$2.0 Billion Revolving Credit Facility	$	1,805,000		$	1,800,000
$600 Million Revolving Credit Facility		—			—
$50 Million Revolving Line of Credit		50,000			50,000
Australian Bank Facility, due 2004		14,934			15,726
Other Note due to Bank		2,750			40,000
$300 Million 6.95% Senior Notes, due 2005, net		301,909			302,169
$200 Million 6.625% Senior Notes, due 2005, net		193,594			192,830
$250 Million 7.25% Senior Notes, due 2006, net		233,163			232,176
$710 Million 9.75% Senior Subordinated Notes, due 2007, net		704,772			704,459
$200 Million 6.75% Senior Notes, due 2007, net		180,509			179,603
$200 Million 6.75% Senior Notes, due 2008, net		178,569			177,698
$200 Million 6.875% Senior Notes, due 2008, net		198,582			198,509
$850 Million 8.50% Senior Notes, due 2010, net		846,242			846,116
$400 Million 8.375% Senior Subordinated Notes, due 2011		400,000			400,000
$100 Million 7.25% Senior Debentures, due 2017, net		80,723			80,567
Other Notes		845			881

		5,191,592			5,220,734
Less: Current portion		(7,356	)		(6,956	)

	$	5,184,236		$	5,213,778

Total interest incurred for the three-month periods ended March 31, 2003 and 2002 was $92 million and $90 million, respectively, of which $6 million and $17 million, respectively, was capitalized.

On April 4, 2003, the Company entered into an amendment to its $600 million revolving credit facility whereby the maturity date was extended to April 2, 2004 and the lending commitment was reduced to $525 million. Concurrently, the Company entered into an amendment for the $2.0 billion revolving credit facility to adjust certain covenants to match the covenants required in the $525 million revolving credit facility. The effect of the amendment was to increase the maximum leverage ratio and decrease the minimum coverage ratio. Under the amended facilities, the Company must maintain a maximum leverage ratio (average debt to EBITDA, as defined) of 5.5:1, decreasing periodically to 5.0:1 by December 2004. The Company must also maintain a minimum coverage ratio (EBITDA to interest charges, as defined) of 2.5:1, increasing to 2.75:1 by March 2004. As of March 31, 2003, the Company's leverage and interest coverage ratios were 4.6:1 and 3.5:1, respectively.

In 2001, the Company entered into several interest rate swap agreements, designated as fair value hedges, which effectively converted a portion of the Company's fixed rate debt to floating rate debt. In the second quarter of 2002, the Company terminated all remaining interest rate swaps, which at the time covered $650 million of fixed rate debt. Net payments totaling $11 million were received during

2001 and 2002 upon the termination of interest rate swap agreements. These amounts have been added to the carrying value of the related debt obligations and are being amortized and recorded as a reduction of interest expense over the remaining life of that debt.

NOTE 4—STOCKHOLDERS' EQUITY

During the three months ended March 31, 2003, the Company repurchased 1.4 million shares of its common stock for $36 million as part of its previously authorized 10 million share repurchase program, which completed that share repurchase program. In February 2003, the Board of Directors authorized a new 10 million share repurchase program (the "2003 program"). In the first quarter of 2003, the Company repurchased 1.2 million shares under the 2003 program at a total cost of $31 million, leaving 8.8 million shares available for repurchase under the 2003 program.

NOTE 5—INCOME PER SHARE OF COMMON STOCK

The weighted-average number of common and common equivalent shares used in the calculation of basic and diluted earnings per share consisted of the following:

Three months ended March 31,	2003	2002
	*(In thousands)*
Weighted-average common shares outstanding (used in the calculation of basic earnings per share)	152,110	158,011
Potential dilution from stock options and restricted stock	1,439	2,141

Weighted-average common and common equivalent shares (used in the calculation of diluted earnings per share)	153,549	160,152

NOTE 6—COMPREHENSIVE INCOME

Comprehensive income consisted of the following:

Three months ended March 31,		2003			2002
		*(In thousands)*
Net income		$	51,003		$	81,956
	Currency translation adjustment, net of tax		2,516			1,704
	Derivative income (loss) from unconsolidated affiliate, net of tax		(71	)		13

Comprehensive income		$	53,448		$	83,673

NOTE 7—STOCK OPTION PLANS AND STOCK-BASED COMPENSATION

In the three months ended March 31, 2003, the Compensation and Stock Option Committee of the Board of Directors granted 8.2 million options to Company employees. As of December 31, 2002, only 2.5 million options were available for grant under existing option plans, but the Company's majority shareholder had indicated its intent to vote its shares in favor of an amendment to the current stock option plan to increase the authorized number of options by 8 million. In May 2003, the Company obtained formal shareholder approval of the amendment. After giving effect to the amendment, as of March 31, 2003, the aggregate number of shares subject to options available for grant under the Company's stock option plans was 2.4 million.

A summary of the status of the Company's stock option plans is presented below:

Three months ended March 31, 2003	Shares (000's)		Weighted Average Exercise Price
Outstanding at beginning of period	14,323		$	27.18
Granted	8,160			25.65
Exercised	(6	)		13.19
Terminated	(63	)		33.40

Outstanding at end of period	22,414			26.57

Exercisable at end of period	7,777			24.79

The Company accounts for stock-based compensation, including employee stock option plans, in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and the Financial Accounting Standards Board's Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25". Had the Company accounted for these plans under the fair value method allowed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure" ("SFAS 148"), the Company's net income and earnings per share would have been reduced to recognize the fair value of employee stock options. The following are required disclosures under SFAS 123 and SFAS 148:

Three months ended March 31,		2003			2002
		(In thousands, except per share amounts)
Net income
	As reported	$	51,003		$	81,956
	Stock-based compensation under SFAS 123		(10,401	)		(2,763	)

	Pro forma	$	40,602			79,193

Basic earnings per share
	As reported	$	0.34		$	0.52
	Stock-based compensation under SFAS 123		(0.07	)		(0.02	)

	Pro forma	$	0.27		$	0.50

Diluted earnings per share
	As reported	$	0.33		$	0.51
	Stock-based compensation under SFAS 123		(0.07	)		(0.02	)

	Pro forma	$	0.26		$	0.49

The stock-based compensation included in the table above represents the after-tax amount of pro forma compensation related to stock option plans. Reported net income includes $1 million and $0, net of tax, of amortization of restricted stock compensation for the three months ended March 31, 2003 and 2002, respectively.

NOTE 8—COMMITMENTS AND CONTINGENCIES

Detroit Development Agreement. MGM Grand Detroit, LLC has operated an interim casino facility in downtown Detroit since July 29, 1999, and is planning a permanent casino facility under a revised development agreement with the City of Detroit entered into on August 2, 2002.

The Company has recorded an intangible asset (development rights, deemed to have an indefinite life) of approximately $115 million in connection with its payment obligations under the revised development agreement. Payments of $22 million were made through March 31, 2003, assets of $3 million will be transferred to the City, and the remainin