UNITED STATESSECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the Quarterly Period Ended June 30, 2001
OR
For the transition period from to
Commission file number 0-16760
MGM MIRAGE (Exact name of registrant as specified in its charter)
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)
Not Applicable (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. Yes /x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
MGM MIRAGE AND SUBSIDIARIES FORM 10-Q I N D E X
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
MGM MIRAGE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
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MGM MIRAGE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
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MGM MIRAGE AND SUBIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
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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, 2001, approximately 57.2% 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") (see Note 2). 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 Holiday Inn® Casino Boardwalk, 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 Properties"), as well as two championship golf courses located near the Primm Properties.
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.
A limited liability company owned 50-50 with Boyd Gaming Corporation is developing the Borgata, a hotel and casino resort on 27 acres in the Marina area of Atlantic City, New Jersey. The Company also owns approximately 95 acres adjacent to the Borgata site which is available for future development.
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.
Through its wholly owned subsidiary, MGM Grand South Africa, Inc., the Company manages two permanent casinos and one interim casino in two provinces of the Republic of South Africa. The Company managed an interim facility in Nelspruit from October 15, 1997 to November 17, 1999, at which time a permanent casino began operations and the temporary operations ceased. The interim casino in Witbank began operations on March 10, 1998, and the interim casino in Johannesburg operated from September 28, 1998 through November 26, 2000, at which time the permanent facility, the Montecasino, began operations and the temporary operations ceased. The Company receives management fees from its partner, Tsogo Sun Gaming & Entertainment ("Tsogo Sun"), which is responsible for providing all project costs. Tsogo Sun has been granted additional licenses for Durban and East London, and the Company anticipates an interim casino will be opened in East London in late 2001.
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As permitted by the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in the 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, 2000.
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, 2001, and the results of its operations for the three and six month periods ended June 30, 2001 and 2000. 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 2000 financial statements to conform to the 2001 presentation, which have no effect on previously reported net income. In addition, the accompanying financial statements reflect certain adjustments to amounts related to other comprehensive income. The adjustments reduce previously reported comprehensive income by $0.4 million and $5.1 million, respectively, for the three and six months ended June 30, 2000, but have no effect on previously reported net income.
NOTE 2—MIRAGE ACQUISITION
On May 31, 2000, the Company completed the Mirage Acquisition whereby Mirage shareholders received $21 per share in cash. The acquisition had a total equity value of approximately $4.4 billion. In addition, the Company assumed approximately $2.0 billion of Mirage's outstanding debt, of which approximately $1.0 billion was refinanced and $950 million remains outstanding. The transaction was accounted for as a purchase and, accordingly, the purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The estimated fair value of assets acquired and liabilities assumed (net of the debt refinanced at the time of the acquisition) were $8.0 billion and $2.7 billion, respectively. The operating results for Mirage are included in the Consolidated Statements of Operations from the date of acquisition.
The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Mirage Acquisition had occurred on January 1, 2000:
This unaudited pro forma consolidated financial information is not necessarily indicative of what the Company's actual results would have been had the acquisition been completed on January 1, 2000, or of future results.
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NOTE 3—LONG-TERM DEBT
Long-term debt consisted of the following:
Total interest incurred for the three month periods ended June 30, 2001 and 2000 was $112 million and $61 million, respectively, of which $20 million and $14 million, respectively, was capitalized. Total interest incurred for the six month periods ended June 30, 2001 and 2000 was $233 million and $85 million, respectively, of which $43 million and $16 million, respectively, was capitalized.
On January 23, 2001, the Company issued under its shelf registration statement $400 million of senior subordinated notes, which carry a coupon of 8.375% and are due on February 1, 2011. These senior subordinated notes contain covenants consistent with the Company's other senior subordinated notes. Remaining capacity under the shelf registration statement after issuance of these notes is $790 million. Any future offering of securities under the shelf registration statement will only be made by means of a prospectus supplement.
The Company's $1.3 billion term loan was fully repaid during the first quarter of 2001, principally through proceeds from the January 23, 2001 senior subordinated note offering. The Company recognized an extraordinary loss of $0.8 million, net of income tax benefit, relating to the early extinguishment of this loan, reflecting the write-off of unamortized debt issuance costs.
On April 6, 2001, the Company entered into an amendment to its $1.0 billion revolving credit facility whereby the maturity date was extended to April 5, 2002 and the lending commitment was reduced to $800 million.
The Company attempts to limit its exposure to interest rate risk by managing the mix of its long-term fixed rate borrowings and short-term borrowings under its bank credit facilities and commercial paper program. Since the Mirage Acquisition was completed on May 31, 2000, the Company has issued $1.25 billion of long-term fixed rate debt and repaid $2.10 billion of bank credit facility borrowings. As a result, as of June 30, 2001, long-term fixed rate borrowings represented
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approximately 60% of the Company's total borrowings. During June 2001, the Company entered into interest rate swap agreements designated as fair value hedges of its $500 million of fixed rate debt due in 2005. Under the terms of these agreements, the Company makes payments based on specified spreads over six-months LIBOR, and receives payments equal to the interest payments due on the fixed rate debt. Giving effect to these agreements, the Company's fixed rate and floating rate borrowings each represent approximately 50% of total borrowings.
The interest rate swap agreements qualify for the "shortcut" method allowed under Statement of Financial Accounting Standards No. 133, which allows an assumption of no ineffectiveness in the hedging relationship. As such, there is no income statement impact from changes in the fair value of the hedging instruments. Instead, the fair value of the instruments is recorded as an asset or liability on the Company's balance sheet, with an offsetting adjustment to the carrying value of the related debt. Other long-term obligations on the accompanying June 30, 2001 balance sheet include approximately $6 million representing the fair value of the interest rate swap agreements at that date, with a corresponding aggregate reduction in the carrying value of the Company's 6.95% and 6.625% senior notes due in 2005.
NOTE 4—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:
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NOTE 5—CONSOLIDATING CONDENSED FINANCIAL INFORMATION
The Company's subsidiaries (excluding MGM Grand Detroit, LLC and the Company's non-U.S. subsidiaries) have fully and unconditionally guaranteed, on a joint and several basis, payment of the $2.0 billion and $800 million revolving credit facilities, the senior notes and debentures and the senior subordinated notes. Separate condensed financial statement information for the subsidiary guarantors and non-guarantors as of June 30, 2001 and December 31, 2000 and for the three and six month periods ended June 30, 2001 and 2000 is as follows:
CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Quarter versus Quarter
The May 31, 2000 acquisition of Mirage has had a significant impact on our operating results. The acquisition added four wholly owned and one joint venture resort on the Las Vegas Strip, as well as resorts in downtown Las Vegas and Laughlin, Nevada and Biloxi, Mississippi. Net revenues for the three months ended June 30, 2001 totaled $1.05 billion, an increase of $448 million, or 74%, over the prior-year second quarter. The Mirage properties generated net revenues of $648 million, an increase of $460 million versus their one-month results in 2000, while same store net revenues at the MGM properties declined by $12 million, or 3%, to $403 million.
The decrease in revenues at the MGM properties was concentrated in the casino area. Consolidated casino revenues for the second quarter of 2001 were $550 million, an increase of $194 million, or 55%, over the prior-year second quarter. The Mirage properties generated casino revenues of $297 million in the 2001 quarter, an increase of $209 million over their one-month results in 2000, while casino revenues at the MGM properties declined by $15 million, or 6%, to $253 million. This decline was principally the result of declines of $11 million at MGM Grand Detroit and $8 million at the Primm Properties, offset in part by an increase of $5 million at MGM Grand Las Vegas. The decline at MGM Grand Detroit resulted from decreased gaming volumes, as a competitor opened the third and final Detroit casino in November 2000. The decrease at the Primm Properties was also attributable to reduced gaming volumes, reflecting increased competition from Native American casinos, as well as higher gasoline and utility costs in California. The increase in casino revenues at MGM Grand Las Vegas resulted from increases in both table games and slot volumes.
Consolidated room revenues for the three months ended June 30, 2001 were $231 million, an increase of $114 million, or 97%, over the second quarter of 2000. Room revenues at the Mirage properties during the second quarter of 2001 totaled $156 million, an increase of $110 million over the one-month result from 2000. The remainder of the increase was attained at MGM Grand Las Vegas, which achieved a 9% increase in room revenues, from $49 million in the second quarter of 2000 to $53 million in the current-year quarter. This increase resulted from a 6% increase in available rooms, as a room remodeling project had been ongoing during the prior-year quarter, coupled with a 3% increase in revenue per available room.
Consolidated food and beverage, entertainment, retail and other revenues were $360 million for the second quarter of 2001, an increase of $181 million, or 102%, over the prior-year second quarter. The Mirage properties contributed $179 million of this increase, as revenues were $252 million for the second quarter of 2001 versus $73 million for the one-month period in 2000. The remainder of the increase was attributable to increased food and beverage revenues at MGM Grand Las Vegas.
Consolidated operating expenses (before preopening expense, restructuring costs, write-downs and impairments and corporate expense) were $824 million for the three months ended June 30, 2001, an increase of $360 million, or 78%, over the $464 million reported in the prior-year quarter. The Mirage properties generated $354 million of this increase, with $513 million of current-period costs versus $159 million in the one-month period in 2000. The MGM properties incurred a $6 million increase in operating expenses despite the $12 million decrease in net revenues. This decline in margins occurred principally at the Primm Properties and New York-New York, and reflected intensified competitive conditions as well as a significant increase in energy costs.
Corporate expense was $10 million in the 2001 second quarter versus $7 million in the prior-year quarter. This increase was primarily attributable to the Mirage acquisition, reflecting higher corporate operating expenses related to a larger corporate structure and higher airplane costs due to the
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operation of two corporate airplanes in the current period compared to only one prior to the Mirage acquisition.
Interest expense, net of amounts capitalized, was $92 million for the second quarter of 2001, versus $47 million in the prior-year quarter. This increase was primarily due to the higher debt levels attributable to the financing of the Mirage acquisition, offset in part by a significant reduction in interest rates on borrowings under our bank credit facilities and a $6 million increase in interest capitalized, principally relating to development sites acquired in the Mirage acquisition.
Six Months versus Six Months
Net revenues for the six months ended June 30, 2001 totaled $2.12 billion, an increase of $1.09 billion, or 107%, over the comparable prior-year period. The Mirage properties generated net revenues of $1.33 billion, an increase of $1.14 billion versus their one-month results in 2000, while same store net revenues at the MGM properties declined by $44 million, or 5%, to $795 million.
The decrease in revenues at the MGM properties for the six-month period was concentrated in the casino area. Consolidated casino revenues for the first half of 2001 were $1.12 billion, an increase of $484 million, or 76%, over the prior-year period. The Mirage properties generated casino revenues of $627 million in the first six months of 2001, an increase of $539 million over their one-month results in 2000, while casino revenues at the MGM properties declined by $55 million, or 10%, to $498 million. This decline was principally the result of declines of $22 million, $16 million and $13 million at MGM Grand Detroit, the Primm Properties and MGM Grand Las Vegas, respectively. The decrease at the Primm Properties was attributable primarily to reduced gaming volumes, reflecting increased competition from Native American casinos, as well as higher gasoline and utility costs in California. The decline at MGM Grand Detroit also resulted from decreased gaming volumes, as a competitor opened the third and final Detroit casino in November 2000. The decrease at MGM Grand Las Vegas was entirely due to a decline in hold percentage, offset in part by higher gaming volumes.
Consolidated room revenues for the six months ended June 30, 2001 were $466 million, an increase of $279 million, or 149%, over the first half of 2000. Room revenues at the Mirage properties during the first half of 2001 totaled $314 million, an increase of $268 million over the one-month result from 2000. The remainder of the increase was attained at MGM Grand Las Vegas and New York-New York. MGM Grand Las Vegas achieved a 10% increase in room revenue, resulting from 5% increases in available rooms and in revenue per available room. Room revenue at New York-New York increased by 5%, reflecting increases in both occupancy percentage and average daily rate.
Consolidated food and beverage, entertainment, retail and other revenues were $715 million for the six months ended June 30, 2001, an increase of $435 million, or 155%, over the first half of 2000. The Mirage properties contributed $430 million of this increase, as revenues were $503 million for the six-month period in 2001 versus $73 million for the one-month period in 2000. The remainder of the increase was attributable to increased food and beverage revenues at MGM Grand Las Vegas.
Consolidated operating expenses (before preopening expense, restructuring costs, write-downs and impairments and corporate expense) were $1.65 billion for the six months ended June 30, 2001, an increase of $863 million, or 110%, over the $783 million reported in the prior-year quarter. The Mirage properties generated an $867 million increase in operating expenses, with $1.03 billion of current-period costs versus $159 million in the one-month period in 2000, while operating costs at the MGM properties declined by $4 million, or 1%. As noted above, operating revenues at the MGM properties declined by 5% over the comparable six-month period in 2000. As discussed previously, intensified competitive conditions and increased energy costs were the principal reasons the decline in costs did not match the decline in revenues.
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The Mirage acquisition resulted in corporate expense increasing from $13 million for the six months ended June 30, 2000 to $21 million for the first half of 2001.
Interest expense, net of amounts capitalized, was $190 million for the first six months of 2001, versus $69 million in the prior-year period. This increase reflected substantial increases both in interest cost and interest capitalized, each as a result of the Mirage acquisition. Interest cost increased due to the higher debt levels attributable to the financing of the Mirage acquisition, offset in part by a significant reduction in interest rates on borrowings under our bank credit facilities. Interest capitalized increased primarily as the result of capitalization of interest on development projects in the Marina area of Atlantic City, on development sites acquired in the Mirage acquisition.
Liquidity and Capital Resources
As of June 30, 2001 and December 31, 2000, we held cash and cash equivalents of $215 million and $228 million respectively. Cash provided by operating activities for the first six months of 2001 was $449 million, compared with $285 million for the comparable period of 2000.
Capital expenditures for the first half of 2001 were $144 million. These expenditures related to general property improvements at our resorts, as well as pre-construction activities associated with ongoing development projects, including capitalized interest, principally in Atlantic City.
On January 23, 2001, we issued $400 million of senior subordinated notes, which carry a coupon of 8.375% and are due on February 1, 2011. These senior subordinated notes were issued under our shelf registration statement, leaving remaining capacity of $790 million. Any future offering of securities under the shelf registration statement will only be made by means of a prospectus supplement. We repaid the remaining $461 million balance under the $1.3 billion term loan during the first quarter of 2001, principally through proceeds from the senior subordinated note offering. We also reduced the outstanding balances under our other bank credit facilities by $257 million during the first half of 2001, bringing total net reductions in the face value of debt during the six-month period to $318 million.
On April 6, 2001, we entered into an amendment to our $1.0 billion revolving credit facility whereby the maturity date was extended to April 5, 2002 and the lending commitment was reduced to $800 million.
We intend to focus on utilizing available free cash flow to reduce indebtedness, as well as to finance our ongoing operations. We expect to finance operations, capital expenditures and existing debt obligations through cash flow from operations, cash on hand, bank credit facilities and, depending on market conditions, public offerings of securities under the shelf registration statement.
Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our long-term debt. We attempt to limit our exposure to interest rate risk by managing the mix of our long-term fixed rate borrowings and short-term borrowings under our bank credit facilities and commercial paper program. Since the Mirage Acquisition was completed on May 31, 2000, we have issued $1.25 billion of long-term fixed rate debt and repaid $2.10 billion of bank credit facility borrowings. As a result, as of June 30, 2001, long-term fixed rate borrowings represented approximately 60% of our total borrowings. During June 2001, we entered into interest rate swap agreements designated as fair value hedges of our $500 million principal amount of fixed rate debt due in 2005. Under the terms of these agreements, we make payments based on specified spreads over six-month LIBOR, and receive payments equal to the interest payments due on the fixed rate debt. Giving effect to these agreements, our fixed rate and floating rate borrowings each represent approximately 50% of total borrowings.
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The following table provides information about our interest rate swaps as of June 30, 2001:
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," was issued in June 2001. The statement provides that goodwill will no longer be amortized effective January 1, 2002, but will instead be reviewed for impairment at least annually.
Safe Harbor Provision
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this 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 competition, development and construction activities, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or international economic conditions (including sensitivity to fluctuations in foreign currencies), pending or future legal proceedings, 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).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We incorporate by reference the information appearing under "Market Risk" in Item 2 of this Form 10-Q.
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
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Additionally, at the Annual Meeting the appointment of Arthur Andersen LLP as the Company's independent auditors for the year ending December 31, 2001 was ratified, by a vote of 147,954,145 shares in favor, 73,228 shares opposed and 5,162 shares abstaining.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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