MGM Resorts - 10-Q quarterly report FY

 

 

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     Organization. MGM MIRAGE (the “Company”) is a Delaware corporation, incorporated on January 29, 1986. As of March 31, 2009, approximately 54% 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, owns and/or operates casino resorts.

     The Company owns and operates the following casino resorts in Las Vegas, Nevada: Bellagio, MGM Grand Las Vegas, Mandalay Bay, The Mirage, Luxor, New York-New York, Excalibur, Monte Carlo, Circus Circus Las Vegas and Slots-A-Fun. Operations at MGM Grand Las Vegas include management of The Signature at MGM Grand Las Vegas, a condominium-hotel consisting of over 1,500 units. Other Nevada operations include Circus Circus Reno, Gold Strike in Jean, and Railroad Pass in Henderson. The Company has a 50% investment in Silver Legacy in Reno, which is adjacent to Circus Circus Reno. The Company also owns Shadow Creek, an exclusive world-class golf course located approximately ten miles north of its Las Vegas Strip resorts, and Primm Valley Golf Club at the California/Nevada state line. The Company owns land for future development on the North Las Vegas Strip. See Note 6 for the status of the Company’s joint venture project with Kerzner International and Istithmar planned for this site. In March 2009, the Company completed the sale of Treasure Island (“TI”) to Ruffin Acquisition, LLC — see further discussion in Note 3.

     The Company is a 50% owner of CityCenter, a mixed-use development on the Las Vegas Strip, between Bellagio and Monte Carlo. The other 50% of CityCenter is owned by Infinity World Development Corp (“Infinity World”), a wholly-owned subsidiary of Dubai World, a Dubai, United Arab Emirates government decree entity. The Company is managing the development of CityCenter and will manage the operations of CityCenter for a fee. CityCenter will feature a 4,000-room casino resort designed by world-famous architect Cesar Pelli; two 400-room non-gaming boutique hotels, one of which will be managed by luxury hotelier Mandarin Oriental; approximately 425,000 square feet of retail shops, dining and entertainment venues; and approximately 2.1 million square feet of residential space in approximately 2,400 luxury condominium and condominium-hotel units in multiple towers. CityCenter is expected to open in late 2009, except the opening of The Harmon Hotel & Spa has been postponed until such time as the Company and Infinity World mutually agree to proceed with its completion. The Company anticipates the total cost of CityCenter, excluding costs of completing The Harmon Hotel & Spa, to be $8.5 billion, including preopening costs of $0.2 billion and financing costs of $0.3 billion.

     The Company and its local partners own and operate MGM Grand Detroit in downtown Detroit, Michigan. The Company also owns and operates two resorts in Mississippi — Beau Rivage in Biloxi, which includes the Fallen Oak golf course, and Gold Strike Tunica.

     The Company has 50% interests in three resorts outside of Nevada — Grand Victoria, Borgata and MGM Grand Macau (through its 50% ownership of MGM Grand Paradise Limited). Grand Victoria is a riverboat in Elgin, Illinois — an affiliate of Hyatt Gaming owns the other 50% of Grand Victoria and also operates the resort. Borgata is a casino resort located on Renaissance Pointe in the Marina area of Atlantic City, New Jersey — Boyd Gaming Corporation owns the other 50% of Borgata and also operates the resort. MGM Grand Macau is a casino resort in Macau S.A.R. — Pansy Ho Chiu-King owns the other 50% of MGM Grand Paradise Limited.

     The Company owns additional land adjacent to Borgata, a portion of which consists of common roads, landscaping and master plan improvements, a portion of which is being utilized by Borgata, and a portion of which is planned for a wholly-owned development, MGM Grand Atlantic City — that development is currently postponed. This project will remain postponed until such time as general economic conditions and the Company’s financial position improve.

     Financial statement impact of the Monte Carlo fire. The Company maintains insurance for both property damage and business interruption relating to catastrophic events, such as the rooftop fire at Monte Carlo in January 2008. Business interruption coverage covers lost profits and other costs incurred during the closure period and up to six months following re-opening.

     Non-refundable insurance recoveries received in excess of the net book value of damaged assets, clean-up and demolition costs, and post-event costs are recognized as income in the period received or committed based on the Company’s estimate of the total claim for property damage and business interruption compared to the recoveries received at that time. All post-event costs and expected recoveries are recorded net within “General and administrative” expenses, except for depreciation of non-damaged assets, which is classified as “Depreciation and amortization.” Gains on insurance recoveries related to business interruption are recorded within “General and administrative” expenses and gains related to property damage are recorded with “Property transactions, net.”

     Insurance recoveries are classified in the statement of cash flows based on the coverage to which they relate. Recoveries related to business interruption are classified as operating cash flows and recoveries related to property damage are classified as investing cash flows. However, the Company’s insurance policy includes undifferentiated coverage for both property damage and business interruption. Therefore, the Company classifies insurance recoveries as being related to property damage until the full amount of damaged assets and demolition costs are recovered and classifies additional recoveries up to the amount of the post-event costs incurred as being related to business interruption. Insurance recoveries beyond that amount are classified as operating or investing cash flows based on the Company’s estimated allocation of the total claim.

     As of March 31, 2009, the Company had received $62 million of proceeds from its insurance carriers related to the Monte Carlo fire and had settled its final claim for a total of $74 million. The Company had a receivable of $12 million from its insurance carriers at March 31, 2009.

     The following table shows the net pre-tax impact on the statements of income for insurance recoveries from the Monte Carlo fire:

     Fair value measurement. The Company adopted statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”) for financial assets and liabilities on January 1, 2008 and for non-financial assets and liabilities on January 1, 2009. The adoption of SFAS 157 for non-financial assets and liabilities did not have a material impact on the Company’s financial statements. The Company accounts for its financial assets and liabilities and non-financial assets and liabilities required to be measured at fair value in accordance with SFAS 157 and measures fair value using “Level 1” inputs, such as quoted prices in an active market; “Level 2” inputs, which are observable inputs for similar assets; or “Level 3” inputs, which are unobservable inputs. The Company’s significant financial assets and liabilities accounted for at fair value are:

     Basis of presentation. 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 Company’s 2008 annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

     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, 2009 and the results of its operations and cash flows for the three month periods ended March 31, 2009 and 2008. The results of operations for such periods are not necessarily indicative of the results to be expected for the full year.

     The Company has significant indebtedness and significant financial commitments in 2009. As of March 31, 2009, the Company had approximately $14.4 billion of total debt. The Company is uncertain as to whether it will be able to generate cash flows from operations or through asset dispositions to fund its 2009 financial commitments and cannot provide any assurances that it will be able to raise additional capital to fund its anticipated expenditures in 2009.

     In late February 2009, the Company borrowed $842 million under its senior credit facility, which amount represented — after giving effect to $93 million in outstanding letters of credit — the total amount of unused borrowing capacity available under its $7.0 billion senior credit facility. In connection with the waivers and amendments, discussed below, the Company repaid $300 million on March 17, 2009 and $100 million on April 29, 2009 under the senior credit facility. Such amounts are not available for reborrowing without the consent of the lenders. The Company has no other existing sources of borrowing availability, except to the extent it pays down further amounts outstanding under the senior credit facility.

     As of March 31, 2009, the Company was not in compliance with its financial covenants under its senior credit facility. On March 16, 2009, the Company entered into an amendment and waiver to its senior credit facility, which provided for, among other conditions, a waiver of the requirement that the Company comply with such financial covenants through May 15, 2009. In addition to the March 16, 2009 amendment and waiver, the Company entered into certain subsequent amendments to the senior credit facility allowing for additional investments in CityCenter and, on April 29, 2009, the Company entered into a further amendment and waiver through June 30, 2009 which provided for the following:

     Following expiration of the current waiver on June 30, 2009, the Company will be subject to an event of default related to the noncompliance with financial covenants under the senior credit facility at March 31, 2009. Under the terms of the senior credit facility, noncompliance with such financial covenants is an event of default, under which the lenders (with a vote of more than 50% of the lenders) may exercise any or all of the following remedies:

     In addition, there are provisions in the Company’s indentures governing its senior and senior subordinated notes under which a) the event of default under the senior secured credit facility, or b) the remedies under an event of default under the senior credit facility, would cause an event of default under the relevant senior and senior subordinated notes, which would allow holders of the Company’s senior and senior subordinated notes to demand immediate repayment and decline to release subsidiary guarantees. If the lenders exercise any or all such rights, the Company may determine to seek relief through a filing under the U.S. Bankruptcy Code.

     The conditions and events described above raise a substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability of assets or the amounts of liabilities that may result should the Company be unable to continue as a going concern. Management’s plans in regard to these matters are described below.

     The Company intends to work with its lenders to obtain additional waivers or amendments prior to June 30, 2009 to address future noncompliance with the senior credit facility; however, the Company can provide no assurance that it will be able to secure such waivers or amendments. The Company has also retained the services of outside advisors to assist the Company in instituting and implementing any required programs to accomplish management’s objectives. The Company is evaluating the possibility of a) disposing of certain assets, b) raising additional debt and/or equity capital, and c) modifying or extending its long-term debt. However, there can be no assurance that the Company will be successful in achieving its objectives.

     The assets and liabilities of TI were classified as held for sale as of December 31, 2008. However, the results of its operations were not classified as discontinued operations because the Company expects to continue to receive significant cash flows from customer migration.

     On March 20, 2009, the Company closed the sale of the TI to Ruffin Acquisition, LLC. At closing, the Company received $600 million in cash proceeds and a $175 million secured note bearing interest at 10% payable not later than 36 months after closing. Ruffin Acquisition, LLC exercised its option, provided for by an amendment to the purchase agreement, to prepay the note on or before April 30, 2009 and receive a $20 million discount on the purchase price. In connection with the sale of TI, including the transfer of all of the membership interest in TI, TI was released as a guarantor of the outstanding indebtedness of the Company and its subsidiaries. The Company recognized a pre-tax gain of $190 million on the sale, which is included within “Property transactions, net” in the accompanying consolidated statements of income for the three month period ended March 31, 2009.

     The following table summarizes the assets and liabilities related to TI classified as assets held for sale and liabilities related to assets held for sale in the accompanying consolidated balance sheet for the year ended December 31, 2008:

     Investments in and advances to unconsolidated affiliates consisted of the following:

     During the first quarter of 2009, the Company made payments of $437 million to CityCenter, of which $100 million was Infinity World’s share of equity contributions. Therefore, the Company recorded a receivable for the $100 million it paid on behalf of Infinity World within “Accounts receivable, net” in the accompanying consolidated balance sheet at March 31, 2009.

     As of March 31, 2009, the Company was required to make additional equity contributions of up to $394 million in accordance with CityCenter’s senior secured credit facility. The Company’s share of such required equity commitments are recorded as “Other accrued liabilities” in the accompanying consolidated balance sheets, with a corresponding increase to its investment balance when initially recorded in 2008. In April 2009, the Company funded an additional $70 million, of which $35 million was Infinity World’s share, leaving a remaining balance of $359 million. In conjunction with the amendments discussed below, in April 2009 Infinity World agreed to fund the $135 million previously funded on its behalf by the Company and the Company agreed to fund its remaining equity contributions of $224 million through irrevocable letters of credit.

     In April 2009, the Company and Dubai World entered into an amended and restated joint venture agreement. Also in April 2009, CityCenter and its lenders entered into an amendment to the bank credit facility. The key terms of the amendment to the CityCenter credit facility included the following:

     The key terms of the amendment to the joint venture agreement included the following:

     The Company is currently evaluating the impact of the amendments to the CityCenter joint venture agreement on its assessment of the consolidation criteria under Financial Accounting Standards Board Interpretation No. 46(R).

     On March 22, 2009, Infinity World filed a lawsuit against the Company that sought judicial relief from Infinity World’s contractual funding obligations to CityCenter on several grounds, which the company contested. The lawsuit was dismissed with prejudice in conjunction with the amended and restated joint venture agreement.

     During each of the three months ended March 31, 2009 and 2008, the Company incurred $13 million of costs reimbursable by CityCenter, primarily employee compensation, residential sales costs, and certain allocated costs. Such costs are recorded as “Other” operating expenses, and the reimbursement of such costs is recorded as “Other” revenue, in the accompanying consolidated statements of income.

     The Company evaluates its investments in unconsolidated affiliates for impairment when events or changes in circumstances indicate that the carrying value of such investment may have experienced an other-than-temporary decline in value. If such conditions exist, the Company compares the estimated fair value of the investment to its carrying value to determine if an impairment is indicated and determines whether such impairment is “other-than-temporary” based on its assessment of relevant factors. The Company estimates fair value using a discounted cash flow analysis. At March 31, 2009, the Company reviewed its CityCenter investment for impairment. The Company’s discounted cash flow analysis for CityCenter utilized “Level 3” inputs under SFAS 157 including, a) estimated future cash outflows for construction and maintenance expenditures and future cash inflows from operations and residential sales of CityCenter and b) market indicators of discount rates and terminal year capitalization rates. Based on its analysis, the Company determined that no impairment charge was necessary at March 31, 2009.

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

     Long-term debt consisted of the following:

     The $7.0 billion senior credit facility, consists of a term loan facility of $2.5 billion and a revolving credit facility of $4.5 billion and matures in 2011. The weighted average interest rate on outstanding borrowings under the senior credit facility at March 31, 2009 and December 31, 2008 was 4.8% and 3.4%, respectively. As discussed in Note 2, the Company has drawn down the entire amount of available borrowings under the senior credit facility.

     As discussed in Note 2, the Company was not in compliance with the financial covenants required under its senior credit facility as of March 31, 2009. The Company’s current amendment and waiver under the senior credit facility provides for a waiver of the requirement that the Company comply with the financial covenants at March 31, 2009 through June 30, 2009. In the event of default the lenders may, among other remedies, demand immediate repayment of all outstanding borrowings under the senior credit facility. Amounts outstanding under the Company’s senior credit facility have been classified as current liabilities as of March 31, 2009 because the Company has not obtained a waiver beyond one year of the balance sheet date. In addition, the Company’s senior and senior subordinated notes have been classified as current liabilities due to cross-default provisions included in the respective indentures covering these obligations.

     Interest expense, net consisted of the following:

     Under the Company’s 13% senior secured notes due 2013, upon consummation of an asset sale, such as the sale of TI described in Note 3, the Company must either a) reinvest the net after-tax proceeds, which can include committed capital expenditures, or b) make an offer to repurchase a corresponding amount of senior secured notes at par plus accrued interest.

     The Company’s long-term debt obligations contain customary covenants requiring the Company to maintain certain financial ratios. At March 31, 2009, the Company was required to maintain a maximum leverage ratio (debt to EBITDA, as defined) of 7.5:1 and a minimum coverage ratio (EBITDA to interest charges, as defined) of 2.0:1. At March 31, 2009, the Company’s leverage and interest coverage ratios were 7.9:1 and 2.4:1, respectively. As discussed above and in Note 2, the Company has obtained a waiver of the requirement to comply with these financial covenants through June 30, 2009.

     Mashantucket Pequot Tribal Nation. The Company entered into a series of agreements to implement a strategic alliance with the Mashantucket Pequot Tribal Nation (“MPTN”), which owns and operates Foxwoods Casino Resort in Mashantucket, Connecticut. The Company and MPTN have formed a jointly owned company — Unity Gaming, LLC — to acquire or develop future gaming and non-gaming enterprises. Under certain circumstances, the Company will provide a loan of up to $200 million to finance a portion of MPTN’s investment in future joint projects.

     Kerzner/Istithmar Joint Venture. In September 2007, the Company entered into a definitive agreement with Kerzner International and Istithmar forming a joint venture to develop a multi-billion dollar integrated resort to be located on the southwest corner of Las Vegas Boulevard and Sahara Avenue. In September 2008, the Company and its partners agreed to defer additional design and pre-construction activities and amended their joint venture agreement accordingly. In April 2009, the Company funded its $13 million share of pre-development costs to date, and was relieved of its obligation to contribute land to the joint venture. Either partner now has the right to dissolve the joint venture at any time and the design and pre-construction activities will remain postponed until such time as the partners agree to move forward with the project. The Company does not expect to move forward with this project until general economic conditions and the Company’s financial position improve.

     CityCenter completion guarantee. As discussed in Note 4, in April 2009 the Company entered into a new completion guarantee in conjunction with the CityCenter credit facility. The completion guarantee provides for additional contingent funding of construction costs in the event such funding is necessary to complete the project, and is secured by the Company’s interests in the assets of Circus Circus Las Vegas and certain adjacent undeveloped land. At March 31, 2009, the Company had recorded a liability of $205 million, classified as “Other long-term obligations” in the accompanying consolidated balance sheets, equal to the fair value of its previous partial completion guarantee. The Company will measure the fair value of its new completion guarantee in the second quarter of 2009.

     Other guarantees. The Company is party to various guarantee contracts in the normal course of business, which are generally supported by letters of credit issued by financial institutions. The Company’s senior credit facility limits the amount of letters of credit that can be issued to $250 million, and the amount of available borrowings under the senior credit facility is reduced by any outstanding letters of credit. At March 31, 2009, the Company had provided $93 million of total letters of credit, including $50 million to support bonds issued by the Economic Development Corporation of the City of Detroit, which are recorded as a liability of the Company. As discussed in Note 4, in April 2009 the Company funded its remaining equity contributions to CityCenter of $224 million through an irrevocable letter of credit, which does not count against the $250 million limit described above. Though not subject to a letter of credit, the Company has an agreement with the Nevada Gaming Control Board to maintain $112 million of availability under its senior credit facility to support normal bankroll requirements at the Company’s Nevada operations. Due to the fact that the Company borrowed the remaining available funds under its senior credit facility as described in Note 2, the Company has established separate bank accounts to hold a minimum of $112 million to support its obligation under the bankroll requirements.

     Litigation. The Company is a party to various legal proceedings, most of which relate to routine matters incidental to its business. Management does not believe that the outcome of such proceedings will have a material adverse effect on the Company’s financial position or results of operations.

     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:

     Approximately 24.6 million and 3.6 million stock options, stock appreciation rights and restricted stock units were excluded from the calculation of diluted earnings per share in the three months ended March 31, 2009 and 2008, respectively, since including these awards would have been anti-dilutive.

     Comprehensive income consisted of the following:

     Tender Offer. In February 2008, the Company and a wholly-owned subsidiary of Dubai World completed a joint tender offer to purchase 15 million shares of Company common stock at a price of $80 per share. The Company purchased 8.5 million shares at a total purchase price of $680 million.

     Stock repurchases. In addition to the tender offer, the Company repurchased 7.0 million shares of common stock in the three months ended March 31, 2008, at a total cost of $427 million. The Company did not repurchase common stock during the three months ended March 31, 2009. At March 31, 2009, the Company had 20 million shares available for repurchase under its May 2008 authorization.

     Activity under share-based payment plans. As of March 31, 2009, the aggregate number of share-based awards available for grant under the Company’s omnibus incentive plan was 18 million. A summary of activity under the Company’s share-based payment plans for the three months ended March 31, 2009 is presented below:

     As of March 31, 2009, there was a total of $48 million of unamortized compensation related to stock options and stock appreciation rights expected to vest, which is expected to be recognized over a weighted-average period of 2.0 years.

     As of March 31, 2009, there was a total of $67 million of unamortized compensation related to RSUs which is expected to be recognized over a weighted-average period of 2.2 years. Certain RSUs granted to certain corporate executives are subject to certain performance requirements determined by the Committee.

     The following table includes additional information related to stock options and SARs:

     Recognition of compensation cost. Compensation cost was recognized as follows:

     Compensation cost for stock options and SARs is based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant, using the following weighted-average assumptions:

     Expected volatility is based in part on historical volatility and in part on implied volatility based on traded options on the Company’s stock. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award.

     Net property transactions consisted of the following:

     Write-downs and impairments in 2009 primarily related to the write-off of several abandoned capital projects. Insurance recoveries related to the Monte Carlo fire — See Note 1. Write-downs and impairments in 2008 primarily related to a damaged marquee sign at Bellagio and assets written off in conjunction with retail store changes at Mandalay Bay.

     The Company’s subsidiaries (excluding MGM Grand Detroit, LLC and certain minor subsidiaries) have fully and unconditionally guaranteed, on a joint and several basis, payment of the senior credit facility, the senior notes and the senior subordinated notes. Separate condensed financial statement information for the subsidiary guarantors and non-guarantors as of March 31, 2009 and December 31, 2008 and for the three month periods ended March 31, 2009 and 2008 is as follows: