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MGM Resorts International 10-K 2008 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2007
OR
For the transition period __________ to __________
Commission
File No. 001-10362
MGM MIRAGE
(Exact name of Registrant as specified in its charter)
3600 Las Vegas Boulevard South — Las Vegas, Nevada 89109
(Address of principal executive office) (Zip Code) (702) 693-7120
(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of the
Registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K: þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act):
Yes o No þ
The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the
Registrant as of June 30, 2007 (based on the closing price on the New York Stock Exchange
Composite Tape on June 30, 2007) was $10.3 billion. As of
February 25, 2008, 293,845,623
shares of Registrant’s Common Stock, $.01 par value, were outstanding.
Portions of the Registrant’s definitive Proxy Statement for its 2008 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Table of Contents
PART I
ITEM 1. BUSINESS
MGM MIRAGE is referred to as the “Company” or the “Registrant,” and together with
our subsidiaries may also be referred to as “we,” “us” or “our.”
Overview
MGM MIRAGE is one of the world’s leading development companies with significant
gaming and resort operations. We believe the resorts we own, manage, and invest in are
among the world’s finest casino resorts. MGM MIRAGE was organized as MGM Grand, Inc. on
January 29, 1986 and is a Delaware corporation. MGM MIRAGE acts largely as a holding
company and its operations are conducted through its wholly-owned subsidiaries.
Our strategy is based on developing and maintaining competitive advantages in the
following areas:
Resort Portfolio
We execute our strategy through a portfolio approach, seeking to ensure that we
own, invest in and manage resorts in each market segment that are superior to our
competitors’ resorts. We also seek to own and invest in superior real estate assets,
with a blend of developing these assets on our own, partnering with others, and
strategically buying and selling real estate.
Our approach to resort ownership and investment is based on operating the premier
resorts in each geographic market and each customer segment in which we operate. We
discuss customer segments in the “Resort Operation” section. Regarding our approach to
resort locations, we feel it is important to selectively operate in markets with stable
regulatory environments. As seen in the table below, this means that a large portion of
our resorts are located in Nevada. In addition, we target markets with growth
potential. Currently, we believe that international markets, particularly in Asia,
offer the most attractive growth opportunities. We also believe there is growth
potential in investing in and managing non-gaming resorts. See the “Sustainable Growth”
and “Leveraging Our Brand and Management Assets” sections for further details on these
initiatives.
Our Operating Resorts
We have provided below certain information about our resorts as of December 31,
2007. Except as otherwise indicated, we wholly own and operate the resorts shown below.
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Further, more detailed information about each of our operating resorts can be found
in Exhibit 99.1 to this Annual Report on Form 10-K, which Exhibit is incorporated herein
by reference.
Investing in Existing Resorts
We believe that ensuring our resorts are the premier resorts in their respective
markets requires significant capital investment. We have a track record of reinvesting
cash flows into our existing resorts and we have achieved strong returns on these
investments in the past.
For instance, between 2003 and 2006 we invested a significant amount of capital at
MGM Grand Las Vegas, with additions such as KÁ, the acclaimed show by Cirque du Soleil;
the Skylofts and West Wing room enhancements; two highly acclaimed restaurants by Joël
Robuchon; and new poker and race and sports areas. That resort earned $290 million of
operating income in 2007, a dramatic increase from the $127 million earned in 2002.
Similarly, we transformed The Mirage, a resort many market observers credit with
changing the face of the Las Vegas Strip. We felt strongly about the allure of the
resort, but also believed that customers need fresh, updated experiences. Therefore, we
invested significant capital at The Mirage between 2004 and 2006, adding several new
restaurants; a category-defining nightclub, Jet; upgraded high-limit gaming areas; and
the Beatles-themed Love show by Cirque du Soleil. The Mirage earned $108 million of
operating income in 2003; in 2007, The Mirage earned $173 million of operating income.
We expect to continue this strategy for the foreseeable future. We have made, and
continue to make, investments in Mandalay Bay, Luxor and Excalibur and will continue to
analyze the needs for similar investments in our other resorts.
In addition, we have actively managed our portfolio of land holdings. We own
approximately 700 acres of land on the Las Vegas Strip, with a meaningful portion of
those acres undeveloped or considered by us to be under-developed. In 2007, we
purchased 34 acres of land on the Las Vegas Strip adjacent to our Circus Circus Las
Vegas resort. See discussion of recent projects announced for certain of our land
holdings in Las Vegas and Atlantic City in the “Sustainable Growth” section.
Risks Associated with Our Portfolio Strategy
The principal risk factors relating to our current portfolio of resorts are:
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Resort Operation
Our operating philosophy is predicated on creating resorts of memorable character,
treating our employees well and providing superior service for our guests. We also seek
to develop competitive advantages in specific markets and among specific customer
groups.
General
We operate primarily in one segment, the ownership and operation of casino resorts,
which includes offering gaming, hotel, dining, entertainment, retail and other resort
amenities. Over half of our net revenue is derived from non-gaming activities, a
higher percentage than many of our competitors, as our operating philosophy is to
provide a complete resort experience for our guests, including non-gaming amenities
which command a premium price based on their quality.
As a resort-based company, our operating results are highly dependent on the volume
of customers at our resorts, which in turn impacts the price we can charge for our hotel
rooms and other amenities. Since we believe that the number of walk-in customers
affects the success of our casino resorts, we design our facilities to maximize their
attraction to guests of other hotels. We also generate a significant portion of our
operating income from the high-end gaming segment, which can cause variability in our
results.
Most of our revenue is essentially cash-based, through customers wagering with cash
or paying for non-gaming services with cash or credit cards. Our resorts, like many in
the industry, generate significant operating cash flow. Our industry is capital
intensive and we rely heavily on the ability of our resorts to generate operating cash
flow to repay debt financing, fund maintenance capital expenditures and provide excess
cash for future development.
Our results of operations do not tend to be seasonal in nature, though a variety of
factors can affect the results of any interim period, including the timing of major Las
Vegas conventions, the amount and timing of marketing and special events for our
high-end customers, and the level of play during major holidays, including New Year and
Chinese New Year. Our significant convention and meeting facilities allow us to
maximize hotel occupancy and customer volumes during off-peak times such as mid-week or
during traditionally slower leisure travel periods, which also leads to better labor
utilization. Our results do not depend on key individual customers, though our success
in marketing to customer groups, such as convention customers, or the financial health
of customer segments, such as business travelers or high-end gaming customers from a
particular country or region, can impact our results.
All of our casino resorts operate 24 hours a day, every day of the year, with the
exception of Grand Victoria which operates 22 hours a day, every day of the year. At
our wholly-owned resorts, our primary casino and hotel operations are owned and managed
by us. Other resort amenities may be owned and operated by us, owned by us but managed
by third parties for a fee, or leased to third parties. We generally have an operating
philosophy that prefers ownership of amenities, since guests have direct contact with
staff in these areas and we prefer to control all aspects of the guest experience.
However, we do lease space to retail and food and beverage operators in certain
situations, particularly for branding opportunities. We also operate many “managed”
outlets, utilizing third party management for specific expertise in areas such as
restaurants and nightclubs, as well as for branding opportunities.
Customers and Competition
Our casino resorts generally operate in highly competitive environments. We compete
against other gaming companies as well as other hospitality and leisure and business
travel companies. Our primary methods of competing successfully include:
Our Las Vegas casino resorts compete for customers with a large number of other
hotel-casinos in the Las Vegas area, including major hotel-casinos on or near the Las
Vegas Strip, major hotel-casinos in the downtown area, which is about five miles from
the center of the Strip, and several major facilities elsewhere in the Las Vegas area.
Our Las Vegas Strip resorts also compete, in part, with each other. According to the
Las Vegas Convention and Visitors Authority, there were approximately 133,000 guestrooms
in Las Vegas at December 31, 2007, up slightly from approximately 132,600 rooms at
December 31, 2006. Las Vegas visitor volume was 39.2 million in 2007, up slightly from
the 38.9 million reported for 2006.
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The principal segments of the Las Vegas gaming market are leisure travel; premium
gaming customers; conventions, including small meetings and corporate incentive
programs; and tour and travel. Our high-end properties, which include Bellagio, MGM
Grand Las Vegas, Mandalay Bay, and The Mirage, appeal to the upper end of each market
segment, balancing their business by using the convention and tour and travel segments
to fill the mid-week and off-peak periods. Our marketing strategy for TI, New York-New
York, Luxor and Monte Carlo is aimed at attracting middle- to upper-middle-income
wagerers, largely from the leisure travel and, to a lesser extent, the tour and travel
segments. Excalibur and Circus Circus Las Vegas generally cater to the value-oriented
and middle-income leisure travel and tour and travel segments.
Outside Las Vegas, our other wholly-owned Nevada operations compete with each other
and with many other similar sized and larger operations. A significant portion of our
customers at these resorts come from California. We believe the expansion of Native
American gaming has had a negative impact on all of our Nevada resorts not located on
the Las Vegas Strip, and additional expansion in California could have a further adverse
effect on these resorts. Our Nevada resorts not located in Las Vegas appeal primarily to
middle-income customers attracted by room, food and beverage and entertainment prices
that are lower than those offered by major Las Vegas hotel-casinos. Our target customer
for these resorts is the value-oriented leisure traveler and the value-oriented local
customer.
Outside Nevada, our wholly-owned resorts mainly compete for customers in local
gaming markets, where location is a critical factor to success. In Tunica, Mississippi,
one of our competitors is closer to Memphis, the area’s principal market. In addition,
we compete with gaming operations in surrounding jurisdictions and other leisure
destinations in each region. For instance, in Detroit, Michigan we also compete with a
casino in nearby Windsor, Canada and with
Native American casinos in Michigan. In Biloxi, Mississippi we also compete with regional
riverboat and land-based casinos in Louisiana, Native American casinos in central
Mississippi, the Florida market, and with casinos in the Bahamas.
Our unconsolidated affiliates mainly compete for customers against casino resorts
in their respective markets, and in some cases against our wholly-owned operations.
Much like our wholly-owned resorts, our unconsolidated affiliates compete through the
quality of amenities, the value of the experience offered to guests, and the location of
their resorts.
Our casino resorts also compete for customers with hotel-casino operations located
in other areas of the United States and other parts of the world, and for leisure and
business travelers with non-gaming tourist destinations such as Hawaii, Florida and
cruise ships. Our gaming operations compete to a lesser extent with state-sponsored
lotteries, off-track wagering, card parlors, and other forms of legalized gaming in the
United States.
Marketing
We advertise on radio, television and billboards and in newspapers and magazines in
selected cities throughout the United States and overseas, as well as on the Internet
and by direct mail. We also advertise through our regional marketing offices located in
major United States and foreign cities. A key element of marketing to premium gaming
customers is personal contact by our marketing personnel. Direct marketing is also
important in the convention segment. We maintain Internet websites which inform
customers about our resorts and allow our customers to reserve hotel rooms, make
restaurant reservations and purchase show tickets. We also operate call centers to
allow customer contact by phone to make hotel and restaurant reservations and purchase
show tickets.
We utilize our world-class golf courses in marketing programs at our Las Vegas
Strip resorts. Our major Las Vegas resorts offer luxury suite packages
that include golf privileges at Shadow Creek. In connection with our marketing
activities, we also invite our premium gaming customers to play Shadow Creek on a
complimentary basis. We use Primm Valley Golf Club for marketing purposes at our Las
Vegas resorts, including offering room and golf packages at special rates.
Additionally, marketing efforts at Beau Rivage benefit from the Fallen Oak golf course
just 20 minutes north of Beau Rivage.
Employees and Management
We believe that knowledgeable, friendly and dedicated employees are a key success
factor in the casino resort industry. Therefore, we invest heavily in recruiting,
training and retaining our employees, as well as seeking to hire and promote the
strongest management team possible. We have numerous programs, both at the corporate
and business unit level, designed to achieve these objectives. For example, our
diversity program extends throughout our Company, and focuses on the unique strengths of
our individuals combined with a culture of working together to achieve greater
performance. Our diversity program has been widely recognized, including the honor of
“Top 50 Best Companies for Diversity” given by DiversityInc magazine. We have also
invested heavily in training, and we believe our programs, such as the MGM Grand
University and MGM MIRAGE leadership programs, are best-in-class among our industry
peers.
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Technology
We utilize technology to maximize revenue and efficiency in our operations. Our
Players Club program links our major resorts, and consolidates all slots and table games
activity for customers with a Players Club account. Customers qualify for benefits
across all of the participating resorts, regardless of where they play. We believe that our Players
Club enables us to more effectively market to our customers. A large
number of
the slot machines at our resorts operate with International Game Technology’s EZ-Pay™
cashless gaming system. We believe that this system enhances the customer experience
and increases the revenue potential of our slot machines.
Technology is a critical part of our strategy in non-gaming and administrative
operations as well. Our hotel systems include yield management modules which allow us
to maximize occupancy and room rates. Additionally, these systems capture charges made
by our customers during their stay, including allowing customers of our resorts to
charge meals and services at certain other MGM MIRAGE resorts to their hotel accounts. We
implemented a new hotel management system at most of our major resorts in 2007, which we
expect will enhance our guest service and improve our yield management across our
portfolio of resorts.
Internal Controls
We have a strong culture of compliance, driven by our history in the highly
regulated gaming industry and our belief that compliance is often a value-added
activity. Our system of internal controls and procedures – including internal control
over financial reporting – is designed to ensure reliable and accurate financial
records, transparent disclosures, compliance with laws and regulations, and protection
of our assets. Our internal controls start at the source of business transactions, and
we have rigorous enforcement through controllership at both the business unit and
corporate level. Our corporate management also review each of our businesses on a
regular basis and we have a corporate internal audit function that performs reviews
around gaming compliance, internal controls over financial reporting, and operational
areas.
In connection with the supervision of gaming activities at our casinos, we maintain
stringent controls on the recording of all receipts and disbursements and other
activities, such as cash transaction reporting. These controls include:
Marker play represents a significant portion of the table games volume at Bellagio,
MGM Grand Las Vegas, Mandalay Bay and The Mirage. Our other facilities do not emphasize
marker play to the same extent, although we offer markers to customers at certain of
those casinos as well. We maintain strict controls over the issuance of markers and
aggressively pursue collection from those customers who fail to pay their marker
balances timely. These collection efforts are similar to those used by most large
corporations when dealing with overdue customer accounts, including the mailing of
statements and delinquency notices, personal contacts, the use of outside collection
agencies and civil litigation.
In Nevada, Mississippi, Michigan, and Illinois, amounts owed for markers which are
not timely paid are enforceable under state laws. All other states are required to
enforce a judgment for amounts owed for markers entered into in Nevada, Mississippi,
Illinois or Michigan which are not timely paid, pursuant to the Full Faith and Credit
Clause of the United States Constitution. Amounts owed for markers which are not timely
paid are not legally enforceable in some foreign countries, but the United States assets
of foreign customers may be reached to satisfy judgments entered in the United States.
Risks Associated With Our Operating Strategy
The principal risk factors relating to our operating strategy are:
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Sustainable Growth
In allocating capital, our financial strategy is focused on managing a proper mix
of investing in existing resorts, spending on new resorts or initiatives, repaying
long-term debt, and returning capital to shareholders. We have actively allocated
capital to each of these areas historically, and expect to continue to do so. We
believe there are reasonable investments for us to make in new initiatives that will
provide returns in excess of the other options. Primarily, we feel these opportunities
are in the areas of large-scale, mixed-use development in established gaming markets,
international opportunities for gaming expansion – particularly in Asia – and expansion
into non-gaming operations.
The following sections discuss certain of our current and potential development
opportunities. We regularly evaluate possible expansion and acquisition opportunities
in both the domestic and international markets, but cannot determine the likelihood of
proceeding with specific development opportunities. Opportunities we evaluate may
include the ownership, management and operation of gaming and other entertainment
facilities in Nevada or in states other than Nevada or outside of the United States. We
may undertake these opportunities either alone or in cooperation with one or more third
parties.
CityCenter
We and our joint venture partner are developing CityCenter located on a 67-acre
site on the Las Vegas Strip, between Bellagio and Monte Carlo. 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 2.3 million square feet of residential space in approximately
2,700 luxury condominium and condominium-hotel units in multiple towers. CityCenter is
expected to open in late 2009. Until November 15, 2007, we owned 100% of CityCenter.
At that time, we completed a transaction with a wholly-owned
subsidiary of Dubai World, a Dubai, United Arab Emirates
government decree entity, to form a 50/50 joint venture for the CityCenter development.
We will continue to serve as developer of CityCenter and will receive additional
consideration of up to $100 million if the project is completed on time and actual
development costs, net of residential proceeds, are within specified parameters. Upon
completion of construction, we will manage CityCenter for a fee.
Atlantic City, New Jersey
We own approximately 130 acres on Renaissance Pointe in Atlantic City, New Jersey.
We lease ten acres to Borgata under long-term leases for use in its current operations
and for its expansion. Of the remaining 120 acres, approximately 72 acres are suitable
for development. We lease nine of these developable acres to Borgata on a short-term
basis for surface parking and a portion of the remaining acres consists of common roads,
landscaping and master plan improvements which we designed and developed as required by
our agreement with Boyd. We own an additional 15 developable acres in the Marina
District near Renaissance Pointe.
In October 2007 we announced the development of MGM Grand Atlantic City which will
be located at the 72-acre site. The proposed resort would include three towers with more
than 3,000 total rooms and suites, approximately 5,000 slot machines, 200 table games,
500,000 square-feet of retail, an extensive convention center and other typical resort
amenities.
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. The Company will contribute 40 acres of land, which is being valued at
$20 million per acre, for fifty percent of the equity in the joint venture. Kerzner
International and Istithmar will contribute cash totaling $600
million and each will obtain twenty-five
percent of the equity in the joint venture.
Jean Properties
We have entered into an operating agreement to form a 50/50 joint venture with
Jeanco Realty Development, LLC, a venture owned by American Nevada Corporation. The
venture will master plan and develop a mixed-use community in Jean, Nevada. We will
contribute Gold Strike and the surrounding land to the joint venture. The value of this
contribution per the operating agreement will be $150 million. We expect to receive a
distribution of $55 million upon contribution of the assets to the venture, which is
subject to the venture obtaining necessary regulatory and other approvals, and $20
million no later than August 2008.
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Risks Associated With Our Growth Strategy
The principal risk factors relating to our growth strategy are:
Leveraging Our Brand and Management Assets
We also seek to leverage our management expertise and well recognized brands
through strategic partnerships and international expansion opportunities. We feel that
several of our brands, particularly the “MGM Grand” brand, are well suited to new
projects in both gaming and non-gaming developments. The recently opened MGM Grand
Macau, the planned MGM Grand Atlantic City, the recently announced MGM Grand Abu Dhabi,
and the MGM Grand branded resort currently under construction adjacent to Foxwoods, are
all part of our brand expansion strategy.
In 2007, we formed MGM MIRAGE Hospitality, LLC (“Hospitality”). The purpose of
this entity is to source strategic resort investment and management opportunities, both
gaming and non-gaming. Hospitality will have a particular focus on international
opportunities, where we feel future growth opportunities are greatest. We have
strategically hired senior operating and development personnel with established
backgrounds in hospitality management and international operations to maximize the
profit potential of Hospitality’s operations.
Mubadala Development Company
In November 2007, we announced plans to develop MGM Grand Abu Dhabi, a
multi-billion dollar, large-scale, mixed-use development that will serve as an incoming
gateway to Abu Dhabi, a United Arab Emirate, located at a prominent downtown waterfront site on Abu Dhabi
Island. The project will be wholly owned by Mubadala; we will serve as developer of the
project and manage the development for a fee. The initial phase will utilize 50 acres
and consist of an MGM Grand hotel, two additional MGM branded luxury hotels, and a
variety of luxury residential offerings. Additionally, the development will feature a
major entertainment facility, high-end retail shops, and world-class dining and
convention facilities.
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 Ledyard, Connecticut. Under the strategic alliance, we are consulting
with MPTN in the development of a new $700 million casino resort currently under
construction adjacent to the existing Foxwoods casino resort. The new resort will
utilize the “MGM Grand” brand name and is scheduled to open
in May 2008. The Company
and MPTN have also formed a jointly owned company – Unity Gaming, LLC – to acquire or
develop future gaming and non-gaming enterprises. The Company will provide a loan of up
to $200 million to finance a portion of MPTN’s investment in joint projects. Unity
Gaming, LLC, along with its minority partners, have applied to develop and manage a
resort in Kansas, the Chisholm Creek Casino Resort. Other entities have also applied to
develop and operate casinos in Kansas and no assurances can be given that the
application we are part of will be selected or approved.
China
We have signed a definitive agreement with the Diaoyutai State Guesthouse in
Beijing, People’s Republic of China, to form a joint venture to develop luxury
non-gaming hotels and resorts globally, initially targeting prime locations, including
Beijing, in the People’s Republic of China.
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Risks Associated With Our Brand and Management Strategy
The principal risk factors relating to our brand and management strategy are:
In addition, to the extent we become involved with development projects as an owner
or investor, we are subject to similar risks as described in the “Sustainable Growth”
section.
Employees and Labor Relations
As
of December 31, 2007, we had approximately 54,700 full-time and
12,700 part-time
employees. At that date, we had collective bargaining contracts with unions covering
approximately 31,300 of our employees. We consider our employee relations to be good.
In August 2007, we entered a new five-year collective bargaining agreement covering
approximately 21,000 of our Las Vegas Strip employees. This does not include the
collective bargaining agreement covering employees at MGM Grand Las Vegas, which expires
in 2008. In addition, in October 2007 we entered into a new four year agreement
covering approximately 2,900 employees at MGM Grand Detroit.
Regulation and Licensing
The gaming industry is highly regulated, and we must maintain our licenses and pay
gaming taxes to continue our operations. Each of our casinos is subject to extensive
regulation under the laws, rules and regulations of the jurisdiction where it is
located. These laws, rules and regulations generally concern the responsibility,
financial stability and character of the owners, managers, and persons with financial
interest in the gaming operations. Violations of laws in one jurisdiction could result
in disciplinary action in other jurisdictions. A more detailed description of the
regulations to which we are subject is contained in Exhibit 99.2 to this Annual Report
on Form 10-K, which Exhibit is incorporated herein by reference.
Our businesses are subject to various federal, state and local laws and regulations
in addition to gaming regulations. These laws and regulations include, but are not
limited to, restrictions and conditions concerning alcoholic beverages, environmental
matters, employees, currency transactions, taxation, zoning and building codes, and
marketing and advertising. Such laws and regulations could change or could be
interpreted differently in the future, or new laws and regulations could be enacted.
Material changes, new laws or regulations, or material differences in interpretations by
courts or governmental authorities could adversely affect our operating results.
Forward-Looking Statements
(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
This Form 10-K and our 2007 Annual Report to Stockholders contain some
forward-looking statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that they do
not relate strictly to historical or current facts. They contain words such as
“anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,”
“could,” “might,” and other words or phrases of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these include
statements relating to future actions, new projects, future performance, the outcome of
contingencies such as legal proceedings, and future financial results. From time to
time, we also provide oral or written forward-looking statements in our Forms 10-Q and
8-K, as well as press releases and other materials we release to the public. Any or all
of our forward-looking statements in this Form 10-K, in our 2007 Annual Report to
Stockholders and in any other public statements we make may turn out to be wrong. They
can be affected by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors mentioned in this Form 10-K — for example, government
regulation and the competitive environment — will be important in determining our future
results. Consequently, no forward-looking statement can be guaranteed. Our actual
future results may differ materially.
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We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related subjects in our Forms
10-K, 10-Q and 8-K reports to the Securities and Exchange Commission (“SEC”). Also note
that we provide a discussion of risks, uncertainties and possible inaccurate assumptions
relevant to our business in Item 1A, “Risk Factors.” This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
You should also be aware that while we from time to time communicate with
securities analysts, we do not disclose to them any material non-public information,
internal forecasts or other confidential business information. Therefore, you should
not assume that we agree with any statement or report issued by any analyst,
irrespective of the content of the statement or report. To the extent that reports
issued by securities analysts contain projections, forecasts or opinions, those reports
are not our responsibility.
Executive Officers of the Registrant
The following table sets forth, as of February 15, 2008, the name, age and position
of each of our executive officers. Executive officers are elected by and serve at the
pleasure of the Board of Directors.
Mr. Lanni has served as Chairman of the Company since July 1995. He served as
Chief Executive Officer of the Company from June 1995 to December 1999, and since March
2001.
Mr. Murren has served as President of the Company since December 1999 and as Chief
Operating Officer since August 2007. He was Chief Financial Officer from January 1998
to August 2007 and Treasurer from November 2001 to August 2007.
Mr. Baldwin has served as Chief Design and Construction Officer since August 2007.
He served as Chief Executive Officer of Mirage Resorts from June 2000 to August 2007 and
President and Chief Executive Officer of Bellagio, LLC from June 1996 to March 2005.
Mr. Jacobs has served as Executive Vice President and General Counsel of the
Company since June 2000 and as Secretary since January 2002. Prior thereto, he was a
partner with the law firm of Christensen, Glaser, Fink, Jacobs, Weil & Shapiro, LLP, and
is currently of counsel to that firm.
Mr. Manzini has served as Executive Vice President and Chief Administrative Officer
since March 2007. Prior thereto, he served as Senior Vice President of Strategic
Planning for the Walt Disney Company and in various senior management positions
throughout his tenure from April 1990 to January 2007.
Mr. D’Arrigo has served as Executive Vice President and Chief Financial Officer
since August 2007. He served as Senior Vice President—Finance of the Company from
February 2005 to August 2007 and as Vice President—Finance of the Company from December
2000 to February 2005.
Mr. Selwood has served as Executive Vice President and Chief Accounting Officer
since August 2007. He served as Senior Vice President—Accounting of the Company from
February 2005 to August 2007 and as Vice President—Accounting of the Company from
December 2000 to February 2005.
Mr. Feldman has served as Senior Vice President—Public Affairs of the Company since
September 2001. He served as Vice President — Public Affairs of the Company from June
2000 to September 2001.
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Mr. Gebhardt has served as Senior Vice President—Global Security of the Company
since November 2004. Prior thereto, he served as a Special Agent of the Federal Bureau
of Investigation for over 30 years, and was the FBI’s Deputy Director for two years
prior to his retirement in October 2004.
Ms. James has served as Senior Vice President and Senior Counsel of the Company
since March 2002. From 1994 to 2001 she served as Corporation (General) Counsel and Law
Department Director for the City of Detroit. In that capacity she also served on
various public and quasi-public boards and commissions on behalf of the City, including
the Election Commission, the Detroit Building Authority and the Board of Ethics.
Ms. Mathur has served as Senior Vice President—Corporate Diversity and Community
Affairs of the Company since May 2004. She served as Vice President—Corporate Diversity
and Community Affairs of the Company from December 2001 to May 2004. She served as Vice
President—Community Affairs of the Company from November 2000 to December 2001.
Ms. Murphey has served as Senior Vice President—Human Resources of the Company
since November 2000.
Mr. Sani has served as Senior Vice President—Taxes of the Company since July 2005.
He served as Vice President—Taxes of the Company from June 2002 to July 2005. Prior
thereto he was a partner in the Transaction Advisory Services practice of Arthur
Andersen LLP, having served that firm in various other capacities since 1988.
Ms. Santoro has served as Senior Vice President and Treasurer since August 2007.
She served as Vice President – Treasury of the Company from August 2004 to August 2007.
Prior thereto she was a Vice President for Wells Fargo Bank, serving in the gaming
division.
Mr. Wright has served as Senior Vice President and Assistant General Counsel of the
Company since March 2005. He served as Vice President and Assistant General Counsel of
the Company from July 2001 to March 2005. He has served as Assistant Secretary of the
Company since January 2002. Prior to joining the Company, Mr. Wright served as Vice
President and Assistant General Counsel of Boyd Gaming Corporation and in other legal
capacities for Boyd Gaming Corporation from September 1993 to July 2001.
Available Information
We maintain a website, www.mgmmirage.com, which includes financial and other
information for investors. We provide access to our SEC filings on our website, free of
charge, through a link to the SEC’s EDGAR database. Through that link, our filings are
available as soon as reasonably practical after we file the documents.
These filings are also available on the SEC’s website at www.sec.gov. In addition,
the public may read and copy any materials that we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Our Corporate Governance Policies, the charter of our Audit Committee and our Code
of Business Conduct and Ethics and Conflict of Interest Policy, along with any
amendments or waivers to the Code, are available on our website under the “Investor
Relations” link. We will provide a copy of these documents without charge to any
stockholder upon receipt of a written request addressed to MGM MIRAGE, Attn: Corporate
Secretary, 3600 Las Vegas Boulevard South, Las Vegas, Nevada 89109.
Reference in this document to our website address does not constitute incorporation
by reference of the information contained on the website.
ITEM 1A. RISK FACTORS
You should be aware that the occurrence of any of the events described in this
section and elsewhere in this report or in any other of our filings with the SEC could
have a material adverse effect on our business, financial position, results of
operations and cash flows. In evaluating us, you should consider carefully, among other
things, the risks described below.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Our principal executive offices are located at Bellagio. The following table lists our
significant land holdings. Unless otherwise indicated, all properties are wholly-owned. We also
own or lease various other improved and unimproved property in Las Vegas and other locations in
the United States and certain foreign countries.
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Borgata occupies approximately 46 acres at Renaissance Pointe, including 19 acres
we lease to Borgata. Borgata owns approximately 27 acres which are used as collateral
for bank credit facilities in the amount of up to $850 million. As of December 31,
2007, $723 million was outstanding under the bank credit facility.
MGM Grand Macau occupies an approximately 10 acre site which it possesses under a
25 year land use right agreement with the Macau government. MGM Grand Paradise
Limited’s interest in the land use right agreement is used as collateral for MGM Grand
Paradise Limited’s bank credit facility. As of December 31, 2007, approximately $700
million was outstanding under the bank credit facility.
Silver Legacy occupies approximately five acres in Reno, Nevada, adjacent to Circus
Circus Reno. The site is used as collateral for Silver Legacy’s senior credit facility
and 10.125% mortgage notes. As of December 31, 2007, $160 million of principal of the
10.125% mortgage notes were outstanding.
CityCenter occupies approximately 67 acres of land between Bellagio and Monte
Carlo, five acres of which are leased from Bellagio under a long-term lease. We expect
that the site will be used as collateral for the permanent CityCenter financing.
Other than as described above, none of our other assets serve as collateral.
ITEM 3. LEGAL PROCEEDINGS
Fair and Accurate Credit Transaction Act Litigation
On June 22, 2007, the Company was served with a purported nationwide class action
lawsuit filed in federal district court in Nevada (Lety Ramirez v. MGM MIRAGE, Inc., et
al.) for alleged willful violations of the Fair and Accurate Credit Transactions Act
(“FACTA”). The lawsuit asserts that the Company failed to comply timely with FACTA’s
directive that merchants who accept credit and/or debit cards not display more than the
last 5 digits of the card number or the card expiration date on electronically-generated
receipts provided to customers at the point of sale. FACTA’s compliance deadline for
electronic machines that were first put into service before January 1, 2005 was December
4, 2006, while electronic machines put into use on or after January 1, 2005 required
immediate compliance.
Although the complaint does not assert that the plaintiff sustained any actual
damage, the plaintiff seeks on behalf of herself and all similarly situated putative
class members throughout the United States statutory damages of $100 (minimum) to $1,000
(maximum) for each transaction violation, attorneys’ fees, costs, punitive damages and a
permanent injunction.
By order entered December 3, 2007 the district court denied the Company’s motion to
dismiss the complaint in its entirety but granted the motion to strike from the
complaint plaintiff’s request for injunctive relief. The Company then filed an answer
to the complaint on December 20, 2007. No discovery has been propounded on the
plaintiff or the Company. On February 11, 2008, the court granted the parties’
stipulation to stay this case pending issuance of a decision by the Ninth Circuit Court
of Appeals on review of the order of a California federal district court denying class
certification in a FACTA case.
We believe that plaintiff Ramirez’s claims for class certification and other relief
are unjustified, and we will continue to vigorously defend our position in this case.
Other
We and our subsidiaries are also defendants in various other lawsuits, most of
which relate to routine matters incidental to our business. We do not believe that the
outcome of this other pending litigation, considered in the aggregate, will have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during the fourth
quarter of 2007.
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PART II
Common Stock Information
Our common stock is traded on the New York Stock Exchange under the symbol “MGM” –
formerly our stock trading symbol was “MGG.” The following table sets forth, for the
calendar quarters indicated, the high and low sale prices of our common stock on the New
York Stock Exchange Composite Tape.
There were approximately 3,929 record holders of our common stock as of February
15, 2008.
We have not paid dividends on our common stock in the last two fiscal years. We
intend to retain our earnings to fund the operation of our business, to service and
repay our debt, to make strategic investments in high return growth projects at our
proven resorts, to repurchase shares of common stock and to reserve our capital to raise
our capacity to capture investment opportunities overseas and in emerging domestic
markets. Furthermore, as a holding company with no independent operations, our ability
to pay dividends will depend upon the receipt of dividends and other payments from our
subsidiaries. Our senior credit facility contains financial covenants that could
restrict our ability to pay dividends. Our Board of Directors periodically reviews our
policy with respect to dividends, and any determination to pay dividends in the future
will be at the sole discretion of the Board of Directors.
Share Repurchases
Our share repurchases are only conducted under repurchase programs approved by our
Board of Directors and publicly announced. The following table includes information
about our share repurchases for the quarter ended December 31, 2007:
In
February 2008, we and a wholly-owned subsidiary of Dubai World completed a joint tender offer to purchase 15
million shares of our common stock at a price of $80 per share. We purchased 8.5
million shares at a total purchase price of $680 million.
Equity Compensation Plan Information
The following table includes information about our equity compensation plans at
December 31, 2007:
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Discontinued Operations
Acquisitions
Other
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Executive Overview
Current Operations
At December 31, 2007, our operations consisted of 17 wholly-owned casino resorts
and 50% investments in four other casino resorts, including:
Other operations include the Shadow Creek golf course in North Las Vegas; two golf
courses south of Primm, Nevada at the California state line; and Fallen Oak golf course
in Saucier, Mississippi.
In April 2007, we closed the sale of the Primm Valley Resorts (Whiskey Pete’s,
Buffalo Bill’s and Primm Valley Resort in Primm, Nevada), not including the two golf
courses. In June 2007, we closed the sale of the Laughlin Properties (Colorado Belle and
Edgewater). See “Results of Operations – Discontinued Operations.” In February 2007, we
entered into an agreement to contribute Gold Strike and Nevada Landing (the “Jean
Properties”) and surrounding land to a joint venture, and we closed Nevada Landing in
March 2007. See “Liquidity and Capital Resources – Other Factors Affecting Liquidity.”
CityCenter Joint Venture Transaction
We and our joint venture partner are developing CityCenter located on a 67-acre
site on the Las Vegas Strip, between Bellagio and Monte Carlo. 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 2.3 million square feet of residential space in approximately
2,700 luxury condominium and condominium-hotel units in multiple towers. CityCenter is
expected to open in late 2009.
In
November 2007, we completed a transaction with Dubai World, a
Dubai, United Arab
Emirates government decree entity, to form a 50/50 joint venture for the CityCenter
development. The joint venture, CityCenter Holdings, LLC (“CityCenter”), is owned
equally by us and Infinity World Development Corp., a wholly-owned subsidiary of Dubai
World. We contributed the CityCenter assets which the parties valued at $5.4 billion,
subject to certain adjustments. Dubai World contributed cash of $2.96 billion. At the
close of the transaction, we received a cash distribution of $2.47 billion, of which $22
million will be repaid to CityCenter as a result of a post-closing adjustment. The
joint venture retained approximately $492 million to fund near-term construction costs.
We will continue to serve as developer of CityCenter and will receive additional
consideration of up to $100 million if the project is completed on time and actual
development costs, net of residential proceeds, are within specified parameters. Upon
completion of construction, we will manage CityCenter for a fee. We recognized a $1.03
billion pre-tax gain as a result of the transaction.
Key Performance Indicators
We operate primarily in one segment, the operation of casino resorts, which
includes offering gaming, hotel, dining, entertainment, retail and other resort
amenities. Over half of our net revenue is derived from non-gaming activities, a higher
percentage than many of our competitors, as our operating philosophy is to provide a
complete resort experience for our guests, including non-gaming amenities which command
a premium price based on their quality. Our significant convention and meeting
facilities allow us to maximize hotel occupancy and customer volumes during off-peak
times such as mid-week or during traditionally slower leisure travel periods, which also
leads to better labor utilization. We believe that we own several of the premier casino
resorts in the world, and a main focus of our strategy is to continually reinvest in
these resorts to maintain our competitive advantage.
As a resort-based company, our operating results are highly dependent on the volume
of customers at our resorts, which in turn impacts the price we can charge for our hotel
rooms and other amenities. We also generate a significant portion of our operating
income from the high-end gaming customers, which can cause variability in our results.
Key performance indicators related to revenue are:
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Most of our revenue is essentially cash-based, through customers wagering with cash
or paying for non-gaming services with cash or credit cards. Our resorts, like many in
the industry, generate significant operating cash flow. Our industry is capital
intensive and we rely heavily on the ability of our resorts to generate operating cash
flow to repay debt financing, fund maintenance capital expenditures and provide excess
cash for future development.
We generate a majority of our net revenues and operating income from our resorts in
Las Vegas, Nevada, which exposes us to certain risks outside of our control, such as
increased competition from new or expanded Las Vegas resorts, and the impact from
expansion of gaming in California. We are also exposed to risks related to tourism and
the general economy, including national and global economic conditions and terrorist
attacks or other global events.
Our results of operations do not tend to be seasonal in nature, though a variety of
factors may affect the results of any interim period, including the timing of major Las
Vegas conventions, the amount and timing of marketing and special events for our
high-end customers, and the level of play during major holidays, including New Year and
Chinese New Year. We market to different customer segments to manage our hotel
occupancy, such as targeting large conventions to ensure mid-week occupancy. Our
results do not depend on key individual customers, though our success in marketing to
customer groups, such as convention customers, or the financial health of customer
segments, such as business travelers or high-end gaming customers from a particular
country or region, can impact our results.
Overall Outlook
We believe that economic conditions in the United States, including the downturn in
the housing market and credit concerns, during the latter half of 2007 and into 2008
have had, and could continue to have, a negative impact on our operating results. The
impact is currently most noticeable at our mid-market resorts, particularly those
outside of Las Vegas. Offsetting these macroeconomic conditions is the continued
expected strength of Las Vegas as a tourist destination. We also believe that we will
continue to benefit from recent and ongoing strategic capital investments at our
resorts. Our Las Vegas Strip resorts require ongoing capital investment to maintain
their competitive advantages. We believe these investments in additional non-gaming
amenities have enhanced our ability to generate increased visitor volume and allow us to
charge premium prices for our amenities. In 2007, we completed many
improvements at our Las Vegas strip resorts, including:
These improvements, along with other amenities and improvements projected to open
in 2008, are expected to lead to increased customer volumes in gaming areas,
restaurants, shops, entertainment venues and our other resort amenities. In addition,
the following items are relevant to our overall outlook:
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Financial Statement Impact of Hurricane Katrina
Beau Rivage closed in late August 2005 due to significant damage sustained as a
result of Hurricane Katrina and re-opened in August 2006. We maintained insurance
covering both property damage and business interruption as a result of the storm. The
deductible under this coverage was approximately $15 million, based on the amount of
damage incurred. Business interruption coverage covered lost profits and other costs
incurred during the construction period and up to six months following the reopening of
the facility.
As of December 31, 2007, we had reached final settlement agreements with our
insurance carriers and received insurance recoveries of $635 million which exceeded the
$265 million of net book value of damaged assets and post-storm costs incurred. All
post-storm costs and expected recoveries have been recorded net within “General and
administrative” expenses in the accompanying consolidated statements of income, except
for depreciation of non-damaged assets, which is classified as “Depreciation and
amortization.” During the year ended December 31, 2007, we recognized $284 million of
insurance recoveries in income, of which $217 million was recorded within “Property
transactions, net” and $67 million was recorded within “General and administrative
expense.” The remaining $86 million previously recognized in income was recorded within
“Property transactions, net” in 2006.
Cash received for insurance recoveries are classified as cash flows from investing
activities if the recoveries relate to property damage, and cash flows from operations
if the recoveries relate to business interruption. During 2007, we received $280
million in insurance recoveries, of which $207 million was classified as investing cash
flows and $73 million was classified as operating cash flows. During 2006, we received
$309 million in insurance recoveries, of which $210 million was classified as investing
cash flows and $99 million was classified as operating cash flows. During 2005, we
received $46 million in insurance recoveries, all of which was classified as investing
cash flows.
Results of Operations
Summary Financial Results
The following table summarizes our financial results:
References to same-store results in our analysis for 2006 compared to 2005 exclude
the resorts acquired in our April 25, 2005 acquisition of Mandalay Resort Group
(“Mandalay”), Monte Carlo and Beau Rivage. We owned 50% of Monte Carlo prior to the
Mandalay acquisition. On a consolidated basis, the most important factors and trends
contributing to our performance over the last three years have been:
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Operating Results
The following table includes key information about our operating results:
Net revenues in 2007 included a full year of results for Beau Rivage. Excluding
Beau Rivage, net revenues increased 4%, largely due to strength in hotel room rates and
other non-gaming revenues. Operating income increased 63% in 2007 over 2006 and
included the CityCenter gain, higher Hurricane Katrina insurance recoveries income, and
a full year of operations at Beau Rivage. These increases were partially offset by
lower profits recognized from the sale of units at The Signature at MGM Grand and higher
preopening expenses, primarily related to the openings of MGM Grand Macau and MGM Grand
Detroit. Excluding the impact from these items, operating income for 2007 decreased
approximately 5% compared to 2006 mainly related to higher depreciation and amortization
expense related to our continued capital investments and higher corporate expense.
Corporate expense increased 20% in 2007 over 2006. The increase in corporate expense is
partially due to severance costs, costs associated with our CityCenter joint venture
transaction, and development costs associated with our planned MGM Grand Atlantic City
project.
The 2006 and 2005 increase in net revenues resulted primarily from the addition of
Mandalay. Net revenues for 2006 included a full year of operations for Mandalay resorts
and 2005 included approximately 8 months of operations for Mandalay resorts. On a
same-store basis, net revenues increased 5% in 2006. Operating income for 2006
increased 32% over 2005; same store operating income increased 15%, partially due to the
increases in revenues discussed above with continued strong operating margins. In
addition, we recognized income of $102 million from our share of profits from The
Signature at MGM Grand along with a $15 million gain on land contributed to the venture.
Partially offsetting these items was the $70 million of incremental stock-based
compensation expense. Excluding these items, same store operating income increased 10%,
with an operating margin of 22% in 2006 compared to 21% in 2005. Corporate expense
increased 24%, almost entirely due to $30 million of stock-based compensation.
Operating Results – Detailed Revenue Information
The following table presents detail of our net revenues:
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Table games revenue decreased 7% in 2007 excluding Beau Rivage, as volumes were
essentially flat. The table games hold percentage was slightly lower in 2007, though in
the normal range for both years. In 2006, table games revenue increased 7% over 2005 on
a same store basis, with strong baccarat volume – up 4% – and a somewhat higher hold
percentage, but within the normal range in both periods.
Excluding Beau Rivage, slots revenue was flat in 2007. Slots revenue was strong at
many of our Las Vegas Strip Resorts, including Bellagio and MGM Grand Las Vegas – each
up 8% – and The Mirage and Mandalay Bay – each up 5%. These increases in slot revenues
at our high-end Las Vegas Strip resorts were offset by lower revenues at our mid-market
resorts. In 2006, slots revenue increased 3% on a same store basis, as a result of
increases at MGM Grand Las Vegas and TI.
Hotel revenue increased 5% in 2007 excluding Beau Rivage, with a 7% increase in
company–wide REVPAR. Strength in demand and room pricing on the Las Vegas Strip led to
a 5% increase in ADR and a slight increase in occupancy percentage to 93%. In 2006,
hotel revenue increased 4% over 2006 on a same-store basis, due to strong room pricing,
leading to a 7% increase in same-store REVPAR.
The increases in food and beverage revenue in 2007 and 2006 are the result of
investments in new restaurants and nightclubs. In particular, in 2007 we opened several
new outlets at Excalibur, Mandalay Bay and Luxor – including the LAX nightclub. Also,
we opened several restaurants and the Jet nightclub at The Mirage throughout 2006. The
strength in the business travel segment has also contributed to revenue growth at many
of our high-end restaurants and in catering operations.
Entertainment revenues in 2007 and 2006 benefited from Love, the Beatles-themed
Cirque du Soleil show at The Mirage, which opened July 2006. In addition, in 2007 we
saw improved results in our production shows generally, with higher occupancy at several
shows compared to 2006.
In 2007, we generated 58% of net revenues from non-gaming activities compared to
56% in 2006 and 55% in 2005. We expect this trend to continue in 2008, as we continue
to invest in new non-gaming amenities at our resorts and the MGM Grand Detroit hotel
will be open for a full year.
Operating Results – Details of Certain Charges
Stock compensation expense is recorded within the department of the recipient of
the stock compensation award. In periods prior to January 1, 2006, such expense
consisted only of restricted stock amortization and expense associated with stock
options granted to non-employees. Beginning January 1, 2006, stock compensation expense
includes the cost of all stock-based awards to employees under SFAS 123(R). The
following table shows the amount of incremental compensation related to employee
stock-based awards included within each income statement expense caption:
Preopening and start-up expenses consisted of the following:
Preopening and start-up expenses for CityCenter will continue to increase as the
project nears its expected completion in late 2009. However, since we completed the
CityCenter joint venture transaction in November 2007 we will only recognize our 50%
share of these preopening costs in the future. MGM Grand Macau preopening and start-up
expenses relate to our share of that venture’s preopening costs. Preopening and
start-up expenses for The Signature at MGM Grand relate to our costs associated with
preparing the towers for rental operations.
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Property transactions, net consisted of the following:
Write-downs and impairments in 2007 included write-offs related to discontinued
construction projects and a write-off of the carrying value of the Nevada Landing
building assets due to its closure in March 2007. The 2007 period also includes
demolition costs primarily related to the Mandalay Bay room remodel.
Write-downs and impairments in 2006 included $22 million related to the write-off
of the tram connecting Bellagio and Monte Carlo, including the stations at both resorts,
in preparation for construction of CityCenter. Other impairments related to assets
being replaced in connection with several capital projects, as well as the $4 million
write-off of Luxor’s investment in the Hairspray show.
Write-downs and impairments in 2005 related primarily to assets removed from
service in connection with capital projects at several resorts. Demolition costs
related primarily to room remodel activity at MGM Grand Las Vegas and the new showroom
at The Mirage.
Insurance recoveries in 2007 and 2006 related to the insurance recoveries received
related to property damage from Hurricane Katrina in excess of the book value of the
damaged assets and post-storm costs incurred.
Non-operating Results
The following table summarizes information related to interest on our long-term
debt:
Gross interest costs increased in 2007 compared to 2006 due to higher average debt
balances during the year up until the significant reduction in debt in the fourth
quarter resulting from the $2.47 billion received upon the close of the CityCenter joint
venture transaction and the $1.2 billion received from our sale
of common stock to a wholly-owned subsidiary of Dubai
World. Net interest expense decreased due to increased capitalized interest from the
ongoing construction of CityCenter, MGM Grand Detroit, and MGM Grand Macau.
Interest costs increased in 2006 over 2005 due to higher average outstanding debt
resulting from a full year of debt outstanding related to the Mandalay acquisition, incremental
borrowings in 2006 to fund capital investments, and a slightly higher average interest
rate. Capitalized interest increased in 2006 as we continued to capitalize interest on
the CityCenter construction and our investment in MGM Grand Macau. The increase in our
weighted average interest rate was due to slightly higher market rates, which affects
our variable rate debt.
The following table summarizes information related to our income taxes:
The effective tax rate in 2007 was slightly higher than the statutory rate and the
prior year rate. The 2007 effective tax rate would have been higher except for the
CityCenter gain, which greatly minimized the impact of permanent and other tax items.
Additionally in 2007, a benefit for a deduction related to domestic production
activities, resulting primarily from the CityCenter transaction, was offset by
nondeductible losses from unconsolidated foreign affiliates during the year.
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The effective income tax rate in 2006 benefited from a reversal of tax reserves
that were no longer required, primarily due to guidance issued by the Internal Revenue
Service related to the deductibility of certain complimentaries. The 2006 rate was
still higher than the 2005 rate, however, as such reversal was less than the one-time
tax benefit recognized in 2005 due to a tax benefit realized from the repatriation of
foreign earnings from Australia as a result of the provisions of the American Jobs
Creation Act of 2004.
Cash paid for income taxes increased only slightly in 2007 over 2006, despite
significantly higher pre-tax income. Since the CityCenter gain was realized in the
fourth quarter of 2007, the associated income taxes will be paid in 2008. Cash paid for
income taxes increased significantly in 2006 due primarily to the payment of taxes on
the gain on Mandalay’s sale of MotorCity Casino, taxable income associated with the
sales of units at the Signature at MGM Grand, and an increase in pre-tax income
resulting from the Mandalay merger and continued improvements in operating results.
Liquidity and Capital Resources
Cash Flows – Summary
Our cash flows consisted of the following:
Cash Flows – Operating Activities
Trends in our operating cash flows tend to follow trends in our operating income,
excluding gains and losses from investing activities and net property transactions,
since our business is primarily cash-based. Cash flow from operations decreased 18% in
2007, partially the result of trends in operating income, excluding the CityCenter gain,
Katrina-related income and other similar items. In addition, the Company’s net cash
outflows related to CityCenter residential sales – construction expenditures and
customer deposits – increased by $135 million. Cash flow from operations increased in
2006 over 2005 as a result of higher operating income, offset by higher interest and tax
payments – tax payments in particular increased to $369 million in 2006 versus $76
million in 2005.
At December 31, 2007 and 2006, we held cash and cash equivalents of $412 million
and $453 million, respectively. We require a certain amount of cash on hand to operate
our resorts. Beyond our cash on hand, we utilize a company-wide cash management system
to minimize the amount of cash held in banks. Funds are swept from accounts at our
resorts daily into central bank accounts, and excess funds are invested overnight or are
used to repay borrowings under our bank credit facilities.
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Cash Flows – Investing Activities
Capital expenditures consisted of the following:
The CityCenter proceeds and Hurricane Katrina insurance recoveries were discussed
earlier in the “Executive Overview” section. In 2007, we received net proceeds of $579
million from the sale of the Primm Valley Resorts and the Laughlin Properties. Also in
2007, we purchased a $160 million convertible note issued by The M Resort LLC, which is
developing a casino resort on Las Vegas Boulevard, 10 miles south of Bellagio. The note
is convertible, with certain restrictions, into a 50% equity position in The M Resort
LLC. Investments in unconsolidated affiliates in 2006 and 2005 primarily represented
investments in MGM Grand Macau.
Cash Flows – Financing Activities
We repaid net debt of $1.8 billion in 2007, including $1.2 billion under our senior
credit facility. In 2007, we issued $750 million of 7.5% senior notes maturing in
2016 and we repaid the following senior and senior subordinated notes at their scheduled
maturity: $710 million of 9.75% senior subordinated notes; $200 million of 6.75% senior
notes; and $492.2 million of 10.25% senior subordinated notes.
In 2007, we received approximately $1.2 billion from the sale of 14.2 million
shares of our common stock to Infinity World Investments, a wholly-owned subsidiary of
Dubai World, at a price of $84 per share. We received $98 million, $89 million and $146
million in proceeds from the exercise of employee stock options in the years ended
December 31, 2007, 2006 and 2005, respectively.
In 2006, we borrowed net debt of $662 million, due to the level of capital
expenditures, share repurchases and investments in unconsolidated affiliates. We repaid
at their scheduled maturity our $200 million 6.45% senior notes and our $245 million
7.25% senior notes, and we issued $1.5 billion of senior notes at various times
throughout the year, with interest rates ranging from 6.75% to 7.625% and maturities
ranging from 2013 to 2017.
Our primary financing activities in 2005 related to the Mandalay acquisition. The
cash purchase price of Mandalay was funded from borrowings under our senior credit
facility. We also issued $875 million of fixed rate debt in various issuances.
In 2005, we repaid at their scheduled maturity two issues of senior notes – $176.4
million of 6.625% senior notes and $300 million of 6.95% senior notes – and redeemed one
issue of senior notes due in 2008 – $200 million of 6.875% senior notes. The redemption
of the 2008 senior notes resulted in a loss on early retirement of debt of $20 million,
which is classified as “Other, net” in the accompanying consolidated statements of
income. In addition, in the second quarter of 2005 we initiated a tender offer for
several issuances of Mandalay’s senior notes and senior subordinated notes totaling $1.5
billion. Holders of $155 million of Mandalay’s senior notes and senior subordinated
notes redeemed their holdings. Holders of Mandalay’s floating rate convertible senior
debentures with a principal amount of $394 million had the right to redeem the
debentures for $566 million through June 30, 2005. $388 million of principal of the
convertible debentures were tendered for redemption and redeemed for $558 million.
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Our share repurchases are only conducted under repurchase programs approved by our
Board of Directors and publicly announced. In December 2007, our Board of Directors
approved a 20 million share authorization. At December 31, 2007, we had 18.2 million
shares available for repurchase under the December 2007 authorization. Our share
repurchase activity was as follows:
Principal Debt Arrangements
Our long-term debt consists of publicly held senior and subordinated notes and our
senior credit facility. We pay fixed rates of interest ranging from 5.875% to 9.5% on
the senior and subordinated notes. We pay variable interest based on LIBOR on our
senior credit facility. Our current senior credit facility has a total capacity of $7.0
billion, matures in 2011, and consists of a $4.5 billion revolving credit facility and a
$2.5 billion term loan facility. As of December 31, 2007, we had approximately $3.7
billion of available liquidity under our senior credit facility.
All of our principal debt arrangements are guaranteed by each of our material
subsidiaries, excluding MGM Grand Detroit, LLC and our foreign subsidiaries. MGM Grand
Detroit is a guarantor under the senior credit facility, but only to the extent that MGM
Grand Detroit, LLC borrows under such facilities. At December 31, 2007, the outstanding
amount of borrowings related to MGM Grand Detroit, LLC was $361 million. None of our
assets serve as collateral for our principal debt arrangements.
Other Factors Affecting Liquidity
Taxes on CityCenter gain. In addition to our typical cash tax payments, in
the first quarter of 2008 we will make a federal income tax payment of approximately
$300 million related to the CityCenter gain.
Long-term debt payable in 2008. We repaid $180 million of senior notes at
maturity in February 2008. We have a total of $196 million in senior notes that we
expect to repay at maturity in the third quarter of 2008.
Tender
offer. In February 2008, we and a wholly-owned subsidiary of Dubai World completed a joint
tender offer for 15 million shares of our common stock at a tender price of $80.00 per
share. We purchased 8.5 million shares at a total purchase price of $680 million.
MGM Grand Atlantic City development. In October 2007, we announced plans
for a multi-billion dollar resort complex on our 72-acre site in Atlantic City. The new
resort, MGM Grand Atlantic City, is preliminarily estimated to cost approximately $4.5
to $5.0 billion, not including land and associated costs. The
proposed resort would
include three towers with more than 3,000 total rooms and suites, approximately 5,000
slot machines, 200 table games, 500,000 square-feet of retail, an extensive convention
center, and other typical resort amenities.
Mashantucket Pequot Tribal Nation. We have 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 Ledyard, Connecticut.
Under the strategic alliance, we are consulting with MPTN in the development of a new
$700 million casino resort currently under construction adjacent to the existing
Foxwoods casino resort. The new resort will utilize the “MGM Grand” brand name and is
scheduled to open in Spring 2008. We have also formed a jointly owned company with MPTN
— Unity Gaming, LLC — to acquire or develop future gaming and non-gaming enterprises.
We will provide a loan of up to $200 million to finance a portion of MPTN’s investment
in joint projects.
Jean Properties. We have entered into an operating agreement to form a
50/50 joint venture with Jeanco Realty Development, LLC. The venture will master plan
and develop a mixed-use community in Jean, Nevada. We will contribute the Gold Strike
and surrounding land to the joint venture. The value of this contribution per the
operating agreement will be $150 million. We expect to receive a distribution of $55
million upon contribution of the assets to the venture, which is subject to the venture
obtaining necessary regulatory and other approvals, and $20 million no later than August
2008.
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Off Balance Sheet Arrangements
Investments in unconsolidated affiliates. Our off balance sheet
arrangements consist primarily of investments in unconsolidated affiliates, which
currently consist primarily of our investments in CityCenter, Borgata, Grand Victoria,
Silver Legacy and MGM Grand Macau. We have not entered into any transactions with
special purpose entities, nor have we engaged in any derivative transactions. Our unconsolidated affiliate investments allow us
to realize the proportionate benefits of owning a full-scale resort in a manner that
minimizes our initial investment. We have not historically guaranteed financing
obtained by our investees, and there are no other provisions of the venture agreements
which we believe are unusual or subject us to risks to which we would not be subjected
if we had full ownership of the resort.
CityCenter. The estimated net project budget for CityCenter is $8.0
billion, after net residential proceeds of $2.7 billion. The gross project budget
consists of $8.7 billion of construction costs, including capitalized interest, $1.7
billion of land, $0.2 billion of preopening expenses, and $0.1 billion of intangible
assets. The construction costs, land and intangible assets reflect the impact of $1.3
billion of positive valuation adjustments upon the contribution of the CityCenter assets
to the joint venture.
The joint venture expects to spend approximately $2.5 billion in construction costs
in 2008. As of December 31, 2007, the joint venture had
$207 million of cash. In February 2008, MGM MIRAGE and Dubai
World each loaned $100 million to the joint venture to fund
near-term construction costs. The joint venture is currently negotiating with its lenders to obtain
project financing to fund remaining construction spending. The joint venture
anticipates that project financing will include requirements to utilize
the project assets as security for the financing. The other potential source of project
financing is additional contributions from MGM MIRAGE and Dubai World, which require
approval of the joint venture’s Board of Directors.
Letters of credit. At December 31, 2007, we had outstanding letters of
credit totaling $85 million, of which $50 million support bonds issued by the Economic
Development Corporation of the City of Detroit. These bonds are recorded as a liability
in our consolidated balance sheets. This obligation was undertaken to secure our right
to develop a permanent casino in Detroit.
Commitments and Contractual Obligations
The following table summarizes our scheduled contractual commitments as of December
31, 2007:
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Summary of Expected Sources and Uses of Funds
We plan to fund our contractual obligations and other estimated spending through a
combination of operating cash flow, available borrowings under our senior credit
facility and potential issuances of fixed rate long-term debt. We generated over $1.0
billion in operating cash flow in 2007, which included deductions for interest payments,
tax payments and certain contractually committed payments reflected in the above table,
including operating leases, employment agreements and entertainment agreements.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our results of operations and liquidity and
capital resources are based on our consolidated financial statements. To prepare our
consolidated financial statements in accordance with accounting principles generally
accepted in the United States of America, we must make estimates and assumptions that
affect the amounts reported in the consolidated financial statements. We regularly
evaluate these estimates and assumptions, particularly in areas we consider to be
critical accounting estimates, where changes in the estimates and assumptions could have
a material impact on our results of operations, financial position or cash flows.
Senior management and the Audit Committee of the Board of Directors have reviewed the
disclosures included herein about our critical accounting estimates, and have reviewed
the processes to determine those estimates.
Allowance for Doubtful Casino Accounts Receivable
Marker play represents a significant portion of the table games volume at Bellagio,
MGM Grand Las Vegas, Mandalay Bay and The Mirage. Our other facilities do not emphasize
marker play to the same extent, although we offer markers to customers at those casinos
as well.
We maintain strict controls over the issuance of markers and aggressively pursue
collection from those customers who fail to pay their marker balances timely. These
collection efforts are similar to those used by most large corporations when dealing
with overdue customer accounts, including the mailing of statements and delinquency
notices, personal contacts, the use of outside collection agencies and civil litigation.
Markers are generally legally enforceable instruments in the United States. At
December 31, 2007 and 2006, approximately 47% and 48%, respectively, of our casino
accounts receivable was owed by customers from the United States. Markers are not
legally enforceable instruments in some foreign countries, but the United States assets
of foreign customers may be reached to satisfy judgments entered in the United States.
At December 31, 2007 and 2006, approximately 38% and 37%, respectively, of our casino
accounts receivable was owed by customers from the Far East.
We maintain an allowance, or reserve, for doubtful casino accounts at all of our
operating casino resorts. The provision for doubtful accounts, an operating expense,
increases the allowance for doubtful accounts. We regularly evaluate the allowance for
doubtful casino accounts. At resorts where marker play is not significant, the
allowance is generally established by applying standard reserve percentages to aged
account balances. At resorts where marker play is significant, we apply standard
reserve percentages to aged account balances under a specified dollar amount and
specifically analyze the collectibility of each account with a balance over the
specified dollar amount, based on the age of the account, the customer’s financial
condition, collection history and any other known information. We also monitor regional
and global economic conditions and forecasts to determine if reserve levels are
adequate.
The collectibility of unpaid markers is affected by a number of factors, including
changes in currency exchange rates and economic conditions in the customers’ home
countries. Because individual customer account balances can be significant, the
allowance and the provision can change significantly between periods, as information
about a certain customer becomes known or as changes in a region’s economy occur.
The following table shows key statistics related to our casino receivables:
The allowance for doubtful accounts as a percentage of casino accounts receivable
has decreased in the current year due to a decrease in aging of accounts. At December
31, 2007, a 100 basis-point change in the allowance for doubtful accounts as a
percentage of casino accounts receivable would change net income by $2.7 million, or
less than $0.01 per share.
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Fixed asset capitalization and depreciation policies
Property and equipment are stated at cost. For the majority of our property and
equipment, cost has been determined based on estimated fair values in connection with
the April 2005 Mandalay acquisition and the May 2000 Mirage Resorts acquisition.
Maintenance and repairs that neither materially add to the value of the property nor
appreciably prolong its life are charged to expense as incurred. Depreciation and
amortization are provided on a straight-line basis over the estimated useful lives of
the assets. We account for construction projects in accordance with Statement of
Financial Accounting Standards No. 67, “Accounting for Costs and Initial Rental
Operations of Real Estate Projects.” When we construct assets, we capitalize direct
costs of the project, including fees paid to architects and contractors, property taxes,
and certain costs of our design and construction subsidiaries.
We must make estimates and assumptions when accounting for capital expenditures.
Whether an expenditure is considered a maintenance expense or a capital asset is a
matter of judgment. When constructing or purchasing assets, we must determine whether
existing assets are being replaced or otherwise impaired, which also may be a matter of
judgment. Our depreciation expense is highly dependent on the assumptions we make about
our assets’ estimated useful lives. We determine the estimated useful lives based on
our experience with similar assets, engineering studies, and our estimate of the usage
of the asset. Whenever events or circumstances occur which change the estimated useful
life of an asset, we account for the change prospectively.
In accordance with Statement of Financial Accounting Standards No. 34,
“Capitalization of Interest Cost” (“SFAS 34”), interest cost associated with major
development and construction projects is capitalized as part of the cost of the project.
Interest is typically capitalized on amounts expended on the project using the
weighted-average cost of our outstanding borrowings, since we typically do not borrow
funds directly related to a development project. Capitalization of interest starts when
construction activities, as defined in SFAS 34, begin and ceases when construction is
substantially complete or development activity is suspended for more than a brief
period.
Impairment of Long-lived Assets
We evaluate our property and equipment and other long-lived assets for impairment
in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” For assets to be disposed of, we
recognize the asset at the lower of carrying value or fair market value less costs of
disposal, as estimated based on comparable asset sales, offers received, or a discounted
cash flow model. For assets to be held and used, we review for impairment whenever
indicators of impairment exist. We then compare the estimated future cash flows of the
asset, on an undiscounted basis, to the carrying value of the asset. If the
undiscounted cash flows exceed the carrying value, no impairment is indicated. If the
undiscounted cash flows do not exceed the carrying value, then an impairment is recorded
based on the fair value of the asset, typically measured using a discounted cash flow
model. If an asset is still under development, future cash flows include remaining
construction costs. All recognized impairment losses, whether for assets to be disposed
of or assets to be held and used, are recorded as operating expenses.
There are several estimates, assumptions and decisions in measuring impairments of
long-lived assets. First, management must determine the usage of the asset. To the
extent management decides that an asset will be sold, it is more likely that an
impairment may be recognized. Assets must be tested at the lowest level for which
identifiable cash flows exist. This means that some assets must be grouped, and
management has some discretion in the grouping of assets. Future cash flow estimates
are, by their nature, subjective and actual results may differ materially from our
estimates.
On a quarterly basis, we review our major long-lived assets to determine if events
have occurred or circumstances exist that indicate a potential impairment. We estimate
future cash flows using our internal budgets. When appropriate, we discount future cash
flows using our weighted-average cost of capital, developed using a standard capital
asset pricing model.
See “Results of Operations” for discussion of write-downs and impairments recorded
in 2007, 2006 and 2005. In 2006, we entered into agreements to sell Primm Valley
Resorts and Laughlin Properties. The fair value less costs to sell exceeded the
carrying value, therefore no impairment was indicated. Other than the above items, we
are not aware of events or circumstances through December 31, 2007 that would cause us
to review any material long-lived assets for impairment.
Income taxes
We account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires the
recognition of deferred tax assets, net of applicable reserves, related to net operating
loss carryforwards and certain temporary differences. The standard requires recognition
of a future tax benefit to the extent that realization of such benefit is more likely
than not. Otherwise, a valuation allowance is applied. Except for certain New Jersey
state net operating losses, certain other New Jersey state deferred tax assets, a
foreign tax credit carryforward and certain foreign deferred tax assets, we believe that
it is more likely than not that our deferred tax assets are fully realizable because of
the future reversal of existing taxable temporary differences and future projected
taxable income.
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Our income tax returns are subject to examination by the Internal Revenue Service
(“IRS”) and other tax authorities. While positions taken in tax returns are sometimes
subject to uncertainty in the tax laws, we do not take such positions unless we have
“substantial authority” to do so under the Internal Revenue Code and applicable
regulations. We may take positions on our tax returns based on substantial authority
that are not ultimately accepted by the IRS.
Effective January 1, 2007, we adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation
of FASB Statement No. 109” (“FIN 48”). FIN 48 requires that tax positions be assessed
using a two-step process. A tax position is recognized if it meets a “more likely than
not” threshold, and is measured at the largest amount of benefit that is greater than 50
percent likely of being realized. As required by the standard, we review uncertain tax
positions at each balance sheet date. Liabilities we record as a result of this
analysis are recorded separately from any current or deferred income tax accounts, and
are classified as current (“Other accrued liabilities”) or long-term (“Other long-term
liabilities”) based on the time until expected payment. Additionally, we recognize
accrued interest and penalties related to unrecognized tax benefits in income tax
expense, a policy that did not change as a result of the adoption of FIN 48.
We file income tax returns in the U.S. federal jurisdiction, various state and
local jurisdictions, and foreign jurisdictions, although the taxes paid in foreign
jurisdictions are not material. We are no longer subject to examination of our U.S.
federal income tax returns filed for years ended prior to 2003. While the IRS
examination of the 2001 and 2002 tax years closed during the first quarter of 2007, the
statute of limitations for assessing tax for such years has been extended in order for
us to complete the appeals process for issues that were not agreed upon at the closure
of the examination. It is reasonably possible that this appeal may be settled in the
next 12 months. The IRS is currently examining our federal income tax returns for the
2003 and 2004 tax years. Tax returns for subsequent years are also subject to
examination.
We are no longer subject to examination of our various state and local tax returns
filed for years ended prior to 2003. During 2007, the City of Detroit initiated an
examination of a Mandalay Resort Group subsidiary return for the pre-acquisition year
ended April 25, 2005. Also during 2007, the state of Mississippi initiated an
examination of returns filed by subsidiaries of MGM MIRAGE and Mandalay Resort Group for
the 2004 through 2006 tax years. This audit was settled during the first quarter of
2008, with no material impact to us. No other state or local income tax returns are
under examination.
Stock-based Compensation
We account for stock-based compensation in accordance with SFAS 123(R). We measure
fair value of share-based awards using the Black-Scholes model. There are several
management assumptions required to determine the inputs into the Black-Scholes model.
Our volatility and expected term assumptions can significantly impact the fair value of
stock-based awards. The extent of the impact will depend, in part, on the extent of
stock-based awards in any given year. In 2007, we granted 2.6 million stock
appreciation rights with a total fair value of $68 million. In 2006, we granted 1.9
million stock options and stock appreciation rights with a total fair value of $28
million.
For 2007 awards, a 10% change in the volatility assumption (32% for 2007; for
sensitivity analysis, volatility was assumed to be 29% and 35%) would have resulted in a
$4.6 million, or 7%, change in fair value. A 10% change in the expected term assumption
(4.1 years for 2007; for sensitivity analysis, expected term was assumed to be 3.7 years
and 4.5 years) would have resulted in a $3.8 million, or 6%, change in fair value.
These changes in fair value would have been recognized over the five-year vesting period
of such awards. It should be noted that a change in the expected term would cause other
changes, since the risk-free rate and volatility assumptions are specific to the term;
we did not attempt to adjust those assumptions in performing the sensitivity analysis
above.
Business Combinations
We account for business combinations in accordance with Statement of Financial
Accounting Standards No. 141, “Accounting for Business Combinations” (“SFAS 141”) and
Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other
Intangible Assets,” and related interpretations. SFAS 141 requires that we record the
net assets of acquired businesses at fair value, and we must make estimates and
assumptions to determine the fair value of these acquired assets and assumed
liabilities.
The determination of the fair value of acquired assets and assumed liabilities in
the Mandalay acquisition required us to make certain fair value estimates, primarily
related to land, property and equipment and intangible assets. These estimates require
significant judgment and include a variety of assumptions in determining the fair value
of acquired assets and assumed liabilities, including market data, estimated future cash
flows, growth rates, current replacement cost for similar capacity for certain fixed
assets, market rate assumptions for contractual obligations and settlement plans for
contingencies and liabilities.
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Recently Issued Accounting Standards
Accounting for Business Combinations and Non-Controlling Interests
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 141 (R), “Business Combinations,” (“SFAS 141R”) and SFAS No. 160 “Non-controlling
interests in Consolidated Financial Statements — an amendment of ARB No. 51,” (“SFAS
160”). These standards amend the requirements for accounting for business combinations,
including the recognition and measurement of additional assets and liabilities at their
fair value, expensing of acquisition-related costs which are currently capitalizable
under existing rules, treatment of adjustments to deferred taxes and liabilities
subsequent to the measure period, and the measurement of non-controlling interest,
previously commonly referred to as minority interests, at fair value. SFAS 141R also
includes additional disclosure requirements with respect to the methodologies and
techniques used to determine the fair value of assets and liabilities recognized in a
business combination. SFAS 141R and SFAS 160 apply prospectively to fiscal years
beginning on or after December 15, 2008, except for the treatment of deferred tax
adjustments which apply to deferred taxes recognized in previous business combinations.
These standards will become effective for us on January 1, 2009. We are currently
evaluating the effect, if any, the adoption of SFAS 141R and SFAS 160 will have on our
consolidated financial statements.
Impact of Buy-Sell Clauses on Sales of Real Estate
In December 2007, the Emerging Issues Task Force (“EITF”) of the FASB ratified its
consensus on EITF No. 07-6 “Accounting for the Sale of Real Estate Subject to the
Requirements of FASB Statement No. 66, Accounting for Sales of Real Estate, When the
Agreement Includes a Buy-Sell Clause.” The EITF reached consensus that a buy-sell
clause, in and of itself, does not constitute a prohibited form of continuing
involvement that would preclude partial sale-recognition under Statement 66. This EITF
is effective for fiscal years beginning after December 15, 2007, or for us January 1,
2008. The adoption of EITF No. 07-6 did not have a material impact on our consolidated
financial statements.
Fair Value and Fair Value Option
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits the measure of certain
financial instruments and certain other items at fair value and establishes presentation
and disclosure requirements to help financial statement users to understand these
measurements and their impact on earnings. This statement is effective for us beginning
in January 1, 2008. The adoption of SFAS 159 did not have a material impact on our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS
157”), SFAS 157 establishes a framework for measuring fair value under generally
accepted accounting principles and expands fair value disclosures. This statement will
be effective for us beginning January 1, 2008 for financial assets and liabilities and
beginning January 1, 2009 for certain non-financial assets and liabilities. The
adoption of SFAS 157 did not have a material impact on our consolidated financial
statements.
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.
As of December 31, 2007, long-term fixed rate borrowings represented approximately
71% of our total borrowings. Based on December 31, 2007 debt levels, an assumed 100
basis-point change in LIBOR would cause our annual interest cost to change by
approximately $3 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We incorporate by reference the information appearing under “Market Risk” in Item 7
of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and Notes to Consolidated Financial
Statements, including the Independent Registered Public Accounting Firm’s Report
thereon, referred to in Item 15(a)(1) of this Form 10-K, are included at pages 42 to 68
of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our Chief Executive Officer (principal executive officer) and Chief Financial
Officer (principal financial officer) have concluded that the design and operation of
our disclosure controls and procedures are effective as of December 31, 2007. This
conclusion is based on an evaluation conducted under the supervision and with the
participation of Company management. Disclosure controls and procedures are those
controls and procedures which ensure that information required to be disclosed in this
filing is accumulated and communicated to management and is recorded, processed,
summarized and reported in a timely manner and in accordance with Securities and
Exchange Commission rules and regulations.
Management’s Annual Report on Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control Over Financial Reporting, referred
to in Item 15(a)(1) of this Form 10-K, is included at page 40 of this Form 10-K.
Attestation Report of the Independent Registered Public Accounting Firm
The Independent Registered Public Accounting Firm’s Attestation Report on
our internal control over financial reporting referred to in
Item 15(a)(1) of this Form 10-K, is included at page 41 of this Form 10-K.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2007, there were no changes in our internal
control over financial reporting that materially affected, or are reasonably likely to
affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We incorporate by reference the information appearing under “Executive Officers of
the Registrant” in Item 1 of this Form 10-K and under “Election of Directors” and
“Corporate Governance” in our definitive Proxy Statement for our 2008 Annual Meeting of
Stockholders, which we expect to file with the Securities and Exchange Commission on or
about April 14, 2008 (the “Proxy Statement”).
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference the information appearing under “Executive and Director
Compensation and Other Information” and “Corporate Governance — Compensation Committee
Interlocks and Insider Participation,” and “Compensation Committee Report” in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
We incorporate by reference the information appearing under “Equity Compensation
Plan Information” in Item 5 of this Form 10-K, and under “Principal Stockholders” and
“Election of Directors” in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
We incorporate by reference the information appearing under “Transactions with
Related Persons” and “Corporate Governance” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
We incorporate by reference the information appearing under “Selection of
Independent Registered Public Accounting Firm” in the Proxy Statement.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1). Financial Statements.
Included in Part II of this Report:
Management’s Annual Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements Consolidated Balance Sheets — December 31, 2007 and 2006 Years Ended December 31, 2007, 2006 and 2005 Consolidated Statements of Income Consolidated Statements of Cash Flows Consolidated Statements of Stockholders’ Equity Notes to Consolidated Financial Statements (a)(2). Financial Statement Schedule.
Years Ended December 31, 2007, 2006 and 2005
Schedule II — Valuation and Qualifying Accounts We have omitted schedules other than the one listed above because they are not
required or are not applicable, or the required information is shown in the financial
statements or notes to the financial statements.
(a)(3). Exhibits.
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MANAGEMENT’S ANNUAL REPORT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management’s Responsibilities
Management is responsible for establishing and maintaining adequate internal
control over financial reporting for MGM MIRAGE and subsidiaries (the “Company”).
Objective of Internal Control Over Financial Reporting
In establishing adequate internal control over financial reporting, management has
developed and maintained a system of internal control, policies and procedures designed
to provide reasonable assurance that information contained in the accompanying
consolidated financial statements and other information presented in this annual report
is reliable, does not contain any untrue statement of a material fact or omit to state a
material fact, and fairly presents in all material respects the financial condition,
results of operations and cash flows of the Company as of and for the periods presented
in this annual report. Significant elements of the Company’s internal control over
financial reporting include, for example:
Management’s Evaluation
Management has evaluated the Company’s internal control over financial reporting
using the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on its
evaluation as of December 31, 2007, management believes that the Company’s internal
control over financial reporting is effective in achieving the objectives described
above.
Report of Independent Registered Public Accounting Firm
Deloitte & Touche LLP audited the Company’s consolidated financial statements as of
and for the period ended December 31, 2007 and issued their report thereon, which is
included in this annual report. Deloitte & Touche LLP has also issued an attestation
report on the effectiveness of the Company’s internal control over financial reporting
and such report is also included in this annual report.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of MGM MIRAGE We have audited the internal control over financial reporting of MGM MIRAGE and
subsidiaries (the “Company”) as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal financial
officers, or persons performing similar functions, and effected by the company’s board
of directors, management, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31,
2007, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended
December 31, 2007, of the
Company and our report dated February 29, 2008, expressed an unqualified opinion on those
financial statements and financial statement schedule and included an explanatory
paragraph regarding the adoption of Statement of Financial Accounting Standards No.
123(R), Share-Based Payment, and the adoption of Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109 .
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 29, 2008 41
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of MGM MIRAGE We have audited the accompanying consolidated balance sheets of MGM MIRAGE and
subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2007. Our audits also included the
financial statement schedule of Valuation and Qualifying Accounts included in Item
15(a)(2). These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion
on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MGM MIRAGE and subsidiaries as of December
31, 2007 and 2006, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 15 to the consolidated financial statements, on January 1,
2006, the Company adopted the provisions of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment. Also, as discussed in Note 12 to the consolidated
financial statements, on January 1, 2007, the Company adopted the provisions of
Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty
in Income Taxes — an interpretation of FASB Statement No. 109.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company’s internal control over
financial reporting as of December 31, 2007, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 29, 2008
expressed an unqualified opinion on the Company’s internal control over financial
reporting.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 29, 2008 42
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MGM MIRAGE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
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MGM MIRAGE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
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MGM MIRAGE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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MGM MIRAGE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands) For the Years Ended December 31, 2007, 2006 and 2005
The accompanying notes are an integral part of these consolidated financial statements.
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MGM MIRAGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION
MGM MIRAGE (the “Company”) is a Delaware corporation, incorporated on January 29,
1986. As of December 31, 2007, approximately 52% 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. On April 25, 2005, the
Company completed its merger with Mandalay Resort Group (“Mandalay”) – see Note 3.
The Company owns and operates the following casino resorts in Las Vegas, Nevada:
Bellagio, MGM Grand Las Vegas, Mandalay Bay, The Mirage, Luxor, Treasure Island (“TI”),
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 three towers. 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.
In April 2007, the Company completed the sale of Buffalo Bill’s, Primm Valley, and
Whiskey Pete’s casino resorts (the “Primm Valley Resorts”), not including the Primm
Valley Golf Club, with net proceeds to the Company of approximately $398 million. In
June 2007, the Company completed the sale of the Colorado Belle and Edgewater in
Laughlin (the “Laughlin Properties”), with net proceeds to the Company of approximately
$199 million. In February 2007, the Company entered into an agreement to contribute
Gold Strike, Nevada Landing and surrounding land (the “Jean Properties”) to a joint
venture. The joint venture’s purpose is to develop a mixed-use community on the site.
See Note 4 for further discussion of these transactions.
The Company is a 50% owner of CityCenter, a mixed-use development on the Las Vegas
Strip, between Bellagio and Monte Carlo. 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
2.3 million square feet of residential space in approximately 2,700 luxury condominium
and condominium-hotel units in multiple towers. The estimated net project budget for
CityCenter is $8.0 billion, after net residential proceeds of $2.7 billion. The gross
project budget consists of $8.7 billion of construction costs, including capitalized
interest, $1.7 billion of land, $0.2 billion of preopening expenses, and $0.1 billion of
intangible assets. The construction costs, land and intangible assets reflect the
impact of $1.3 billion of positive valuation adjustments upon the contribution of the
CityCenter assets to the joint venture. The Company owned 100% of CityCenter until
November 15, 2007; see Note 5 for discussion of the CityCenter joint venture
transaction.
The Company and its local partners own and operate MGM Grand Detroit, which
recently opened a new permanent hotel and casino complex in downtown Detroit, Michigan.
The interim facility closed on September 30, 2007 and the new casino resort opened on
October 2, 2007. The Company also owns and operates two resorts in Mississippi – Beau
Rivage in Biloxi and Gold Strike Tunica. Beau Rivage reopened in August 2006, after
having been closed due to damage sustained as a result of Hurricane Katrina in August
2005.
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.
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 for an expansion of Borgata, and a portion of which is planned for a
wholly-owned development, MGM Grand Atlantic City, preliminarily estimated to cost
approximately $4.5 – $5.0 billion excluding land and associated costs. The proposed
resort would include three towers with more than 3,000 rooms and suites, approximately
5,000 slot machines, 200 table games, 500,000 square-feet of retail, an extensive
convention center, and other typical resort amenities.
MGM Grand Macau is a casino resort that opened on December 18, 2007. Pansy Ho
Chiu-King owns the other 50% of MGM Grand Paradise Limited. Construction of MGM Grand
Macau is expected to cost approximately $880 million, excluding preopening, land rights
and license costs. Preopening and start-up expenses were approximately $110 million.
The land rights cost approximately $60 million. The subconcession agreement, which
allows MGM Grand Paradise Limited to operate casinos in Macau, cost $200 million.
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NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Principles of consolidation. The consolidated financial statements include the
accounts of the Company and its subsidiaries. Investments in unconsolidated affiliates
which are 50% or less owned and do not meet the consolidation criteria of Financial
Accounting Standards Board Interpretation No. 46(R) (as amended), “Consolidation of
Variable Interest Entities – an Interpretation of ARB No. 51” (“FIN 46(R)”), are
accounted for under the equity method. All significant intercompany balances and
transactions have been eliminated in consolidation. The Company’s operations are
primarily in one segment – operation of casino resorts. Other operations, and foreign
operations, are not material.
Management’s use of estimates. The consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the United
States of America. Those principles require the Company’s management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Financial statement impact of Hurricane Katrina. The Company maintained insurance
for both property damage and business interruption covering wind and flood damage
sustained at Beau Rivage. Business interruption coverage covered lost profits and other
costs incurred during the construction period and up to six months following the
re-opening of the facility. Non-refundable insurance recoveries received in excess of
the net book value of damaged assets, clean-up and demolition costs, and post-storm
costs have been 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.
As of December 31, 2007, the Company had reached final settlement agreements with
its insurance carriers and received insurance recoveries of $635 million, which exceeded
the $265 million net book value of damaged assets and post-storm costs incurred. All
post-storm costs and expected recoveries have been recorded net within “General and
administrative” expenses in the accompanying consolidated statements of income, except
for depreciation of non-damaged assets, which is classified as “Depreciation and
amortization.” During the year ended December 31, 2007, the Company recognized $284
million of insurance recoveries in income, of which $217 million was recorded within
“Property transactions, net” and $67 million related to the business interruption
portion of the Company’s claim was recorded within “General and administrative
expenses.” The remaining $86 million previously recognized in income was recorded
within “Property transactions, net” in 2006.
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 classified insurance recoveries as being related to property
damage until the full $160 million of damaged assets and demolition costs were recovered
and classified additional recoveries up to the amount of the post-storm costs incurred
as being related to business interruption. Insurance recoveries beyond that amount have
been classified as operating or investing cash flows based on the Company’s estimated
allocation of the total claim. During the years ended December 31, 2007, 2006 and 2005,
insurance recoveries of $73 million, $99 million and $0, respectively, have been
classified as operating cash flows and recoveries of $207 million, $210 million and $46
million, respectively, have been classified as investing cash flows.
Cash and cash equivalents. Cash and cash equivalents include investments and
interest bearing instruments with maturities of three months or less at the date of
acquisition. Such investments are carried at cost which approximates market value.
Book overdraft balances resulting from the Company’s cash management program are
recorded as accounts payable or construction payable, as applicable.
Accounts receivable and credit risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of casino
accounts receivable. The Company issues markers to approved casino customers following
background checks and investigations of creditworthiness. At December 31, 2007, a
substantial portion of the Company’s receivables were due from customers residing in
foreign countries. Business or economic conditions or other significant events in these
countries could affect the collectibility of such receivables.
Trade receivables, including casino and hotel receivables, are typically
non-interest bearing and are initially recorded at cost. Accounts are written off when
management deems the account to be uncollectible. Recoveries of accounts previously
written off are recorded when received. An estimated allowance for doubtful accounts is
maintained to reduce the Company’s receivables to their carrying amount, which
approximates fair value. The allowance is estimated based on specific review of
customer accounts as well as historical collection experience and current economic and
business conditions. Management believes that as of December 31, 2007, no significant
concentrations of credit risk existed for which an allowance had not already been
recorded.
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Inventories. Inventories consist of food and beverage, retail merchandise and
operating supplies, and are stated at the lower of cost or market. Cost is determined
primarily by the average cost method for food and beverage and supplies and the retail
inventory or specific identification methods for retail merchandise.
Real estate under development. Real estate under development at December 31, 2006
represented capitalized costs of wholly-owned real estate projects to be sold, which
consisted entirely of condominium and condominium-hotel developments at CityCenter.
Subsequent to the contribution of CityCenter to a joint venture – See Note 5 – the
Company no longer has real estate under development.
Property and equipment. Property and equipment are stated at cost. Gains or
losses on dispositions of property and equipment are included in the determination of
income. Maintenance costs are expensed as incurred. Property and equipment are
generally depreciated over the following estimated useful lives on a straight-line
basis:
We evaluate our property and equipment and other long-lived assets for impairment
in accordance with the Financial Accounting Standards Board’s Statement of Financial
Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” For assets to be disposed of, we recognize the asset to be sold at the lower
of carrying value or fair value less costs of disposal. Fair value for assets to be
disposed of is estimated based on comparable asset sales, offers received, or a
discounted cash flow model.
For assets to be held and used, we review fixed assets for impairment whenever
indicators of impairment exist. If an indicator of impairment exists, we compare the
estimated future cash flows of the asset, on an undiscounted basis, to the carrying
value of the asset. If the undiscounted cash flows exceed the carrying value, no
impairment is indicated. If the undiscounted cash flows do not exceed the carrying
value, then an impairment is measured based on fair value compared to carrying value,
with fair value typically based on a discounted cash flow model. If an asset is still
under development, future cash flows include remaining construction costs. For a
discussion of recognized impairment losses, see Note 17.
Capitalized interest. The interest cost associated with major development and
construction projects is capitalized and included in the cost of the project. When no
debt is incurred specifically for a project, interest is capitalized on amounts expended
on the project using the weighted-average cost of the Company’s outstanding borrowings.
Capitalization of interest ceases when the project is substantially complete or
development activity is suspended for more than a brief period.
Investment in The M Resort LLC convertible note. In June 2007, the Company
purchased a $160 million convertible note issued by The M Resort LLC, which is
developing a casino resort on Las Vegas Boulevard, 10 miles south of Bellagio. The
convertible note matures in June 2015, contains certain optional and mandatory
redemption provisions, and is convertible into a 50% equity interest in The M Resort LLC
beginning in December 2008. The convertible note earns interest at 6% which may be paid
in cash or accrued “in kind” for the first five years; thereafter interest must be paid
in cash. There are no scheduled principal payments before maturity.
The convertible note is accounted for as a hybrid financial instrument consisting
of a host debt instrument and an embedded call option on The M Resort LLC’s equity. The
debt component is accounted for separately as an available-for-sale marketable security,
with changes in value recorded in other comprehensive income. The call option is
treated as a derivative with changes in value recorded in earnings. The initial value
of the call option was $0 and the initial value of the debt was $155 million, with the
discount accreted to earnings over the term of the note. The entire carrying value of
the convertible note is included in “Deposits and other assets, net” in the accompanying
consolidated balance sheets, as the security is not marketable.
Goodwill and other intangible assets. Goodwill represents the excess of purchase
price over fair market value of net assets acquired in business combinations. Goodwill
and indefinite-lived intangible assets must be reviewed for impairment at least annually
and between annual test dates in certain circumstances. The Company performs its annual
impairment test for goodwill and indefinite-lived intangible assets in the fourth
quarter of each fiscal year. No impairments were indicated as a result of the annual
impairment reviews for goodwill and indefinite-lived intangible assets in 2007, 2006 or
2005.
Revenue recognition and promotional allowances. Casino revenue is the aggregate
net difference between gaming wins and losses, with liabilities recognized for funds
deposited by customers before gaming play occurs (“casino front money”) and for chips in
the customers’ possession (“outstanding chip liability”). Hotel, food and beverage,
entertainment and other operating revenues are recognized as services are performed.
Advance deposits on rooms and advance ticket sales are recorded as accrued liabilities
until services are provided to the customer.
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Gaming revenues are recognized net of certain sales incentives, including discounts
and points earned in point-loyalty programs. The retail value of accommodations, food
and beverage, and other services furnished to guests without charge is included in gross
revenue and then deducted as promotional allowances. The estimated cost of providing
such promotional allowances is primarily included in casino expenses as follows:
Reimbursed expenses. The Company recognizes costs reimbursed pursuant to
management services as revenue in the period it incurs the costs. Reimbursed costs in
2007 related solely to the Company’s management of CityCenter and totaled $5 million,
classified as other revenue and other operating expenses in the accompanying
consolidated statements of income.
Point-loyalty programs. The Company’s primary point-loyalty program, in operation
at its major resorts, is Players Club. In Players Club, customers earn points based on
their slots play, which can be redeemed for cash or free play at any of the Company’s
participating resorts. The Company records a liability based on the points earned times
the redemption value and records a corresponding reduction in casino revenue. The
expiration of unused points results in a reduction of the liability. Customers’ overall
level of table games and slots play is also tracked and used by management in awarding
discretionary complimentaries – free rooms, food and beverage and other services – for
which no accrual is recorded. Other loyalty programs at the Company’s resorts generally
operate in a similar manner, though they generally are available only to customers at
the individual resorts. At December 31, 2007 and 2006, the total company-wide liability
for point-loyalty programs was $56 million and $47 million, respectively, including
amounts classified as liabilities related to assets held for sale.
Advertising. The Company expenses advertising costs the first time the advertising
takes place. Advertising expense of continuing operations, which is generally included
in general and administrative expenses, was $141 million, $119 million and $98 million
for 2007, 2006 and 2005, respectively.
Corporate expense. Corporate expense represents unallocated payroll and aircraft
costs, professional fees and various other expenses not directly related to the
Company’s casino resort operations. In addition, corporate expense includes the costs
associated with the Company’s evaluation and pursuit of new business opportunities,
which are expensed as incurred until development of a specific project has become
probable.
Preopening and start-up expenses. The Company accounts for costs incurred during
the preopening and start-up phases of operations in accordance with the American
Institute of Certified Public Accountants’ (“AICPA”) Statement of Position 98-5,
“Reporting on the Costs of Start-up Activities.” Preopening and start-up costs,
including organizational costs, are expensed as incurred. Costs classified as
preopening and start-up expenses include payroll, outside services, advertising, and
other expenses related to new or start-up operations and new customer initiatives.
Property transactions, net. The Company classifies transactions related to
long-lived assets – such as write-downs and impairments, demolition costs, and normal
gains and losses on the sale of fixed assets – as “Property transactions, net” in the
accompanying consolidated statements of income. See Note 17 for a detailed discussion
of these amounts.
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:
Currency translation. The Company accounts for currency translation in accordance
with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation.”
Balance sheet accounts are translated at the exchange rate in effect at each balance
sheet date. Income statement accounts are translated at the average rate of exchange
prevailing during the period. Translation adjustments resulting from this process are
charged or credited to other comprehensive income.
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Comprehensive income. Comprehensive income includes net income and all other
non-stockholder changes in equity, or other comprehensive income. Elements of the
Company’s other comprehensive income are reported in the accompanying consolidated
statements of stockholders’ equity, and the cumulative balance of these elements
consisted of the following:
Reclassifications. The consolidated financial statements for prior years reflect
certain reclassifications, which have no effect on previously reported net income, to
conform to the current year presentation.
Recently Issued Accounting Standards. The following accounting standards were
issued in 2007 but will impact the Company in future periods.
Accounting for Business Combinations and Non-Controlling Interests. In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141
(R), “Business Combinations,” (“SFAS 141R”) and SFAS No. 160 “Non-controlling interests
in Consolidated Financial Statements – an amendment of ARB No. 51,” (“SFAS 160”). These
standards amend the requirements for accounting for business combinations, including the
recognition and measurement of additional assets and liabilities at their fair value,
expensing of acquisition-related costs which are currently capitalizable under existing
rules, treatment of adjustments to deferred taxes and liabilities subsequent to the
measure period, and the measurement of non-controlling interest, previously commonly
referred to as minority interests, at fair value. SFAS 141R also includes additional
disclosure requirements with respect to the methodologies and techniques used to
determine the fair value of assets and liabilities recognized in a business combination.
SFAS 141R and SFAS 160 apply prospectively to fiscal years beginning on or after
December 15, 2008, except for the treatment of deferred tax adjustments which apply to
deferred taxes recognized in previous business combinations. These standards will
become effective for the Company on January 1, 2009. The Company is currently
evaluating the effect, if any, the adoption of SFAS 141R and SFAS 160 will have on its
consolidated financial statements.
Impact of Buy-Sell Clauses on Sales of Real Estate. In December 2007, the
Emerging Issues Task Force (“EITF”) of the FASB ratified its consensus on EITF No. 07-6
“Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement
No. 66, Accounting for Sales of Real Estate, When the Agreement Includes a Buy-Sell
Clause.” The EITF reached consensus that a buy-sell clause, in and of itself, does not
constitute a prohibited form of continuing involvement that would preclude partial
sale-recognition under Statement 66. This EITF is effective for fiscal years beginning
after December 15, 2007, or for the Company on January 1, 2008. The adoption of EITF No.
07-6 did not have a material impact on the Company’s consolidated financial statements.
Fair Value and Fair Value Option. In February 2007, the FASB issued SFAS
No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS 159”). SFAS 159 permits the measure of certain financial instruments and certain
other items at fair value and establishes presentation and disclosure requirements to
help financial statement users to understand these measurements and their impact on
earnings. This statement is effective for the Company beginning in January 1, 2008. The
adoption of SFAS 159 did not have a material impact on the Company’s consolidated
financial statements.
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS
157”). SFAS 157 establishes a framework for measuring fair value under generally
accepted accounting principles and expands fair value disclosures. This statement will
be effective for the Company beginning January 1, 2008 for financial assets and
liabilities and beginning January 1, 2009 for certain non-financial assets and
liabilities. The adoption of SFAS 157 did not have a material impact on the Company’s
consolidated financial statements.
NOTE 3 — ACQUISITION
On April 25, 2005, the Company closed its merger with Mandalay under which the
Company acquired 100% of the outstanding common stock of Mandalay for $71 in cash for
each share of Mandalay’s common stock. The total acquisition cost was $7.3 billion,
including the fair value of debt assumed, transaction costs, and the net proceeds from
disposal of Mandalay assets.
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The operating results for Mandalay are included in the accompanying consolidated
statements of income from the date of the acquisition. The following unaudited pro
forma consolidated financial information for the Company has been prepared assuming the
Mandalay acquisition had occurred on January 1, 2005.
NOTE 4 — DISCONTINUED OPERATIONS
The sale of the Primm Valley Resorts in April 2007 resulted in a pre-tax gain of
$202 million and the sale of the Laughlin Properties in June 2007 resulted in a pre-tax
gain of $64 million.
The assets and liabilities of the Jean Properties have not been contributed to the
planned joint venture and therefore are classified as held for sale at December 31,
2007. The assets and liabilities of Primm Valley Resorts and the Laughlin Properties
were classified as held for sale at December 31, 2006 in the accompanying consolidated
balance sheets. Nevada Landing closed in March 2007 and the carrying value of its
building assets were written-off. These amounts are included in “Property transactions,
net” in the accompanying consolidated statements of income for the twelve month period
ended December 31, 2007.
The following table summarizes the assets held for sale and liabilities related to
assets held for sale in the accompanying consolidated balance sheets:
The results of the Laughlin Properties and Primm Valley Resorts are classified as
discontinued operations in the accompanying consolidated statements of income for all
periods presented. Due to our continuing involvement in the Jean Properties, the
results of these operations have not been classified as discontinued operations in the
accompanying consolidated statements of income. The cash flows of discontinued
operations are included with the cash flows of continuing operations in the accompanying
consolidated statements of cash flows.
Other information related to discontinued operations is as follows:
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NOTE 5 — CITYCENTER TRANSACTION
In
August 2007, the Company and Dubai World, a Dubai, United Arab Emirates government
decree entity, agreed to form a 50/50 joint venture for the CityCenter development. The
joint venture, CityCenter Holdings, LLC, is owned equally by the Company and Infinity
World Development Corp., a wholly-owned subsidiary of Dubai World. On November 15, 2007
the Company contributed the CityCenter assets which the parties valued at $5.4 billion,
subject to certain adjustments. Dubai World contributed $2.96 billion in cash. At the
close of the transaction, the Company received a cash distribution of $2.47 billion, of
which $22 million will be repaid to CityCenter as a result of a post-closing adjustment.
The joint venture retained approximately $492 million to fund near-term construction
costs. The Company will continue to serve as developer of CityCenter and will receive
additional consideration of up to $100 million if the project is completed on time and
actual development costs, net of residential proceeds, are within specified parameters.
Upon completion of construction, the Company will manage CityCenter for a fee.
The initial contribution of the CityCenter assets has been accounted for as a
partial sale of real estate. As a partial sale, profit can be recognized when a seller
retains an equity interest in the assets, but only to the extent of the outside equity
interests, and only if the following criteria are met: 1) the buyer is independent of
the seller; 2) collection of the sales price is reasonably assured; and 3) the seller
will not be required to support the operations of the property to an extent greater than
its proportionate retained interest.
The transaction meets criteria 1 and 3, despite the Company’s equity interest and
ongoing management of the project, because the Company does not control the venture and
the management and other agreements between the Company and CityCenter have been
assessed as being fair market value contracts. In addition, the Company assessed
whether it had a prohibited form of continuing involvement based on the presence of
certain contingent repurchase options, including an option to purchase Dubai World’s
interest if Dubai World is denied required gaming approvals. The Company assessed the
probability of such contingency as remote and, therefore, determined that a prohibited
form of continuing involvement does not exist.
As described above, the Company did not receive the entire amount of the sales
price, as a portion remained in the venture to fund near-term construction costs. The
Company expects that the permanent financing for CityCenter will require such funds to
remain in the venture and not be distributed; therefore, the Company believes that
portion of the gain does not meet criteria 2 above and has been deferred. The Company
recorded a gain of $1.03 billion based on the following (in millions):
The Company is accounting for its ongoing investment in CityCenter using the equity
method, consistent with its other investments in unconsolidated affiliates. The Company
assessed whether CityCenter should be consolidated under the provisions of FIN 46(R) and
determined that CityCenter is not a variable interest entity, based on the following: 1)
CityCenter does not meet the scope exceptions in FIN 46(R); 2) the equity at risk in
CityCenter is sufficient, based on qualitative assessments; 3) the equity holders of
CityCenter (the Company and Dubai World) have the ability to control CityCenter and the
right/obligation to receive/absorb expected returns/losses of CityCenter; and 4) while
the Company’s 50% voting rights in CityCenter may not be proportionate to its
rights/obligations to receive/absorb expected returns/losses given the fact that the
Company manages CityCenter, substantially all of the activities of CityCenter do not
involve and are not conducted on behalf of the Company.
NOTE 6 — ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
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NOTE 7 — PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
NOTE 8 — INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company has investments in unconsolidated affiliates accounted for under the
equity method. Under the equity method, carrying value is adjusted for the Company’s
share of the investees’ earnings and losses, as well as capital contributions to and
distributions from these companies. Investments in unconsolidated affiliates consisted
of the following:
As of December 31, 2007, The Signature at MGM Grand had completed the sales of all
units and had essentially ceased operations. During the fourth quarter of 2007, the
Company purchased the remaining 88 units in Towers B and C from the joint venture for
$39 million. These units have been recorded as property, plant and equipment in the
accompaying consolidated balance sheets.
The Company recognized the following related to its share of profit from
condominium sales, based on when sales were closed.
Differences between the Company’s venture-level equity and investment balances are as follows:
The fair value adjustments related to business combinations include a $90 million
increase for Borgata, related to land; a $267 million increase for Grand Victoria,
related to indefinite-lived gaming license rights; and a $35 million reduction for
Silver Legacy, related to long-term assets and long-term debt. The adjustments for
Borgata and Grand Victoria are not being amortized; the adjustments for Silver Legacy
are being amortized based on the useful lives of the related assets and liabilities.
The adjustment to CityCenter equity reflects the fact that the net assets (and
corresponding equity) contributed by MGM MIRAGE were recorded at a partial step-up in
value, while the investment is on a historical cost basis. Other adjustments includes
the deferred gain on the CityCenter transaction. A portion of the CityCenter-related
amounts will be amortized, based on amounts assigned to depreciable assets, or recorded
upon the sales of condominium units. The remainder will not be amortized, based on
amounts assigned to land and indefinite-lived intangible assets.
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The Company recorded its share of the results of operations of the unconsolidated
affiliates as follows:
Summarized balance sheet information of the unconsolidated affiliates is as follows:
Summarized results of operations of the unconsolidated affiliates are as follows:
Summarized balance sheet information of the CityCenter joint venture is as follows:
Summarized
income statement information of the CityCenter joint venture is as follows:
NOTE 9 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following:
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Goodwill related to the Mandalay acquisition was primarily assigned to Mandalay
Bay, Luxor, Excalibur and Gold Strike Tunica. Goodwill related to the Mirage Resorts
acquisition was assigned to Bellagio, The Mirage and TI. Changes in the recorded
balances of goodwill are as follows:
The Company’s indefinite-lived intangible assets consist primarily of development
rights in Detroit and trademarks. The Company’s finite–lived intangible assets consist
primarily of customer lists amortized over five years, lease acquisition costs amortized
over the life of the related leases, and certain license rights amortized over their
contractual life.
NOTE 10 — OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
NOTE 11 — LONG-TERM DEBT
Long-term debt consisted of the following:
Amounts due within one year of the balance sheet date are classified as long-term
in the accompanying consolidated balance sheets because the Company has both the intent
and ability to repay these amounts with available borrowings under the senior credit
facility.
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Interest expense, net consisted of the following:
The senior credit facility has a total capacity of $7 billion and matures in 2011.
The Company has the ability to solicit additional lender commitments to increase the
capacity to $8 billion. The components of the senior credit facility include a term
loan facility of $2.5 billion and a revolving credit facility of $4.5 billion. At
December 31, 2007, the Company had approximately $3.7 billion of available borrowing
capacity under the senior credit facility.
In
May 2007, the Company issued $750 million of 7.5% senior notes due 2016. In
June 2007, the Company repaid the $710 million of 9.75% senior subordinated notes at
maturity. In August 2007, the Company repaid the $200 million of 6.75% senior notes and
the $492.2 million of 10.25% senior subordinated notes at maturity using borrowings
under the senior credit facility.
In February 2006, the Company repaid the $200 million 6.45% senior notes at their
maturity. In October 2006, the Company repaid the $244.5 million 7.25% senior notes at
their maturity. The Company repaid both issuances of senior notes with borrowings under
the senior credit facility. In April 2006, the Company issued $500 million of 6.75%
senior notes due 2013 and $250 million of 6.875% senior notes due 2016. In December
2006, the Company issued $750 million of 7.625% senior notes due 2017. The proceeds of
the April 2006 and December 2006 issuances were used to repay outstanding borrowings
under the senior credit facility.
In February 2005, the Company redeemed all of its outstanding 6.875% senior notes
due February 2008 at the present value of future interest payments plus accrued interest
at the date of redemption. The Company recorded a loss on retirement of debt of $20
million in the first quarter of 2005, classified as “Other, net” in the accompanying
consolidated statements of income.
In December 2004, the Company’s Board of Directors authorized the purchase of up to
$100 million of the Company’s public debt securities. This authorization remains
available as of December 31, 2007.
The Company and each of its material subsidiaries, excluding MGM Grand Detroit, LLC
and the Company’s foreign subsidiaries, are directly liable for or unconditionally
guarantee the senior credit facility, senior notes, senior debentures, and senior
subordinated notes. MGM Grand Detroit, LLC is a guarantor under the senior credit
facility, but only to the extent that MGM Grand Detroit, LLC borrows under such
facilities. At December 31, 2007, the outstanding amount of borrowings related to MGM
Grand Detroit, LLC was $361 million. See Note 19 for consolidating condensed financial
information of the subsidiary guarantors and non-guarantors. None of the Company’s
assets serve as collateral for its senior credit facility, senior notes, or other
long-term debt.
The Company’s long-term debt obligations contain customary covenants requiring the
Company to maintain certain financial ratios. At December 31, 2007, the Company was
required to maintain a maximum leverage ratio (debt to EBITDA, as defined) of 6.5:1 and
a minimum coverage ratio (EBITDA to interest charges, as defined) of 2.0:1. As of
December 31, 2007, the Company’s leverage and interest coverage ratios were 3.0:1 and
4.0:1, respectively.
Maturities of the Company’s long-term debt as of December 31, 2007 are as follows:
The estimated fair value of the Company’s long-term debt at December 31, 2007 was
approximately $10.9 billion, versus its book value of $11.2 billion. At December 31,
2006, the estimated fair value of the Company’s long-term debt was approximately $13
billion, consistent with its book value. The estimated fair value of the Company’s debt
securities was based on quoted market prices on or about December 31, 2007 and 2006.
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NOTE 12 — INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109
requires the recognition of deferred income tax assets, net of applicable reserves,
related to net operating loss carryforwards and certain temporary differences. The
standard requires recognition of a future tax benefit to the extent that realization of
such benefit is more likely than not. Otherwise, a valuation allowance is applied.
The income tax provision attributable to continuing operations and discontinued
operations is as follows:
The income tax provision attributable to income from continuing operations before
income taxes is as follows:
A reconciliation of the federal income tax statutory rate and the Company’s effective tax rate is as follows:
The major tax-effected components of the Company’s net deferred tax liability are as follows:
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