Table of Contents

 

 

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

OR

 

o          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                               to                              

 

Commission File No. 001-10362

 

MGM Resorts International

(Exact name of registrant as specified in its charter)

 

 

3600 Las Vegas Boulevard South,   Las Vegas,   Nevada    89109

(Address of principal executive offices)

 

(702) 693-7120

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):  Yes x   No o

 

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:

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):  Yes o   No x

 

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

 

Class		Outstanding at August 1, 2012
Common Stock, $.01 par value		488,942,131 shares

 

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

 

FORM 10-Q

 

I N D E X

 

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at June 30, 2012 and December 31, 2011	1
	Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2012 and  June 30, 2011	2
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2012 and  June 30, 2011	3
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and June 30, 2011	4
	Condensed Notes to Consolidated Financial Statements	5-24
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25-39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	42
SIGNATURES		43

 

Table of Contents

 

Part I.    FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

		June 30,			December 31,
		2012			2011
ASSETS
Current assets
Cash and cash equivalents		$	1,731,921		$	1,865,913
Accounts receivable, net		478,588			491,730
Inventories		113,316			112,735
Deferred income taxes, net		122,134			91,060
Prepaid expenses and other		231,458			251,282
Total current assets		2,677,417			2,812,720
Property and equipment, net		14,783,177			14,866,644
Other assets
Investments in and advances to unconsolidated affiliates		1,498,864			1,635,572
Goodwill		2,900,237			2,896,609
Other intangible assets, net		4,889,311			5,048,117
Other long-term assets, net		514,002			506,614
Total other assets		9,802,414			10,086,912
		$	27,263,008		$	27,766,276
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	171,878		$	170,994
Income taxes payable		336			7,611
Current portion of long-term debt		141,674			—
Accrued interest on long-term debt		251,373			203,422
Other accrued liabilities		1,364,123			1,362,737
Total current liabilities		1,929,384			1,744,764
Deferred income taxes		2,513,840			2,502,096
Long-term debt		13,225,319			13,470,167
Other long-term obligations		182,258			167,027
Commitments and contingencies (Note 6)
Stockholders’ equity
Common stock, $.01 par value: authorized 1,000,000,000 shares; issued and outstanding 488,940,301 and 488,834,773 shares		4,889			4,888
Capital in excess of par value		4,091,166			4,094,323
Retained earnings		1,618,684			1,981,389
Accumulated other comprehensive income		11,046			5,978
Total MGM Resorts International stockholders’ equity		5,725,785			6,086,578
Noncontrolling interests		3,686,422			3,795,644
Total stockholders’ equity		9,412,207			9,882,222
		$	27,263,008		$	27,766,276

 

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

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2012			2011			2012			2011
Revenues
Casino		$	1,299,196		$	797,495		$	2,634,230		$	1,387,715
Rooms		418,766			396,791			812,386			765,128
Food and beverage		391,891			371,960			764,844			708,784
Entertainment		120,909			130,094			241,309			249,687
Retail		52,086			54,292			98,710			100,442
Other		132,900			128,826			246,023			243,049
Reimbursed costs		90,938			89,482			181,477			175,770
		2,506,686			1,968,940			4,978,979			3,630,575
Less: Promotional allowances		(182,921		)	(162,955		)	(367,624		)	(311,739		)
		2,323,765			1,805,985			4,611,355			3,318,836
Expenses
Casino		826,211			485,965			1,693,685			836,730
Rooms		129,897			123,886			256,052			240,872
Food and beverage		222,567			215,899			434,206			414,147
Entertainment		88,559			94,505			177,347			182,716
Retail		29,241			32,479			56,824			61,638
Other		88,835			88,392			175,057			166,689
Reimbursed costs		90,938			89,482			181,477			175,770
General and administrative		309,478			301,582			612,767			571,144
Corporate expense		42,540			40,016			84,800			76,501
Preopening and start-up expenses		—			(316		)	—			(316		)
Property transactions, net		90,467			900			91,384			991
Gain on MGM China transaction		—			(3,496,005		)	—			(3,496,005		)
Depreciation and amortization		235,643			177,467			472,452			329,864
		2,154,376			(1,845,748		)	4,236,051			(439,259		)
Income (loss) from unconsolidated affiliates		5,986			32,027			(7,323		)	95,370
Operating income		175,375			3,683,760			367,981			3,853,465
Non-operating income (expense):
Interest expense		(276,323		)	(270,224		)	(560,665		)	(540,138		)
Non-operating items from unconsolidated affiliates		(20,836		)	(28,002		)	(47,702		)	(68,292		)
Other, net		46			(13,017		)	(57,530		)	(16,972		)
		(297,113		)	(311,243		)	(665,897		)	(625,402		)
Income (loss) before income taxes		(121,738		)	3,372,517			(297,916		)	3,228,063
Benefit for income taxes		51,304			78,174			24,175			132,757
Net income (loss)		(70,434		)	3,450,691			(273,741		)	3,360,820
Less: Net income attributable to noncontrolling interests		(75,018		)	(8,706		)	(88,964		)	(8,706		)
Net income (loss) attributable to MGM Resorts International		$	(145,452	)	$	3,441,985		$	(362,705	)	$	3,352,114
Income (loss) per share of common stock attributable to MGM Resorts International
Basic		$	(0.30	)	$	7.04		$	(0.74	)	$	6.86
Diluted		$	(0.30	)	$	6.22		$	(0.74	)	$	6.09

 

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

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2012			2011			2012			2011
Net income (loss)		$	(70,434	)	$	3,450,691		$	(273,741	)	$	3,360,820
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment		8,313			(5,433		)	10,001			(2,834		)
Other		—			—			—			(37		)
Other comprehensive income (loss)		8,313			(5,433		)	10,001			(2,871		)
Comprehensive income (loss)		(62,121		)	3,445,258			(263,740		)	3,357,949
Less: Comprehensive income attributable to noncontrolling interests		(79,122		)	(7,054		)	(93,897		)	(7,054		)
Comprehensive income (loss) attributable to MGM Resorts International		$	(141,243	)	$	3,438,204		$	(357,637	)	$	3,350,895

 

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

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2012			2011
Cash flows from operating activities
Net income (loss)		$	(273,741	)	$	3,360,820
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		472,452			329,864
Amortization of debt discounts, premiums and issuance costs		39,388			47,182
Loss on retirement of long-term debt		58,740			—
Provision for doubtful accounts		31,675			12,539
Stock-based compensation		20,796			18,606
Property transactions, net		91,384			991
Gain on MGM China transaction		—			(3,496,005		)
(Income) loss from unconsolidated affiliates		55,025			(27,078		)
Distributions from unconsolidated affiliates		10,415			48,214
Change in deferred income taxes		(43,683		)	(146,131		)
Change in operating assets and liabilities:
Accounts receivable		(18,395		)	(7,008		)
Inventories		(568		)	(641		)
Income taxes receivable and payable, net		(7,234		)	178,284
Prepaid expenses and other		4,833			21,199
Accounts payable and accrued liabilities		85,904			(43,969		)
Other		(14,735		)	56
Net cash provided by operating activities		512,256			296,923
Cash flows from investing activities
Capital expenditures, net of construction payable		(216,230		)	(85,178		)
Acquisition of MGM China, net of cash acquired		—			407,046
Investments in and advances to unconsolidated affiliates		(25,000		)	(102,648		)
Distributions from unconsolidated affiliates in excess of earnings		2,085			2,799
Investments in treasury securities - maturities longer than 90 days		(135,179		)	(150,130		)
Proceeds from treasury securities - maturities longer than 90 days		150,182			149,999
Other		(811		)	(742		)
Net cash provided by (used in) investing activities		(224,953		)	221,146
Cash flows from financing activities
Net borrowings (repayments) under bank credit facilities — maturities of 90 days or less		257,900			(1,278,106		)
Borrowings under bank credit facilities — maturities longer than 90 days		450,000			3,490,856
Repayments under bank credit facilities — maturities longer than 90 days		(2,734,128		)	(2,284,128		)
Issuance of senior notes		1,850,000			311,415
Retirement of senior notes		—			(333,906		)
Debt issuance costs		(40,447		)	—
Distributions to noncontrolling interest owners		(204,074		)	—
Other		(1,365		)	(1,364		)
Net cash used in financing activities		(422,114		)	(95,233		)
Effect of exchange rate on cash		819			(247		)
Cash and cash equivalents
Net increase (decrease) for the period		(133,992		)	422,589
Balance, beginning of period		1,865,913			498,964
Balance, end of period		$	1,731,921		$	921,553
Supplemental cash flow disclosures
Interest paid, net of amounts capitalized		$	473,326		$	505,816
Federal, state and foreign income taxes paid, net of refunds		6,246			(172,177		)
Non-cash investing and financing activities
Increase in investment in CityCenter related to change in completion guarantee liability		$	24,794		$	18,459

 

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

 

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MGM RESORTS INTERNATIONAL AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE 1 — ORGANIZATION

 

Organization.   MGM Resorts International (the “Company”) is a Delaware corporation that acts largely as a holding company and, through wholly owned subsidiaries, owns and/or operates casino resorts. The Company owns and operates the following casino resorts in Las Vegas, Nevada:  Bellagio, MGM Grand Las Vegas, The Mirage, Mandalay Bay, Luxor, New York-New York, Monte Carlo, Excalibur and Circus Circus Las Vegas.  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 and its local partners own and operate MGM Grand Detroit in Detroit, Michigan. The Company owns and operates two resorts in Mississippi: Beau Rivage in Biloxi and Gold Strike Tunica.  The Company also owns Shadow Creek, an exclusive world-class golf course located approximately ten miles north of its Las Vegas Strip resorts, Primm Valley Golf Club at the California/Nevada state line and Fallen Oak golf course in Saucier, Mississippi.

 

The Company owns 51% and has a controlling interest in MGM China Holdings Limited (“MGM China”), which owns MGM Grand Paradise, S.A. (“MGM Grand Paradise”), the Macau company that owns the MGM Macau resort and casino and the related gaming subconcession and land concession. As further discussed in Note 3, the Company began consolidating the results of MGM China on June 3, 2011 and ceased recording the results of MGM Macau as an equity method investment.

 

The Company owns 50% of CityCenter, located between Bellagio and Monte Carlo. The other 50% of CityCenter is owned by Infinity World Development Corp (“Infinity World”), a wholly owned subsidiary of Dubai World, a Dubai, United Arab Emirates government decree entity. CityCenter consists of Aria, a casino resort; Mandarin Oriental Las Vegas, a non-gaming boutique hotel; Crystals, a retail, dining and entertainment district; and Vdara, a luxury condominium-hotel. In addition, CityCenter features residential units in the Residences at Mandarin Oriental and Veer.  The Company receives a management fee of 2% of revenues for the management of Aria and Vdara, and 5% of EBITDA (as defined in the agreements governing the Company’s management of Aria and Vdara). In addition, the Company receives an annual fee of $3 million for the management of Crystals.

 

The Company has a 50% interest in Grand Victoria and a 50% interest in Silver Legacy. Grand Victoria is a riverboat casino in Elgin, Illinois; an affiliate of Hyatt Gaming owns the other 50% of Grand Victoria and also operates the resort. Silver Legacy is located in Reno, adjacent to Circus Circus Reno, and the other 50% is owned by Eldorado LLC.  See Note 4 for additional information related to Grand Victoria and Silver Legacy.

 

MGM Hospitality seeks to leverage the Company’s management expertise and well-recognized brands through strategic partnerships and international expansion opportunities.  The Company has entered into management agreements for non-gaming resorts in the Middle East, North Africa, India and China, as well as a casino resort in Vietnam.

 

Borgata. The Company has a 50% economic interest in Borgata Hotel Casino & Spa (“Borgata”) located on Renaissance Pointe in the Marina area of Atlantic City, New Jersey. Boyd Gaming Corporation (“Boyd”) owns the other 50% of Borgata and also operates the resort.   The Company’s interest is held in trust and currently offered for sale pursuant to the Company’s amended settlement agreement with New Jersey Department of Gaming Enforcement (“DGE”) and approved by the New Jersey Casino Control Commission (“CCC”). The terms of the amended settlement agreement mandate the sale by March 2014. The Company has the right to direct the sale through March 2013, subject to approval of the CCC, and the trustee is responsible for selling the trust property during the following 12-month period.

 

The Company consolidates the trust as it is the sole economic beneficiary and accounts for its interest in Borgata under the cost method. As of June 30, 2012, the trust had $162 million of cash and investments, of which $135 million is held in U.S. treasury securities with maturities greater than three months but less than one year, and is recorded within “Prepaid expenses and other.” Distributions received by the trust that do not exceed the Company’s share of earnings are recognized currently in earnings. However, distributions received by the trust that exceed the Company’s share of earnings for such periods are applied to reduce the carrying amount of its investment.  For the three and six months ended June 30, 2012, $3 million and $26 million, respectively were withdrawn from the trust account for the payment of property taxes and interest on the Company’s senior credit facility, as authorized in accordance with the terms of the trust agreement.

 

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NOTE 2— BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation.   As permitted by the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  These consolidated financial statements should be read in conjunction with the Company’s 2011 annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments — which include only normal recurring adjustments — necessary to present fairly the Company’s interim financial statements.  The results for such periods are not necessarily indicative of the results to be expected for the full year.

 

Fair value measurement.   Fair value measurements affect the Company’s accounting and impairment assessments of its long-lived assets, investments in unconsolidated affiliates, cost method investments, assets acquired and liabilities assumed in an acquisition, goodwill and other intangible assets. Fair value measurements also affect the Company’s accounting for certain of its financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and is measured according to a hierarchy that includes: Level 1 inputs, such as quoted prices in an active market; Level 2 inputs, which are observable inputs for similar assets; or Level 3 inputs, which are unobservable inputs. At June 30, 2012, the fair value of the Company’s treasury securities held by the Borgata trust was $135 million, measured using Level 1 inputs. See Note 1 for additional information related to the Borgata trust. When assessing the impairment of its investment in Grand Victoria at June 30, 2012, the Company estimated fair value utilizing “Level 3” inputs. See Note 4 for additional information related to the impairment of the Company’s investment in Grand Victoria.  The Company uses Level 1 inputs for its long-term debt fair value disclosures.

 

Income tax provision.   The Company recognizes deferred tax assets, net of applicable reserves, related to net operating loss carryforwards and certain temporary differences with a future tax benefit to the extent that realization of such benefit is more likely than not.  Otherwise, a valuation allowance is applied. Given the negative impact of the U.S. economy on the results of operations in the past several years and expectations that its recovery will be tempered by certain aspects of the current economic conditions such as weaknesses in employment conditions and the housing market, the Company no longer relies on future domestic operating income in assessing the realization of its domestic deferred tax assets and now relies only on the future reversal of existing domestic taxable temporary differences.  As of June 30, 2012, the scheduled future reversal of existing U.S. federal deductible temporary differences exceeds the scheduled future reversal of existing U.S. federal taxable temporary differences.  Therefore, the Company began recording in the current year a valuation allowance for U.S. federal deferred tax assets in order to account for this excess, resulting in additional tax provision of $69 million and $181 million for the three and six months ended June 30, 2012, respectively.

 

In June 2012, MGM Grand Paradise reached an agreement with the Macau government to settle the 12% complementary tax that would otherwise be due by its shareholders on distributions of its gaming profits by paying a flat annual payment (“annual fee arrangement”).  Such arrangement covers the years 2007 through 2011 including the distribution that was made in March 2012 (the “covered period”).  Cumulative annual payments of $4 million for the covered period were paid and a corresponding reduction to benefit for income taxes was recorded for the three months and six months ended June 30, 2012.  Shareholders of MGM Grand Paradise are not subject to the complementary tax on distributions they received during the covered period as a result of this arrangement.  Consequently, the Company reversed complementary taxes previously accrued on such distributions in the amount of $63 million, and recorded a corresponding increase to benefit for income taxes for the three months ended June 30, 2012. The increase to benefit for income taxes amounted to $19 million for the six months ended June 30, 2012 because the Company accrued $44 million of complementary taxes in the first quarter of 2012.  MGM Grand Paradise has submitted a request for a five year extension of the annual fee arrangement beyond the covered period which is pending with the Macau government.  If this extension is not granted, MGM China would be subject to complementary taxes on distributions made by MGM Grand Paradise after the covered period.  However, MGM China would not accrue additional complementary tax in 2012 until MGM Grand Paradise (1) no longer has a cumulative deficit in U.S. GAAP pretax earnings, which amounted to $213 million at June 30, 2012, or (2) distributes additional earnings, but would accrue additional complementary tax beginning in 2013 on (1) U.S GAAP earnings accruing after 2012 or (2) distributions of additional earnings.

 

Recently Issued Accounting Standards.  Certain amendments to Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements,” became effective for the Company for fiscal years beginning after December 15, 2011. Such amendments included a consistent definition of fair value, enhanced disclosure requirements for “Level 3” fair value adjustments and other changes to required disclosures.  The Company’s adoption of these amendments did not have a material effect on its financial statements.

 

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In June 2011, ASC 220, “Comprehensive Income,” was amended and became effective for the Company for fiscal years beginning after December 15, 2011.  The Company elected to present a separate statement of comprehensive income which provides each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income.  The Company’s adoption of this amendment did not have a material effect on its financial statements.

 

In September 2011, ASC 350, “Intangibles-Goodwill and Others,” was amended to simplify the assessment of goodwill impairment and became effective for the Company for fiscal years beginning after December 15, 2011.  The amended guidance allows the Company to do an initial qualitative assessment of relative events and circumstances to determine if fair value of a reporting unit is more likely than not less than its carrying value, prior to performing the two-step quantitative goodwill impairment test.  The Company’s adoption of this amendment did not have a material effect on its financial statements.

 

In July 2012, ASC 350, “Intangibles-Goodwill and Others,” was amended to simplify the assessment of testing the impairment of indefinite-lived intangible assets other than goodwill and will become effective for the Company for fiscal years beginning after September 15, 2012.  The amended guidance allows the Company to do an initial qualitative assessment to determine whether it is more likely than not that the fair value of its indefinite-lived intangible assets are less than their carrying amounts prior to performing the quantitative indefinite-lived intangible asset impairment test. The Company does not believe the adoption of this amendment will have a material effect on its financial statements.

 

NOTE 3 — MGM CHINA ACQUISITION

 

On June 3, 2011, the Company and Ms. Ho, Pansy Catilina Chiu King (“Ms. Pansy Ho”) completed a reorganization of the capital structure of MGM China and the initial public offering of 760 million shares of MGM China on The Stock Exchange of Hong Kong Limited (the “IPO”), representing 20% of the post issuance capital stock of MGM China, at an offer price of HKD 15.34 per share. Pursuant to this reorganization, the Company, through a wholly owned subsidiary, acquired an additional 1% of the overall capital stock of MGM China for HKD 15.34 per share, or approximately $75 million, and thereby became the indirect owner of 51% of MGM China.

 

Through the acquisition of its additional 1% interest of MGM China, the Company obtained a controlling interest and was required to consolidate MGM China as of June 3, 2011. Prior to the IPO, the Company held a 50% interest in MGM Grand Paradise, which was accounted for under the equity method as discussed in Note 4. The acquisition of the controlling financial interest was accounted for as a business combination and the Company recognized 100% of the assets, liabilities and noncontrolling interests of MGM China at fair value at the date of acquisition. The fair value of the equity interests of MGM China was determined by the IPO transaction price and equaled approximately $7.5 billion. The carrying value of the Company’s equity method investment was significantly less than its share of the fair value of MGM China at the acquisition date, resulting in a $3.5 billion gain on the acquisition. Under the acquisition method, the fair value was allocated to the assets acquired, liabilities assumed and noncontrolling interests recorded in the transaction. The following table sets forth the allocation at June 3, 2011 (in thousands):

 

Current assets		$	558,037
Property and equipment and other long-term assets		704,823
Goodwill		2,821,589
Gaming subconcession		4,499,727
Land concession		84,466
Customer lists		128,564
Gaming promoter relationships		179,989
Current liabilities, excluding long-term debt		(459,518		)
Long-term debt		(642,818		)
Deferred taxes		(380,628		)
		$	7,494,231
Noncontrolling interests		$	(3,672,173	)

 

As discussed above, the Company recognized the identifiable intangible assets of MGM China at fair value. The gaming subconcession and land concession had historical cost bases which were being amortized by MGM Macau. The customer relationship intangible assets did not have historical cost bases at MGM Macau. The estimated fair values of the intangible assets acquired were primarily determined using Level 3 inputs.  The gaming subconcession was valued using an excess earnings model based on estimated future cash flows of MGM Macau.  All of the recognized intangible assets were determined to have finite lives and are being amortized over their estimated useful lives as discussed below.

 

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Gaming subconcession.   Pursuant to the agreement dated June 19, 2004 between MGM Grand Paradise and Sociedade de Jogos de Macau, S.A. (“SJM”), a gaming subconcession was acquired by MGM Grand Paradise for the right to operate casino games of chance and other casino games for a period of 15 years commencing on April 20, 2005. The Company cannot provide any assurance that the gaming subconcession will be extended beyond the original terms of the agreement; however, management believes that the gaming subconcession will be extended, given that the land concession agreement with the government extends significantly beyond the gaming subconcession. In addition, management believes that the fair value of MGM China reflected in the IPO pricing suggests that market participants have assumed the gaming subconcession will be extended beyond its initial term. As such, the Company is amortizing the gaming subconcession intangible asset on a straight-line basis over the initial term of the land concession through April 6, 2031.

 

Land concession.   MGM Grand Paradise entered into a contract with the Macau government to use the land under MGM Macau commencing from April 6, 2006.  The land use right has an initial term through April 6, 2031, subject to renewal for additional periods. The land concession intangible asset is amortized on a straight-line basis over the remaining initial contractual term.

 

Customer lists. The Company recognized an intangible asset related to customer lists, which is amortized on an accelerated basis over its estimated useful life of five years.

 

Gaming promoter relationships.  The Company recognized an intangible asset related to its relationships with gaming promoters, which is amortized on a straight-line basis over its estimated useful life of four years.

 

Deferred taxes.  The Company recorded a net deferred tax liability of $381 million for the acquisition of the controlling financial interest in MGM China and a corresponding increase to goodwill.  The net deferred tax liability represents the excess of the financial reporting amounts of the net assets of MGM China over their respective bases under Macau tax law measured at the enacted tax rates expected to apply to taxable income in the periods such differences are expected to be realized, net of a valuation allowance of $72 million. The tax-effected components of the net deferred tax liability at June 3, 2011 are as follows (in thousands):

 

Deferred tax assets- foreign
Accruals, reserves and other		$	121
Bad debt reserve		3,161
Long-term debt		2,816
Net operating loss carryforward		58,781
Preopening and start-up expenses		3,838
Property and equipment		7,822
		76,539
Less: Valuation allowance		(71,670		)
		4,869
Deferred tax liabilities- foreign
Intangible assets		(385,497		)
Net deferred tax liability		$	(380,628	)

 

Income generated from gaming operations of MGM Grand Paradise is exempted from Macau’s 12% complementary tax for the five-year period ending December 31, 2016 pursuant to approval from the Macau government granted on September 22, 2011.  The exemption from the Macau 12% complementary tax on gaming profits does not apply to dividend distributions of such profits to MGM China, its sole shareholder.  However, in June 2012, MGM Grand Paradise reached an agreement with the Macau government to settle the 12% complementary tax that would otherwise be due by its shareholders (including MGM China) on distributions of its gaming profits by paying a flat annual payment. Such agreement covers the years 2007 through 2011, including the distribution made during the first quarter of 2012. MGM China is still subject to the 12% complementary tax on dividend distributions after the covered period.  See Note 2 for further discussion of the complementary tax.

 

Non-gaming operations remain subject to the complementary tax.  At June 3, 2011 MGM Grand Paradise had a complementary tax net operating loss carryforward of $490 million resulting from non-gaming operations that will expire if not utilized against non-gaming income in years 2011 through 2013. The Macanese net operating loss carryforwards are fully offset by valuation allowance.

 

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At June 3, 2011, the Company had an excess amount for financial reporting over the U.S. tax basis of its investment in MGM China of $3.6 billion that management does not consider to be essentially permanent in duration.  The Company expects this basis difference to resolve through repatriations of future MGM China earnings.  The Company has not provided U.S. deferred taxes for such excess financial reporting basis because there would be sufficient foreign tax credits to offset all U.S. income tax that would result from the future repatriation of such earnings.

 

Consolidated results.  MGM China’s consolidated results beginning as of June 3, 2011 are presented below:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2012			2011			2012			2011
		(In thousands)
Net revenues		$	709,296		$	192,984		$	1,411,386		$	192,984
Operating income		90,215			19,448			158,342			19,448
Net income		139,658			15,515			160,282			15,515

 

Pro forma information. The operating results for MGM China and its subsidiaries are included in the accompanying consolidated statements of income from the date of acquisition.  The following unaudited pro forma consolidated financial information for the Company has been prepared assuming the Company’s acquisition of its controlling financial interest had occurred as of January 1, 2011 and does not include the $3.5 billion gain recognized by the Company on the acquisition:

 

		Six Months Ended
		June 30,
		2011
		(In thousands, except per share data)
Net revenues		$	4,389,867
Operating income		348,507
Net loss		(158,649		)
Net loss attributable to MGM Resorts International		(208,879		)
Loss per share of common stock attributable to MGM Resorts International:
Basic		$	(0.43	)
Diluted		$	(0.43	)

 

The pro forma information for the six months ended June 30, 2011 disclosed in the table above reflects adjustments to correct the amounts previously presented, primarily to include additional depreciation and amortization of $128 million related to purchase accounting entries.  These adjustments have no impact on the Company’s consolidated balance sheet or statement of operations, and the Company does not believe the adjustments to the pro forma footnote presentation are material to the consolidated financial statements.

 

NOTE 4 — INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

 

Investments in and advances to unconsolidated affiliates include:

 

		June 30,			December 31,
		2012			2011
		(In thousands)
CityCenter Holdings, LLC — CityCenter (50%)		$	1,282,456		$	1,332,299
Elgin Riverboat Resort—Riverboat Casino — Grand Victoria (50%)		205,000			292,094
Other		11,408			11,179
		$	1,498,864		$	1,635,572

 

The Company recorded its share of the net income (loss) of unconsolidated affiliates including recognition of amortized basis differences as follows:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2012			2011			2012			2011
		(In thousands)
Income (loss) from unconsolidated affiliates		$	5,986		$	32,027		$	(7,323	)	$	95,370
Non-operating items from unconsolidated affiliates		(20,836		)	(28,002		)	(47,702		)	(68,292		)
		$	(14,850	)	$	4,025		$	(55,025	)	$	27,078

 

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Grand Victoria

 

At June 30, 2012, the Company reviewed the carrying value of its Grand Victoria investment for impairment due to a decrease in operating results at the property and the loss of market share as a result of the opening of a new river boat casino in the Illinois market, as well as a decrease in forecasted cash flows for 2013 through 2015.  Management used a discounted cash flow analysis to determine the estimated fair value from a market participant’s point of view.  Key assumptions included in the analysis were estimates of future cash flows including outflows for capital expenditures, a long-term growth rate of 2% and a discount rate of 10.5%.  As a result of the discounted cash flow analysis, management determined that it was necessary to record an other-than-temporary impairment charge of $85 million based on an estimated fair value of $205 million for the Company’s 50% interest.  The Company intends to, and believes it will be able to, retain its investment in Grand Victoria; however, due to the extent of the shortfall and the Company’s assessment of the uncertainty of fully recovering its investment, the Company has determined that the impairment was other-than-temporary.

 

Silver Legacy

 

Silver Legacy had approximately $143 million of outstanding senior secured notes that were due in March 2012.  Silver Legacy did not repay its notes at maturity and filed for Chapter 11 bankruptcy protection in May 2012. These notes are non-recourse to the Company.  The Company recorded an other-than-temporary impairment charge at December 31, 2011 which decreased the carrying value of its investment to zero. The Company also ceased applying the equity method for its investment in Silver Legacy and will not provide for additional losses until its share of future net income, if any, equals the share of net losses not recognized during the period the equity method was suspended.

 

MGM Macau

 

As discussed in Note 3, the Company obtained a controlling financial interest in MGM China as of June 3, 2011 and therefore was required to consolidate MGM China beginning on that date. Prior thereto, the Company’s investment in MGM Grand Paradise was accounted for under the equity method.

 

CityCenter

 

CityCenter summary financial information.   Summarized balance sheet information of the CityCenter joint venture is as follows:

 

		June 30,			December 31,
		2012			2011
		(In thousands)
Current assets		$	357,642		$	393,140
Property and other long-term assets, net		8,897,369			9,068,790
Current liabilities		369,306			375,870
Long-term debt and other liabilities		2,480,808			2,491,166
Equity		6,404,897			6,594,894

 

Summary results of operations for CityCenter are provided below:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2012			2011			2012			2011
		(In thousands)
Net revenues		$	290,145		$	281,281		$	529,062		$	552,904
Operating expenses		(313,129		)	(371,034		)	(613,503		)	(679,549		)
Operating loss		(22,984		)	(89,753		)	(84,441		)	(126,645		)
Non-operating expense		(64,081		)	(66,216		)	(139,459		)	(154,351		)
Net loss		$	(87,065	)	$	(155,969	)	$	(223,900	)	$	(280,996	)

 

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February 2012 senior secured notes.  In February 2012, CityCenter issued $240 million in aggregate principal amount of its 7.625% senior secured first lien notes due 2016 in a private placement.

 

March 2012 amended and restated credit agreement.  In March 2012, CityCenter entered into a second amendment and restatement of its senior credit facility.  The loans outstanding under the prior credit agreement were repaid in full.  No loans were outstanding under the amended credit agreement at June 30, 2012. The amended CityCenter credit facility consists of a $75 million revolving facility which matures January 21, 2015, and loans that will bear interest at a base rate (as defined) plus 4%, or in the case of Eurodollar loans, at the Eurodollar rate (as defined) plus 5%. The amended credit agreement contains covenants that, among other things, restricts CityCenter from incurring additional indebtedness, making distributions to equity interests, selling assets and entering into certain transfers. In addition, CityCenter is required to maintain specified minimum trailing twelve month EBITDA (as defined in the agreement governing its credit facility) levels.

 

2011 Residential inventory impairment.   CityCenter is required to carry its residential inventory at the lower of its carrying value or fair value less costs to sell. Fair value of the residential inventory is determined using a discounted cash flow analysis based on management’s current expectations of future cash flows. The key inputs in the discounted cash flow analysis include estimated sales prices, the absorption rate over the sell-out period, and the discount rate.  CityCenter recorded a $53 million impairment charge in the second quarter of 2011.  The Company recognized 50% of such impairment charge, resulting in a pre-tax charge of approximately $26 million.

 

NOTE 5 — LONG-TERM DEBT

 

Long-term debt consists of the following:

 

		June 30,			December 31,
		2012			2011
		(In thousands)
Senior credit facility:
$819.9 million ($1,834 million at December 31, 2011) term loans, net		$	780,433		$	1,728,510
Revolving loans		450,000			1,462,000
MGM Grand Paradise credit facility		553,021			552,312
$534.7 million 6.75% senior notes, due 2012		534,650			534,650
$462.2 million 6.75% senior notes, due 2013		462,226			462,226
$150 million 7.625% senior subordinated debentures, due 2013, net		151,020			151,483
$750 million 13% senior secured notes, due 2013, net		732,062			726,333
$508.9 million 5.875% senior notes, due 2014, net		508,385			508,231
$650 million 10.375% senior secured notes, due 2014, net		641,933			640,051
$875 million 6.625% senior notes, due 2015, net		876,925			877,208
$1,450 million 4.25% convertible senior notes, due 2015, net		1,463,048			1,465,287
$242.9 million 6.875% senior notes, due 2016		242,900			242,900
$732.7 million 7.5% senior notes, due 2016		732,749			732,749
$500 million 10% senior notes, due 2016, net		495,704			495,317
$743 million 7.625% senior notes, due 2017		743,000			743,000
$850 million 11.125% senior secured notes, due 2017, net		833,338			832,245
$475 million 11.375% senior notes, due 2018, net		465,506			464,928
$850 million 8.625% senior notes, due 2019		850,000			—
$845 million 9% senior secured notes, due 2020		845,000			845,000
$1,000 million 7.75% senior notes, due 2022		1,000,000			—
$0.6 million 7% debentures, due 2036, net		572			572
$4.3 million 6.7% debentures, due 2096		4,265			4,265
Other notes		256			900
		13,366,993			13,470,167
Less: Current portion		(141,674		)	—
		$	13,225,319		$	13,470,167

 

As of June 30, 2012, a portion of the principal amount of senior notes due within one year of the balance sheet date is classified as short-term because the amount due exceeds available borrowings under the senior credit facility.  Amounts outstanding under the MGM Grand Paradise credit facility were classified as long-term as MGM Grand Paradise has both the intent and ability to repay scheduled amortization payments under the term loan due within one year of the balance sheet date with available borrowings under its revolving credit facility.

 

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Senior credit facility. The Company’s senior credit facility was amended and restated in February 2012, and loans and revolving commitments aggregating approximately $1.8 billion (the “extending loans”) were extended to February 2015.  In accordance with the amendment, the Company repaid $409 million of outstanding loans to extending lenders. In March 2012, an additional $24 million in term loans were extended and the Company repaid the remaining non-extending term loans. At June 30, 2012, the senior credit facility consisted of approximately $820 million in term loans and a $1.3 billion revolver ($360 million of which has not been extended and matures in February 2014) and had approximately $855 million of available borrowing capacity.  In connection with the amendment and subsequent repayment of the non-extending loans, the Company recorded a loss on early retirement of debt of $59 million related to previously recorded discounts and certain debt issuance costs.

 

As of December 31, 2011, interest on the senior credit facility was based on a LIBOR margin of 5.00%, with a LIBOR floor of 2.00%, and a base rate margin of 4.00%, with a base rate floor of 4.00%. The non-extended revolving loans continue to be subject to this pricing. Interest on the extending loans is subject to a LIBOR floor of 1% and a pricing grid based upon collateral coverage levels. The interest rate on extending loans was 5% at June 30, 2012. Interest on non-extending revolving loans remains at 7%. The weighted average interest rate on outstanding borrowings under the senior credit facility at June 30, 2012 and December 31, 2011 was 5.2% and 7.0%, respectively.

 

The senior credit facility allows the Company to refinance indebtedness maturing prior to February 23, 2015 but limits its ability to prepay later maturing indebtedness until the extended facilities are paid in full. The Company may issue unsecured debt, equity-linked and equity securities to refinance its outstanding indebtedness; however, the Company is required to use net proceeds from certain indebtedness issued in amounts in excess of $250 million (excluding amounts used to refinance indebtedness) to ratably prepay the credit facilities in an amount equal to 50% of the net cash proceeds of such excess. The Company is no longer required to use net proceeds from equity offerings to prepay the senior credit facility in connection with the restatement of the senior credit facility. In addition, the Company agreed to deliver a mortgage, limited in amount to comply with indenture restrictions, encumbering the Beau Rivage.  The Company delivered such mortgage in March 2012.

 

At June 30, 2012, the Company is required to maintain a minimum trailing twelve month consolidated EBITDA (as defined in the agreement governing its senior credit facility) of $1.2 billion for each of the quarters of 2012, increasing to $1.25 billion at March 31, 2013, to $1.3 billion at June 30, 2013, and to $1.4 billion at March 31, 2014. EBITDA for the trailing twelve months ended June 30, 2012 calculated in accordance with the terms of the senior credit facility was $1.3 billion.  Additionally, the Company and its restricted subsidiaries are limited to $500 million of annual capital expenditures (as defined) during 2012; the Company was in compliance with the maximum capital expenditures covenants at June 30, 2012.

 

Substantially all of the assets of MGM Grand Detroit serve as collateral to secure its $450 million obligation outstanding as a co-borrower under the Company’s senior credit facility. In addition, substantially all of the assets of Gold Strike Tunica, substantially all of the assets of Beau Rivage and certain land across from the Luxor serve as collateral to secure up to $578 million of obligations outstanding under the Company’s senior credit facility.

 

MGM Grand Paradise credit facility. MGM Grand Paradise’s credit facility is comprised of approximately $553 million in term loans and a $400 million revolving loan.  The outstanding balance of MGM Grand Paradise’s credit facility at June 30, 2012 is comprised solely of term loans.  Scheduled amortization on the term loans begins in July 2012 with a lump sum payment of approximately $276 million upon final maturity in July 2015.  The revolving loan may be redrawn, but is required to be repaid in full on the last date of the respective term loan, no later than July 2015.  Interest on the term loan facility is based on HIBOR plus a margin ranging between 3% and 4.5%, based on MGM Grand Paradise’s adjusted leverage ratio, as defined in its credit facility agreement.  Interest on the revolving facility can be denominated in either Hong Kong dollars or U.S. dollars and is based on the same margin range, plus HIBOR or LIBOR, as appropriate.  As of June 30, 2012, the credit facility is denominated entirely in Hong Kong dollars and interest is based on a margin of 3%, plus HIBOR. Substantially all of the assets of MGM Grand Paradise serve as collateral for the MGM Grand Paradise credit facility, which is guaranteed by MGM China and certain of its direct and indirect subsidiaries.

 

At June 30, 2012, MGM Grand Paradise was required to maintain a specified adjusted leverage ratio, as defined, at the end of each quarter while the loans are outstanding. The adjusted leverage ratio is required to be no greater than 3.50 to 1.00. In addition, MGM Grand Paradise is required to maintain a debt service coverage ratio (as defined in the agreement governing its credit facility) of no less than 1.50 to 1.00 at each quarter end. At June 30, 2012, MGM Grand Paradise was in compliance with its adjusted leverage ratio and debt service coverage ratio.

 

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Senior and senior secured notes.   In January 2012 the Company issued $850 million of 8.625% senior notes due 2019 for net proceeds to the Company of approximately $836 million. In March 2012, the Company issued $1.0 billion of 7.75% senior notes due 2022 for net proceeds to the Company of approximately $986 million.  The notes are unsecured and otherwise rank equally in right of payment with the Company’s existing and future senior indebtedness.

 

Substantially all of the assets of New York-New York serve as collateral for the Company’s 13% senior secured notes due 2013, substantially all of the assets of Bellagio and The Mirage serve as collateral for the Company’s 10.375% senior secured notes due 2014 and the 11.125% senior secured notes due 2017 and substantially all of the assets of MGM Grand serve as collateral for the Company’s 9.00% senior secured notes due 2020. Upon the issuance of the 10.375%, 11.125% and 9.00% notes, the holders of the Company’s 13% senior secured notes due 2013 obtained an equal and ratable lien in all collateral securing these notes.  In addition, the holders of the Company’s 13% senior secured notes obtained an equal and ratable lien in the Beau Rivage collateral upon the issuance of such collateral.

 

Fair value of long-term debt. The estimated fair value of the Company’s long-term debt at June 30, 2012 was approximately $14.1 billion.  At December 31, 2011, the estimated fair value of the Company’s long-term debt was approximately $13.7 billion. Fair value was estimated using quoted market prices for the Company’s senior notes, senior subordinated notes and senior credit facility.  Carrying value of the MGM Grand Paradise credit facility approximates fair value.

 

NOTE 6 — COMMITMENTS AND CONTINGENCIES

 

CityCenter completion guarantee.   In January 2011, the Company entered into an amended completion and cost overrun guarantee.  Consistent with the terms of the previous completion guarantee, the terms of the amended completion guarantee provide for the ability to utilize the then remaining $124 million of net residential proceeds to fund construction costs, or to reimburse the Company for construction costs previously expended, though the timing of receipt of such proceeds is uncertain.  The completion guarantee is collateralized by substantially all of the assets of Circus Circus Las Vegas, as well as certain undeveloped land adjacent to that property.

 

As of June 30, 2012, the Company has funded $670 million under the completion guarantee. The Company has recorded a receivable from CityCenter of $101 million related to these amounts, which represents amounts reimbursable to the Company from CityCenter from future residential proceeds. The Company has a remaining estimated net obligation under the completion guarantee of $18 million which includes estimated litigation costs related to the resolution of disputes with contractors as to the final construction costs and estimated amounts to be paid to contractors through the legal process related to the Perini litigation. The Company’s accrual also reflects certain estimated offsets to the amounts claimed by the contractors.  CityCenter has reached settlement agreements with all but seven of Perini’s first-tier subcontractors.  However, significant disputes remain with the general contractor and the remaining subcontractors.  Amounts claimed by such parties exceed amounts included in the Company’s completion guarantee accrual by approximately $189 million, as such amounts exceed the Company’s best estimate of its liability. Moreover, the Company has not accrued for any contingent payments to CityCenter related to the Harmon Hotel & Spa component, which will not be completed using the building as it now stands.

 

The Clark County Building Division (the “Building Division”) retained a structural engineering consultant to provide with respect to the Harmon building “an engineering analysis to determine the structural stability of the as-built condition…”  The report from the Building Division’s structural engineering consultant, however, stated: “It is our understanding that the full nature and extent of the current as-built condition has not been documented or provided to us at the current time.  We based this study only on information that was obtained from the available design documents, non-compliance reports and limited visual observations.”  Thus, the Building Division’s structural engineering consultant apparently did not perform other testing or a relevant analysis of the building in its current, as-built condition.

 

Among its general findings the report of the Building Division’s structural engineering consultant stated: “Our analytical findings suggest that the as-designed Harmon Tower structure is structurally stable under design loads from a maximum considered earthquake (MCE) event;” and further, “Our analysis indicates that the as-designed strength of Harmon Tower’s shear wall system is generally sufficient to resist the design loads from a maximum considered earthquake (MCE).”  The report from the Building Division’s structural engineering consultant recommended further study of the Harmon building’s vulnerabilities.  Accordingly, since the County’s consultant did not appear to have performed an as-built analysis, the report that was issued has minimal value if any in resolution of the issues presented to CityCenter’s pending litigation with Perini.

 

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The Building Division requested that CityCenter conduct an analysis, based on all available information, as to the structural stability of the Harmon under building-code-specified load combinations.  On July 11, 2011 a consulting engineer engaged by CityCenter for this review submitted the results of his analysis of the Harmon tower and podium in its current as-built condition.  The engineer opined, among other things, that “[i]n a code-level earthquake, using either the permitted or current code specified loads, it is likely that critical structural members in the tower will fail and become incapable of supporting gravity loads, leading to a partial or complete collapse of the tower.  There is missing or misplaced reinforcing steel in columns, beams, shear walls, and transfer walls throughout the structure of the tower below the twenty-first floor.”  In response to this opinion, on July 12, 2011 the Building Division required CityCenter, no later than August 15, 2011, “to provide a plan of action that will abate the potential for structural collapse and protect impacted uses and occupancies.”  Under the relevant building code provision, “abate” means repair, rehabilitation, demolition or removal of the subject building.

 

On August 15, 2011, after expert consultation, CityCenter submitted its reply to the Building Division.  CityCenter informed the Building Division it has decided to abate the potential for structural collapse of the Harmon in the event of a code-level earthquake by demolishing the building, and enclosed a plan of action for demolition by implosion prepared by LVI Environmental Services of Nevada, Inc.  CityCenter also advised that prior to undertaking the demolition plan of action, it will seek relief from a standing order of the District Court judge presiding over the Perini litigation that prohibits alteration or destruction of the building without court approval.  In addition, CityCenter supplied the foundational data for the engineering conclusions stated in the July 11, 2011 letter declaring the Harmon’s structural instability in the event of a code-level earthquake.

 

The Building Division advised CityCenter that the Building Division’s staff would review CityCenter’s August 15, 2011 submission and then issue its conclusions to CityCenter, but the Building Division did not specify a date for such guidance.  By letter dated August 18, 2011, the Building Division requested a meeting with CityCenter’s retained engineering firm concerning its conclusions regarding the Harmon’s as-built condition.  Pursuant to this request by the Building Division, representatives from CityCenter’s retained engineering firm met with the Building Division and directly responded to the Building Division’s inquiries.

 

On November 22, 2011, the Building Division informed CityCenter by letter that “[b]ased on the information provided to Clark County Development Services including but not limited to the Weidlinger & Associates Letter of August 11, 2011 and subsequent conversations, it is required that MGM Resorts submit a plan abating the code deficiencies discovered in the Harmon Tower.”  CityCenter made a motion to the court presiding over the Perini litigation for permission to proceed with the demolition of the Harmon in advance of the conclusion of the litigation.  The hearing on that motion, which Perini and its Harmon-related subcontractors oppose, commenced on March 12, 2012.  After several days of testimony, the hearing was continued and scheduled to reconvene in July 2012, after the completion of further related proceedings, due to the scope of legal issues presented at the hearing.  On July 16, 2012 the hearing resumed, and after several additional days of testimony, on July 19, 2012 the court ruled that an adequate opportunity for investigation and observation of the Harmon had occurred, and granted CityCenter’s motion to demolish the Harmon with two conditions.  First, the court indicated it would approve a subcontractor’s application for additional nondestructive and destructive testing filed within 10 days of the order.  Second, the court stated that the following jury instruction would be given if demolition had occurred at the time of trial:  “CityCenter has made a business decision to demolish the Harmon.  The mere fact that the Harmon has been demolished is not evidence of any nonconformance with code or plans.  It is not evidence of any constructional defect or any safety issues at the Harmon.  You are to make all decisions in this case based upon the evidence presented here in court.”  At the conclusion of the evidentiary hearing the court ruled that due to his method of selecting certain test locations, statistically extrapolated data derived from those test locations would be inappropriate to present to the jury as the basis for the opinion of CityCenter’s structural engineer about certain defects at the Harmon.  Accordingly, CityCenter will make an application to the court for permission to conduct additional destructive testing at the Harmon prior to its demolition.

 

CityCenter also resubmitted the plan of abatement action prepared by LVI which was submitted on August 15, 2011, and applied to the Building Division for appropriate demolition permits and approvals.  Those applications are pending.

 

The Company does not believe it would be responsible for funding under the completion guarantee any additional remediation efforts that might be required with respect to the Harmon; however, the Company’s view is based on a number of developing factors, including with respect to on-going litigation with CityCenter’s contractors, actions by local officials and other developments related to the CityCenter venture, that are subject to change. CityCenter’s revolving credit facility provides that certain demolition or repair expenses may be funded only from (i) Member contributions designated for demolition of the Harmon, (ii) the proceeds of certain specified extraordinary receipts (which include any proceeds from the Perini litigation) or (iii) cash or cash equivalents in an amount not to exceed $30 million in the aggregate. Based on current estimates, which are subject to change, the Company believes the demolition of the Harmon would cost approximately $31 million.

 

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CityCenter construction litigation. In March 2010, Perini Building Company, Inc. (“Perini”), general contractor for CityCenter, filed a lawsuit in the Eighth Judicial District Court for Clark County, State of Nevada, against MGM MIRAGE Design Group (a wholly owned subsidiary of the Company which was the original party to the Perini construction agreement) and certain direct or indirect subsidiaries of CityCenter Holdings, LLC (the “CityCenter Owners”). Perini asserts that CityCenter was substantially completed, but the defendants failed to pay Perini approximately $490 million allegedly due and owing under the construction agreement for labor, equipment and materials expended on CityCenter. The complaint further charges the defendants with failure to provide timely and complete design documents, late delivery to Perini of design changes, mismanagement of the change order process, obstruction of Perini’s ability to complete the Harmon component, and fraudulent inducement of Perini to compromise significant amounts due for its general conditions. The complaint advances claims for breach of contract, breach of the implied covenant of good faith and fair dealing, tortious breach of the implied covenant of good faith and fair dealing, unjust enrichment and promissory estoppel, and fraud and intentional misrepresentation. Perini seeks compensatory damages, punitive damages, attorneys’ fees and costs.

 

In April 2010, Perini served an amended complaint in this case which joins as defendants many owners of CityCenter residential condominium units (the “Condo Owner Defendants”), adds a count for foreclosure of Perini’s recorded master mechanic’s lien against the CityCenter property in the amount of approximately $491 million, and asserts the priority of this mechanic’s lien over the interests of the CityCenter Owners, the Condo Owner Defendants and CityCenter lenders in the CityCenter property.

 

The CityCenter Owners and the other defendants dispute Perini’s allegations, and contend that the defendants are entitled to substantial amounts from Perini, including offsets against amounts claimed to be owed to Perini and its subcontractors and damages based on breach of their contractual and other duties to CityCenter, duplicative payment requests, non-conforming work, lack of proof of alleged work performance, defective work related to the Harmon, property damage and Perini’s failure to perform its obligations to pay certain subcontractors and to prevent filing of liens against CityCenter.  Parallel to the court litigation, CityCenter management conducted an extra-judicial program for settlement of CityCenter subcontractor claims.  CityCenter has resolved the claims of 215 first-tier Perini subcontractors (including the claims of any lower-tier subcontractors that might have claims through those first-tier subcontractors), with only seven remaining for further proceedings along with trial of Perini’s claims and CityCenter’s Harmon-related counterclaim and other claims by CityCenter against Perini and its parent guarantor, Tutor Perini.  Three of the remaining subcontractors are implicated in the defective work at the Harmon.  In June 2012, Perini recorded an amended notice of lien reducing its lien to approximately $240 million.  On July 3, 2012, CityCenter served Perini with a demand supported by the necessary paperwork requesting that Perini reduce its lien by an additional $33 million for a revised lien of $207 million, and Perini has stated in a court filing that it intends to make the requested reduction.  In addition to this anticipated reduction, CityCenter believes it may be entitled to a further lien reduction of approximately $13 million (for a revised lien amount of $195 million, including certain liens not related to Perini’s lien) based on a partial payment to subcontractor Fisk Electric once the Company has provided the court and Perini with the required information.

 

Perini made a motion for partial summary judgment as to the validity and enforceability of its mechanic’s lien.  After hearing on the motion, on July 9, 2012 the court granted Perini’s motion.  The court ruled that Perini’s notice of lien and the amended notices of lien recorded constitute a valid and enforceable mechanic’s lien “subject to at some point a determination of the amount of the lien and whether the lien is frivolous, overstated, or an appropriate setoff is due as a result of the counterclaims that CityCenter has made in this litigation.”

 

The court has set a new trial date of June 24, 2013 for the consolidated action involving the claims of Perini, the remaining Perini subcontractors and any related third parties, and CityCenter’s counterclaim against Perini and other parties for defective construction of the Harmon and other nonconforming work, and also amended other significant pre-trial dates.  Discovery is in process.  The CityCenter Owners and the other defendants will continue to vigorously assert and protect their interests in the Perini lawsuit. The Company believes that a loss with respect to Perini’s punitive damages claim is neither probable nor reasonably possible.  Please refer to the disclosure above for further discussion on the Company’s completion guarantee obligation which may be impacted by the outcome of the above litigation and the joint venture’s extra-judicial settlement process.

 

Sales and use tax on complimentary meals.   In March 2008, the Nevada Supreme Court ruled, in a case involving another gaming company, that food and non-alcoholic beverages purchased for use in providing complimentary meals to customers and to employees were exempt from use tax.  The Company had previously paid use tax on these items and has generally filed for refunds for the periods from January 2001 to February 2008 related to this matter. The Company is claiming the exemption on sales and use tax returns for

 

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periods after February 2008 in light of this Nevada Supreme Court decision and has not accrued or paid any sales or use tax for those periods.  In February 2012, the Nevada Department of Taxation asserted that customer complimentary meals and employee meals are subject to sales tax on a prospective basis commencing February 15, 2012.  In July 2012, the Nevada Department of Taxation announced that sales taxes applicable to such meals are due and payable without penalty or interest at the earlier of certain regulatory, judicial or legislative events or June 30, 2013.  The Nevada Department of Taxation position stems from a Nevada Tax Commission decision concerning another gaming company which states that complimentary meals provided to customers are subject to sales tax at the retail value of the meal and employee meals are subject to sales tax at the cost of the meal. The other gaming company filed in Clark County District Court a petition for judicial review of the Nevada Tax Commission decision. The Company disagrees with the Nevada Department of Taxation assertions.  Based on an analysis of the facts and circumstances as of the date of these financial statements, the Company does not believe it is probable it will incur a liability with respect to such assertions.  Any reasonably possible range of loss would not be material to the Company’s financial statements as of June 30, 2012.

 

Other guarantees.   The Company is party to various guarantee contracts in the normal course of business, which are generally supported by letters of credit issued by financial institutions.  The Company’s senior credit facility limits the amount of letters of credit that can be issued to $250 million, and the amount of available borrowings under the senior credit facility is reduced by any outstanding letters of credit.  At June 30, 2012, the Company had provided $37 million of total letters of credit.  In addition, MGM China guarantees approximately $39 million of debt under the MGM Grand Paradise credit facility.

 

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

 

NOTE 7 — INCOME (LOSS) PER SHARE OF COMMON STOCK

 

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

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2012			2011			2012			2011
		(In thousands)
Numerator:
Net income (loss) attributable to MGM Resorts International - basic		$	(145,452	)	$	3,441,985		$	(362,705	)	$	3,352,114
Interest on convertible debt, net of tax		—			9,054			—			17,902
Net income (loss) attributable to MGM Resorts International - diluted		$	(145,452	)	$	3,451,039		$	(362,705	)	$	3,370,016
Denominator:
Weighted-average common shares outstanding - basic		488,931			488,609			488,896			488,574
Potential dilution from share-based awards		—			1,891			—			1,962
Potential dilution from assumed conversion of convertible debt		—			64,390			—			63,154
Weighted-average common and common equivalent shares - diluted		488,931			554,890			488,896			553,690
Anti-dilutive share-based awards excluded from the calculation of diluted earnings per share		23,942			18,004			23,942			18,224

 

NOTE 8 — STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS

 

Noncontrolling interests.  As discussed in Note 3, the Company became the controlling shareholder of MGM China and began consolidating the financial position of MGM China in its financial statements as of June 3, 2011. The noncontrolling interests in MGM China and other minor subsidiaries are presented as a separate component of stockholders’ equity in the Company’s consolidated balance sheets and the net income attributable to noncontrolling interests is presented on the Company’s consolidated statements of operations.

 

MGM China dividend.   MGM China paid an approximately $400 million dividend in March 2012, of which approximately $204 million remained within the consolidated entity and approximately $196 million was distributed to noncontrolling interests.

 

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