UNITED STATES
SECURITIES AND 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, 1996
OR
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. 1-12962
GRAND CASINOS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1689535
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13705 First Avenue North
Minneapolis, Minnesota 55441
(Address of principal executive offices) (Zip Code)
(612) 449-9092
(Registrant's telephone number, including area code)
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 _______
As of August 12, 1996, there were 41,748,022 shares of Common Stock, $0.01 par
value per share, outstanding.
GRAND CASINOS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995
Consolidated Statements of Earnings
for the three months ended June 30, 1996
and July 2, 1995
Consolidated Statements of Earnings for
the six months ended June 30, 1996 and
July 2, 1995.
Consolidated Statements of Cash Flows
for the six months ended June 30, 1996
and July 2, 1995
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of
Security Holders
ITEM 6. Exhibits and Reports On Form 8-K
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) *
JUNE 30, 1996 DECEMBER 31, 1995
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 201,173 $ 334,772
Current installments of notes receivable 10,541 13,750
Accounts receivable 18,662 10,864
Deferred income taxes 6,507 6,747
Other current assets 9,725 13,736
---------- ----------
Total Current Assets 246,608 379,869
---------- ----------
Property and Equipment, Net 727,517 542,838
---------- ----------
Other Assets:
Cash and cash equivalents-restricted 7,746 6,902
Securities available for sale 38,575 14,200
Notes receivable, less current installments 38,793 43,594
Investments in and notes from unconsolidated affiliates 109,303 109,413
Debt issuance and deferred licensing costs-net 24,244 20,582
Other long-term assets 21,576 10,710
---------- ----------
Total Other Assets 240,237 205,401
---------- ----------
TOTAL ASSETS $1,214,362 $1,128,108
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable-trade $ 8,687 $ 6,252
Accounts payable-construction 37,629 12,517
Current installments of long-term debt and capital leases 6,559 11,562
Accrued interest 3,882 4,030
Accrued payroll and related expenses 18,982 17,157
Other accrued expenses 25,517 16,314
---------- ----------
Total Current Liabilities 101,256 67,832
---------- ----------
Long-term Liabilities:
Long-term debt-less current installments 457,439 459,070
Deferred income taxes 75,343 75,106
---------- ----------
Total Long-Term Liabilities 532,782 534,176
---------- ----------
TOTAL LIABILITIES 634,038 602,008
---------- ----------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Common stock, $.01 par value; authorized 100,000 shares;
issued and outstanding 41,607 and 40,988
at June 30, 1996 and December 31, 1995, respectively 416 410
Additional paid-in-capital 410,312 397,298
Net unrealized gains on securities available for sale 6,251 2,102
Retained earnings 163,345 126,290
---------- ----------
Total Shareholders' Equity 580,324 526,100
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,214,362 $1,128,108
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
*DERIVED FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS.
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED
------------------------------
JUNE 30, 1996 JULY 2, 1995
--------- ---------
REVENUES:
Casino $ 80,297 $ 68,311
Hotel 6,622 2,650
Food and beverage 9,889 8,594
Management fee income 20,400 16,905
Retail and other income 2,965 1,924
--------- ---------
Gross Revenues 120,173 98,384
Less: Promotional allowances (7,196) (3,680)
--------- ---------
NET REVENUES 112,977 94,704
--------- ---------
COSTS AND EXPENSES:
Casino 26,407 21,037
Hotel 1,580 1,025
Food and beverage 4,963 4,087
Other operating expenses 2,658 1,840
Depreciation and amortization 6,832 5,976
Lease expense 4,141 3,620
Selling, general and administrative 29,138 25,585
--------- ---------
Total Costs and Expenses 75,719 63,170
--------- ---------
EARNINGS FROM OPERATIONS 37,258 31,534
--------- ---------
OTHER INCOME (EXPENSE):
Interest income 4,119 4,231
Interest expense (4,840) (7,561)
Gain on sale of investments 0 987
Equity in loss of unconsolidated affiliates (4,697) (120)
--------- ---------
Total other income (expense), net (5,418) (2,463)
--------- ---------
Earnings before income taxes and minority interest 31,840 29,071
Provision for income taxes 12,432 11,839
--------- ---------
Earnings before minority interest 19,408 17,232
Minority interest 0 1,033
--------- ---------
NET EARNINGS $ 19,408 $ 18,265
========= =========
EARNINGS PER COMMON SHARE $ 0.45 $ 0.52
========= =========
WEIGHTED AVERAGE COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 43,262 34,800
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
SIX MONTHS ENDED
------------------------------
JUNE 30, 1996 JULY 2, 1995
--------- ---------
REVENUES:
Casino $ 154,600 $ 130,507
Hotel 12,039 2,650
Food and beverage 19,068 16,290
Management fee income 39,092 31,013
Retail and other income 5,335 2,988
--------- ---------
Gross Revenues 230,134 183,448
Less: Promotional allowances (13,320) (7,188)
--------- ---------
NET REVENUES 216,814 176,260
--------- ---------
COSTS AND EXPENSES:
Casino 50,686 40,650
Hotel 3,048 1,052
Food and beverage 9,521 7,682
Other operating expenses 5,575 2,956
Depreciation and amortization 13,339 10,381
Lease expense 8,173 6,897
Selling, general and administrative 61,848 50,133
--------- ---------
Total Costs and Expenses 152,190 119,751
--------- ---------
EARNINGS FROM OPERATIONS 64,624 56,509
--------- ---------
OTHER INCOME (EXPENSE):
Interest income 9,438 6,744
Interest expense (10,566) (12,212)
Gain on sale of investment (0) 1,621
Equity in loss of unconsolidated affiliates (3,839) (270)
--------- ---------
Total other (expense), net (4,967) (4,117)
--------- ---------
Earnings before income taxes and minority interest 59,657 52,392
Provision for income taxes 22,601 20,506
--------- ---------
Earnings before minority interest 37,056 31,886
Minority interest 0 1,456
--------- ---------
NET EARNINGS $ 37,056 $ 33,342
========= =========
EARNINGS PER COMMON SHARE $ 0.86 $ 0.98
========= =========
WEIGHTED AVERAGE COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 43,063 34,126
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-----------------------------
JUNE 30, 1996 JULY 2, 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 37,056 $ 33,342
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 12,227 9,273
Amortization of original issue discount and debt issuance costs 1,112 2,853
Gain on sale of investment 0 (1,621)
Equity in loss of unconsolidated affiliate 3,839 270
Decrease in minority interest 0 (1,456)
Change in deferred income taxes 616 0
Changes in operating assets and liabilities:
Current assets (9,050) (2,651)
Accounts payable - trade 27,547 (126)
Accrued expenses and income taxes 15,997 16,665
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 89,344 56,549
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for notes receivable 505 (4,123)
Investment in and notes receivable from unconsolidated affiliates (4,364) (6,434)
Proceeds from repayment of notes receivable 7,304 10,116
(Increase) decrease in cash and cash equivalents-restricted (843) (181,128)
Payments for property and equipment (195,946) (59,117)
Purchases of securities available for sale (19,750) 0
Proceeds from sale of investment 0 1,562
Increase in other long-term assets (11,461) (532)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (224,555) (239,656)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in accounts payable-construction 0 (1,562)
Proceeds from issuance of common stock-net 13,020 763
Debt issuance costs and deferred financing costs (4,774) (11,163)
Proceeds from issuance of long-term debt 0 220,500
Payments on long-term debt and capital lease obligations (6,634) (8,864)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,612 199,674
--------- ---------
Net increase (decrease) in cash and cash equivalents (133,599) 16,567
Cash and cash equivalents - beginning of period 334,772 29,797
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 201,173 $ 46,364
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of capitalized interest $ 10,714 $ 11,109
Income taxes $ 8,000 $ 11,367
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for debt issuance costs $ 0 $ 4,000
Increase in goodwill due to an increase in ownership of Stratosphere Corporation $ 0 $ 7,960
Increase in minority interest due to an increase in ownership of Stratosphere Corporation $ 0 $ 11,922
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
NOTE 1 UNAUDITED FINANCIAL STATEMENTS
Grand Casinos, Inc. and Subsidiaries, collectively the
Company, develop, construct, and manage land-based and
dockside casinos and related hotel and entertainment
facilities primarily in emerging gaming jurisdictions. The
Company owns and operates two dockside casinos on the
Mississippi Gulf Coast, one dockside casino in Tunica, County,
Mississippi, and manages two Indian-owned casinos in Minnesota
and two Indian-owned casinos in Louisiana. The Company
operates Grand Casino Tunica in Tunica County, Mississippi, a
dockside casino which opened on June 24, 1996. It is also an
owner of approximately 42% of Stratosphere Corporation
(Stratosphere), which constructed the Stratosphere project in
Las Vegas, Nevada, which opened on April 29, 1996. Related
hotel and entertainment facilities at the Grand Casino Tunica
and Stratosphere projects are currently under construction and
will open at various times.
The consolidated financial statements include the accounts of
Grand Casinos, Inc. and its wholly-owned and majority-owned
subsidiaries. The prior year's accompanying consolidated
financial statements include the accounts of Stratosphere from
October 2, 1994, the date on which the Company first owned
over 50% of the voting stock of Stratosphere, to December 20,
1995, the date on which the Company again owned less than 50%
of the voting stock of Stratosphere. Investments in
unconsolidated subsidiaries representing between 20% and 50%
of voting stock are accounted for on the equity method. All
material intercompany balances and transactions have been
eliminated in the consolidation.
The accompanying unaudited consolidated financial statements
have been prepared by the Company in accordance with generally
accepted accounting principles for interim financial
information, in accordance with the rules and regulations of
the Securities and Exchange Commission. Pursuant to such rules
and regulations, certain financial information and footnote
disclosures normally included in the consolidated financial
statements have been condensed or omitted. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for fair presentation have
been included. Operating results for the six months ended June
30, 1996, are not necessarily indicative of the results that
may be expected for the fiscal year ending December 29, 1996.
The consolidated financial statements should be read in
conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1995.
NOTE 2 INCOME RECOGNITION
The Company recognizes revenues from its owned and operated
casinos in accordance with industry practice. Casino revenue
is the net win from gaming activities (the difference between
gaming wins and losses). Casino revenues are net of accruals
for anticipated payouts of progressive and certain other slot
machine jackpots. Revenues include the retail value of food
and beverage and other items which are provided to customers
on a complimentary basis. A corresponding amount is deducted
as promotional allowances. The costs of such complimentaries
are included in casino costs and expenses in the accompanying
Consolidated Statements of Earnings. Revenue from the
management of Indian-owned casino gaming facilities is
recognized when earned according to the terms of the
management contracts.
NOTE 3 INVENTORIES
Inventories, consisting of food and beverage, retail and
operating supplies, are stated at the lower of cost or market.
Cost is determined using the first in, first out method.
NOTE 4 PREOPENING EXPENSES
Preopening expenses incurred prior to opening of Company-owned
facilities are capitalized and amortized to expense using the
straight-line method over the six months following the opening
of the respective facilities. These costs include payroll,
training, and marketing costs incurred prior to commencement
of operations. Depreciation and amortization for the six
months ended June 30, 1996 and July 2, 1995 includes
approximately $.3 million and $.3 million of preopening
amortization expense, respectively.
NOTE 5 EARNINGS PER COMMON SHARE
Earnings per common share was determined by dividing net
earnings by the weighted average number of common shares and
common stock equivalents outstanding during the six and three
months ended June 30, 1996 and July 2, 1995.
NOTE 6 PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, except in the case
of capitalized lease assets, which are stated at the lower of
the present value of the future minimum lease payments or fair
market value at the inception of the lease. Expenditures for
additions, renewals and improvements are capitalized. Costs of
repairs and maintenance are expensed when incurred.
Depreciation of property and equipment is computed using the
straight-line method over useful lives of three to thirty
years. Leasehold acquisition costs are amortized over the
shorter of the estimated useful life or the term of the
respective leases once the assets are placed in service.
NOTE 7 AMORTIZATION OF ORIGINAL ISSUE DISCOUNT AND DEBT
ISSUANCE COSTS
Original issue discounts are amortized using the effective
interest method, over the life of the related indebtedness.
Debt issuance costs are amortized using the straight-line and
effective interest methods, over the life of the related
indebtedness.
NOTE 8 INTEREST COSTS
Interest is capitalized in connection with the construction of
major facilities. The capitalized interest is recorded as part
of the asset to which it relates and is amortized over the
asset's estimated useful life once the assets are placed in
service. For the six months ended June 30, 1996 and July 2,
1995, approximately $13.1 million and $8.1 million,
respectively, of interest cost was capitalized. For the three
months ended June 30, 1996 and July 2, 1995, approximately
$6.9 million and $4.9 million, respectively, of interest cost
was capitalized.
NOTE 9 NOTES RECEIVABLE
Notes receivable consist of the following (in thousands):
June 30, 1996 Dec. 31, 1995
------------- -------------
Notes from the Coushatta Tribe with interest at a defined
reference rate plus 1% (not to exceed 16%), receivable in 84
monthly installments through January 2002 $25,247 $26,903
Notes from the Tunica-Biloxi Tribe with interest at a defined
reference rate plus 1% (not to exceed 16%), receivable in 84
monthly installments through June
2001 13,570 14,529
Notes from the Mille Lacs Band with interest at a defined
reference rate plus 1% (not to exceed 16%), receivable in
varying installments through October 1997 2,240 3,071
Notes from the Mille Lacs Band, with
interest at 9.75%, receivable in 60 monthly
installments through December 1997 1,870 2,435
Note from Casino Magic Corp. related to
sale of assets with interest at 12% per annum,
principal and interest due May 26, 1996 0 2,773
Other 6,407 7,633
----- -----
$49,334 $57,344
Less current installments of notes receivable 10,541 13,750
------ ------
Notes receivable-less current installments $38,793 $43,594
======= =======
NOTE 10 LONG-TERM DEBT
On November 30, 1995, the Company completed its public
offering of $450.0 million of eight year 10.125% First
Mortgage Notes due December 1, 2003, realizing net cash
proceeds of approximately $434.5 million after underwriting
and other related offering costs. The Company used $132.6
million of net proceeds to extinguish $115.0 million aggregate
principal amount of 12.5% First Mortgage Notes due on February
1, 2000 (including accrued interest of $4.8 million and $12.8
million related to a tender offer premium and expenses), and
$25.3 million to retire all outstanding principal and interest
due under a credit facility with First Interstate Bank of
Nevada, N.A. (F.I.B. Note). The balance of net proceeds of
approximately $275.7 million is to be used to develop and open
Grand Casino Tunica and to construct additional hotel rooms
and entertainment and gaming-related amenities at Grand Casino
Biloxi and Grand Casino Gulfport.
The 10.125% First Mortgage Notes are secured by substantially
all the assets of Grand Casino Biloxi and Grand Casino
Gulfport, Grand Casino Tunica assets included in Phase 1
development, capital stock owned by the Company in
Stratosphere, and certain existing notes receivable due the
Company from Tribes. The notes require semi-annual payments of
interest only on June 1 and December 1 of each year commencing
June 1, 1996, until December 1, 2003, at which time the entire
principal plus accrued interest is due and payable. The notes
may be redeemed at the Company's option, in whole or in part,
anytime after December 1, 1999, at a premium, declining
ratably thereafter to par value on December 1, 2002, to
maturity.
On May 10, 1996, the Company completed a $120 million Senior
Secured Term Loan through BankAmerica Leasing and Capital
Group. The five-year Senior Secured Term Loan Facility, with
varying interest rates ranging from 1.75% to 2.50% over the
LIBO Rate, will be used for the continued development of the
Company's Grand Casino Tunica project, located in northern
Mississippi, just outside of Memphis,Tennessee. Approximately
$90 million of the loan will be used for furniture, fixtures
and equipment for the 340,000 square foot casino complex. The
balance of approximately $30 million will be used to construct
a 600-room hotel at Grand Casino Tunica. As of July 31, 1996
and June 30, 1996, $18.4 million and $0 million had been
advanced under the Senior Secured Term Loan Facility,
respectively.
NOTE 11 COMMITMENTS AND CONTINGENCIES
STRATOSPHERE CORPORATION
On March 9, 1995, the Company converted $33.5 million of
outstanding advances to Stratosphere into an aggregate 8.25
million shares of common stock. The Company has agreed to
provide credit enhancements, subject to certain limitations,
to guarantee completion of construction of the project to a
limit of $50.0 million (the "Completion Guarantee") and to
purchase up to $20.0 million of additional equity in
Stratosphere during each of the first three years (up to $60.0
million total) Stratosphere is operating to the extent
Stratosphere's consolidated cash flow does not reach $50.0
million in each of such years. Stratosphere has notified the
Company that Stratosphere believes that the Company will be
obligated to loan Stratosphere $48.5 million pursuant to the
Completion Guarantee.
Stratosphere has announced that its cash on hand and projected
internally generated funds will not be sufficient to fund both
Stratosphere's cash requirements for existing operations,
including debt service, and Stratosphere's currently
anticipated capital requirements to complete Phase II of the
Stratosphere project. Stratosphere is exploring a variety of
means to obtain additional financing, including, to the extent
permitted under Stratosphere's First Mortgage Note Indenture,
debt and equity financing. There can be no assurance that
additional financing will be available, or that if available,
will be on terms favorable to Stratosphere. Stratosphere
currently plans to continue construction of Phase II. In the
event Stratosphere does not obtain additional financing in a
timely manner, Stratosphere will be required to restructure
its existing indebtedness. If Stratosphere cannot restructure
its existing indebtedness there will be serious doubt as to
whether Stratosphere will be able to continue as a going
concern. If Stratosphere does not continue as a going concern,
the Company would be required to write-off all or a
substantial portion of the Company's investment in
Stratosphere which would have a material adverse effect on the
Company's results of operations.
LOAN GUARANTY AGREEMENTS
The Company has guaranteed a loan and security agreement
entered into by the Tunica-Biloxi Tribe of Louisiana for $14.1
million for the purpose of financing casino equipment. The
agreement extends through 1998, and as of June 30, 1996, the
amount outstanding was $8.5 million. In addition, the Company
has guaranteed loan and security agreements entered into by
the Coushatta Tribe of Louisiana for $22.3 million for the
purpose of financing casino equipment. The agreements are for
three years and have various maturity dates through 1998, and
as of June 30, 1996, the amounts outstanding were $14.7
million.
The Company has entered into a master hotel development
agreement with Casino Resource Corporation for the hotel
adjacent to Grand Casino Hinckley. The Company has guaranteed
the mortgage related to the hotel in the amount of $2.8
million as of June 30, 1996.
OTHER
The Company, in connection with the development and
construction of Grand Casino Tunica in Tunica County,
Mississippi, has entered into a fixed price construction
contract in the amount of $212.9 million. As of June 30, 1996,
the balance remaining to complete under the contract is
approximately $98.3 million.
The Company is a defendant in various pending litigation. In
management's opinion, the ultimate outcome of such litigation
will not have a material adverse effect on the results of
operations or the financial position of the Company.
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops, constructs and manages land-based and
dockside casinos primarily in emerging gaming jurisdictions.
The Company's revenues are derived from the Company-owned
casinos of Grand Casino Biloxi, Grand Casino Gulfport, and
Grand Casino Tunica, and from management fee income from Grand
Casino Mille Lacs, Grand Casino Hinckley, Grand Casino
Avoyelles, and Grand Casino Coushatta.
Pursuant to the Mille Lacs, Hinckley, Avoyelles, and Coushatta
management contracts, the Company receives a fee equal to 40%
of the net distributable profits generated by Grand Casino
Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles, and
Grand Casino Coushatta.
The Company commenced operations in August 1990, and opened
its Company-owned casinos, Grand Casino Gulfport, Grand Casino
Biloxi and Grand Casino Tunica in May 1993, January 1994 and
June 1996, respectively. Therefore, the Company's limited
operating history may not be indicative of the Company's
future performance. In addition, a comparison of results from
year to year may not be meaningful due to the opening of new
facilities during such years. The Company's growth strategy
contemplates expanding existing operations and establishing
additional gaming operations. The successful implementation of
this growth strategy is contingent upon the satisfaction of
various conditions and the occurrence of certain events,
including obtaining governmental approvals and increased
competition, many of which are beyond the control of the
Company. The following discussion and analysis should be read
in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
The casino operations of Grand Casino Tunica opened to the
public on June 24, 1996. Accordingly, only five days of Grand
Casino Tunica's operations are included in the results of
operations for the three and six month periods ended June 30,
1996. The Company's long term plan was, and continues to be,
to develop Grand Casino Tunica into a destination resort with
the development of hotels and other amenities over the next
several months. An 188 room hotel is scheduled to open in
September 1996 and 1,200 additional rooms are currently under
development. Until such time that such hotels and other
amenities are fully operational, Grand Casino Tunica will be
dependent on the highly competitive day trip market. Although
Grand Casino Tunica has only been open for a short period of
time, gaming revenue for the first seven weeks of operation of
Grand Casino Tunica was approximately $19.0 million, which is
below expectations. The average weekly gaming revenue for the
four week period ended August 11, 1996 was approximately $2.2
million. The Company believes that the addition of hotels and
other amenities will improve Grand Casino Tunica's
performance. However, there can be no assurance that results
will improve as such additional amenities are added.
Revenues from owned and operated casinos are calculated in
accordance with generally accepted accounting principles and
presented in a manner consistent with industry practice. Net
distributable profits from Grand Casino Mille Lacs, Grand
Casino Hinckley, Grand Casino Avoyelles, and Grand Casino
Coushatta are computed using a modified cash basis of
accounting in accordance with the management contracts. The
effect of the use of the modified cash basis of accounting is
to accelerate the write-off of capital equipment and leased
assets, which thereby impacts the timing of net distributable
profits.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS
ENDED JULY 2, 1995
Earnings Per Common Share and Net Earnings
Earnings per common share for the six months ended June 30,
1996 were $.86 versus $.98 for the prior year's comparable
period based upon weighted average common shares outstanding
of 43.1 million and 34.1 million for the six month periods
ended June 30, 1996 and July 2, 1995, respectively. The
increase in the weighted average common shares outstanding was
primarily a result of the acquisition with Gaming Corporation
of America and Grand Gaming Corp. on November 30, 1995 in
which 7.3 million shares of common stock were issued.
Net earnings increased $3.7 million to $37.1 million for the
six months ended June 30, 1996 compared to the prior year
principally due to an increase in revenues in 1996 for Grand
Casino Biloxi, Grand Casino Gulfport and management fee
income. Included in Net earnings is the Company's 42% share of
Stratosphere Corporation's net loss. The Company's share was
$3.8 million or $.09 loss per Common Share.
Net Revenues
Net revenues for the Company increased $40.6 million for the
six months ended June 30, 1996 compared to the same period in
the prior year. The increase in net revenues is primarily due
to increased revenues at Company owned facilities Grand Casino
Biloxi, and Grand Casino Gulfport in the amount of $32.8
million and increased management fee income from Indian-owned
casinos in the amount of $7.2 million. Grand Casino Tunica
opened on June 24, 1996. Accordingly, only five days of Grand
Casino Tunica's operations are included in the results for the
six months ended June 30, 1996.
Grand Casino Biloxi, Grand Casino Gulfport and Grand Casino
Tunica generated $154.6 million in gross casino revenue and
$36.4 million in gross hotel, food, beverage, retail, and
entertainment revenue during the six months ended June 30,
1996. During the six months ended July 2, 1995, these
properties generated $130.5 million in gross casino revenue
and $21.9 million in gross food, beverage and retail revenue.
The increase in gross revenue is primarily a result of hotels
opened at both Grand Casino Biloxi and Grand Casino Gulfport
for the entire six months ended June 30, 1996. The Biloxi
hotel opened in April 1995. The Gulfport hotel opened in
September 1995.
Costs and Expenses
Total costs and expenses increased $32.4 million from $119.8
million for the six months ended July 2, 1995 to $152.2
million for the six month period ended June 30, 1996.
Casino expenses were $50.7 million for the six month period
June 30, 1996 compared to $40.7 million for the comparable
period. This increase is principally related to the increase
of $24.1 million in casino revenues. As a result of additional
overnight guests at Biloxi and Gulfport, additional casino
expenses in the form of complimentary rooms and entertainment
have increased casino expenses. Food and beverage expenses
increased $1.8 million to $9.5 million for the six month
period ended June 30, 1996.
Increases in selling, general and administrative expenses in
the amount of $11.7 million are primarily attributable to
increases in marketing expenses in the amount of $7.1 million
for the Biloxi and Gulfport properties as a result of air
charter programs and additional promotions and increases in
indirect expenses associated with the Biloxi and Gulfport
hotels as well as the opening of Grand Casino Tunica in the
aggregate amount of $3.1 million.
Other
Interest income increased by $2.7 million to $9.4 million for
the six months ended June 30, 1996. This increase is primarily
attributable to interest income earned on the proceeds of the
Company's $450.0 million First Mortgage Note offering that
closed on November 30, 1995. In addition, interest expense
decreased by $1.6 million to $10.6 million for the six months
ended June 30, 1996 compared to $12.2 million for the six
months ended July 2, 1995, as a result of additional
capitalized interest in the amount of $5.0 million. The
capitalized interest relating to Grand Casino Tunica during
the six months ended June 30, 1996 was $9.3 million and
capitalized interest for Stratosphere Corporation, which was
included in consolidated results until December 1995, for the
six months ended July 2, 1995 was $3.8 million.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THE THREE MONTHS
ENDED JULY 2, 1995
Earnings Per Common Share and Net Earnings
Earnings per common share for the three months ended June 30,
1996 were $.45 versus $.52 for the prior year's comparable
period based upon weighted average common shares outstanding
of 43.3 million and 34.8 million for the three month periods
ended June 30, 1996 and July 2, 1995, respectively. The
increase in the weighted average common shares outstanding was
primarily a result of the acquisition with Gaming Corporation
of America and Grand Gaming Corp. on November 30, 1995 in
which 7.3 million shares of common stock were issued.
Net earnings increased $1.1 million to $19.4 million for the
three months ended June 30, 1996 compared to the prior year
principally due to an increase in revenues in 1996 for Grand
Casino Biloxi, Grand Casino Gulfport and management fee
income. Included in net earnings is the Company's 42% share of
Stratosphere Corporation's net loss. The Company's share was
$4.7 million or $.11 loss per common share.
Net Revenues
Net revenues for the Company increased $18.3 million for the
three months ended June 30, 1996 compared to the same period
in the prior year. The increase in net revenues is primarily
due to increased revenues at Company owned facilities Grand
Casino Biloxi, Grand Casino Gulfport and Grand Casino Tunica
and increased management fee income from Indian owned casinos.
Grand Casino Biloxi, Gulfport and Tunica generated net
revenues of $92.6 million during the three months ended June
30, 1996, an increase of $15.1 million compared to the
comparable period in the prior year. Management fee income
from Indian owned casinos increased by $3.0 million during the
three month period ended June 30, 1996 compared to the
comparable period. Only five days of Grand Casino Tunica's
results were included in the three months ended June 30, 1996.
Grand Casino Biloxi, Grand Casino Gulfport and Grand Casino
Tunica generated $80.3 million in gross casino revenue and
$19.5 million in gross hotel, food, beverage, retail and
entertainment revenue during the three months ended June 30,
1996. During the three months ended July 2, 1995, Grand Casino
Biloxi and Grand Casino Gulfport generated $68.3 million in
gross casino revenue and $13.2 million in gross food, beverage
and retail revenue. The increase in gross revenue is primarily
a result of hotels opened at both Grand Casino Biloxi and
Grand Casino Gulfport for the entire three months ended June
30, 1996, whereas, only the Biloxi Hotel was open during the
three months ended July 2, 1995. In addition, increase in
gross revenue resulted from marketing programs such as air
charter.
Costs and Expenses
Total costs and expenses increased $12.5 million from $63.2
million for the three months ended July 2, 1995 to $75.7
million for the three month period ended June 30, 1996.
Casino expenses were $26.4 million for the three month period
ended June 30, 1996 compared to $21.0 million for the
comparable period, principally due to the increase of $12.0
million in casino revenues. As a result of additional
overnight guests at Biloxi and Gulfport, additional casino
expenses in the form of complimentary rooms and entertainment
have increased casino expenses. Food and beverage expenses
increased $.9 million to $5.0 million for the three month
period ended June 30, 1996. Increases in selling, general and
administrative expenses in the amount of $3.6 million are
primarily attributable to increases in marketing expenses in
the amount of $3.2 million for the Biloxi and Gulfport
properties, increases in indirect expenses associated with the
Gulfport Hotel and Grand Casino Tunica in the amount of $1.4
million which were offset by a decrease in corporate expenses.
Other
Interest expense decreased by $2.7 million to $4.8 million for
the three months ended June 30, 1996 compared to $7.6 million
for the three months ended July 2, 1995, as a result of
capitalized interest on the Grand Casino Tunica project in the
amount of $6.0 million during the three months ended June 30,
1996. This was offset by increased interest expense related to
the increased principal amount of indebtedness incurred in
November 1995.
CAPITAL RESOURCES AND LIQUIDITY
As of June 30, 1996, the Company had cash and cash equivalents
of $201.2 million. For the six months ended June 30, 1996,
capital expenditures were $195.9 million compared to $59.1
million for the comparable period in the prior year. The
majority of expenditures, $179.0 million for the six months
ended June 30, 1996, related to construction of Grand Casino
Tunica. Based upon current construction plans, the Company
expects that development, construction, equipping and
furnishing Grand Casino Tunica will require an aggregate of
approximately $470 million, of which $294.2 million was
expended as of June 30, 1996.
The Company secured $120.0 million in Senior Secured Term Loan
Facility financing for the Grand Casino Tunica project. Based
on the current construction plans, the continued development
of Grand Casino Tunica will require $176 million of capital,
of which $120 million is anticipated to be funded through the
Senior Secured Term Loan Facility for the Grand Casino Tunica
project. These estimates are based upon current construction
plans, which are subject to change, and the scope and cost of
each of the Company's projects may vary significantly from
that which is currently anticipated.
The Company, in conjunction with the closing of Stratosphere
Corporation's First Mortgage Notes, agreed to provide credit
enhancements, subject to certain limitations, to guarantee
completion of construction of the project up to a limit of
$50.0 million and to purchase up to $20.0 million of
additional equity in Stratosphere Corporation during each of
the first three years (up to $60.0 million total) after
Stratosphere Corporation commences operations to the extent
Stratosphere's consolidated cash flow does not reach $50.0
million in each of such years.
Stratosphere has notified the Company that Stratosphere
believes that the Company will be obligated to loan
Stratosphere $48.5 million pursuant to the Completion
Guarantee. Based on Stratosphere's net loss reported for the
second quarter of 1996 in the amount of $11.1 million and the
factors discussed below, there can be no assurance that
Stratosphere will generate sufficient cash flow to service
this debt. Pursuant to the terms of the Completion Guarantee,
Stratosphere is permitted to defer the payment of interest and
principal on such indebtedness.
Stratosphere has announced that its cash on hand and projected
internally generated funds will not be sufficient to fund both
Stratosphere's cash requirements for existing operations,
including debt service, and Stratosphere's currently
anticipated capital requirements to complete Phase II of the
Stratosphere project. Stratosphere is exploring a variety of
means to obtain additional financing, including, to the extent
permitted under Stratosphere's First Mortgage Note Indenture,
debt and equity financing. There can be no assurance that
additional financing will be available, or that if available,
will be on terms favorable to Stratosphere. Stratosphere
currently plans to continue construction of Phase II. In the
event Stratosphere does not obtain additional financing in a
timely manner, Stratosphere will be required to restructure
its existing indebtedness. If Stratosphere cannot restructure
its existing indebtedness there will be serious doubt as to
whether Stratosphere will be able to continue as a going
concern. If Stratosphere does not continue as a going concern,
the Company would be required to write-off all or a
substantial portion of the Company's investment in
Stratosphere which would have a material adverse effect on the
Company's results of operations.
The Company is not obligated to provide funds to Stratosphere
other than as noted above.
Pursuant to the Company's covenants related to the $450.0
million First Mortgage Notes, the Company is restricted from
paying cash dividends and from transferring funds from certain
subsidiaries to the Company. Because of such restrictions and
to provide funds for the growth of the Company, no cash
dividends are expected to be paid on common shares in the
foreseeable future.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides
a "safe harbor" for forward-looking statements. Certain
information included in this Form 10-Q and other materials
filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by
the Company) contains statements that are forward-looking,
such as statements relating to plans for future expansion and
other busines development activities as well as other capital
spending, financing sources and the effects of regulation
(including gaming and tax regulation) and competition. Such
forward-looking information involves important risks and
uncertainties that could significantly affect anticipated
results in the future and, accordingly, such results may
differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating
to development and construction activities, dependence on
existing management, leverage and debt service (including
sensitivity to fluctuations in interest rates), domestic or
global economic conditions, changes in federal or state tax
laws or the administration of such laws and changes in gaming
laws or regulations (including the legalization of gaming in
certain jurisdictions).
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 6, 1996, a complaint was filed in the United States District
Court for the District of Nevada (Michael Caesar, et al. v.
Stratosphere Corporation, et al.) against the Company, Lyle A. Berman
(an officer and director of the Company and Stratosphere Corporation
("Stratosphere"), Robert E. Stupak (a former officer and director of
Stratosphere), Bob Stupak Enterprises, David R. Wirshing (a former
officer and director of Stratosphere), Thomas A. Lettero (an officer of
Stratosphere), Andrew S. Blumen (an officer and director of
Stratosphere), Thomas G. Bell (a director of Stratosphere) and
Stratosphere. The complaint purports to seek relief on behalf of a
class of plaintiffs who purchased Stratosphere's common stock during
the period from December 19, 1995 through July 22, 1996, inclusive.
The complaint alleges that the defendants made misrepresentations and
engaged in other wrongdoing. The Company believes that the claims made
in the complaint are without merit. The Company plans to vigorously
defend such claims.
See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 1996 for information regarding other
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 6, 1996.
(b) Matters voted upon:
(1) Directors elected at meeting:
Affirmative Negative
Votes Votes Abstentions
----- ----- -----------
Lyle Berman 36,248,061 124,823 5,204,981
Patrick R. Cruzen 36,247,990 124,894 5,204,981
Morris Goldfarb 36,248,781 124,103 5,204,981
Ronald Kramer 36,245,671 127,213 5,204,981
David L. Rogers 36,248,781 124,103 5,204,981
Neil I. Sell 36,247,856 125,028 5,204,981
Stanley M. Taube 36,248,031 124,853 5,204,981
Joel N. Waller 36,248,701 124,183 5,204,981
(2) To approve and adopt the Company's 1995 Director
Stock Option Plan for the issuance of up to a maximum
of 200,000 shares.
Affirmative Negative
Votes Votes Abstentions
----- ----- -----------
25,593,203 5,314,445 10,670,217
(3) Proposal to amend the Company's 1991 Stock Option and
Compensation Plan to increase the number of shares of
Common Stock reserved for issuance thereunder by
2,575,000 shares.
Affirmative Negative
Votes Votes Abstentions
----- ----- -----------
21,556,108 9,004,765 11,016,992
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibit
No.
10.1 Participation Agreement dated as of May 10, 1996
among BL Development Corp., Grand Casinos, Inc.,
Hancock Bank, Certain Financial Institutions, Bank of
Scotland, First Interstate Bank of Nevada and Societe
Generale, Credit Lyonnais, Los Angeles Branch and BA
Leasing & Capital Corporation
10.2 Lease Agreement and Deed of Trust dated as of May 10,
1996 between Hancock Bank and BL Development Corp.
10.3 Loan Agreement dated as of May 10, 1996 among Hancock
Bank; BA Leasing & Capital Corporation; Bank of
Scotland, First Interstate Bank of Nevada and Societe
Generale; and Credit Lyonnais, Los Angeles Branch
10.4 Trust Agreement dated as of May 10, 1996 between BL
Development Corp., as Guarantor, and Hancock Bank, as
Trustee
10.5 Security Agreement and Assignment of Rents and Leases
dated as of May 10, 1996 between Hancock Bank and BA
Leasing & Capital Corporation
10.6 Construction Agency Agreement dated as of May 10,
1996 between Hancock Bank and BL Development Corp.
10.7 Guaranty dated as of May 10, 1996 of Grand Casinos,
Inc. and its Subsidiaries in favor of The
Beneficiaries Named
10.8 Deed of Trust, Assignment of Rents and Leases and
Security Agreement dated as of May 10, 1996 by and
among BL Development Corp., Hancock Bank, James R.
McIlwain and BA Leasing & Capital Corporation (Resort
Hotel)
10.9 Deed of Trust, Assignment of Rents and Leases and
Security Agreement dated as of May 10, 1996 by and
among BL Development Corp., Hancock Bank,, James R.
McIlwain and BA Leasing & Capital Corporation (Barge
Equipment)
10.10 Third Preferred Mortgage of BL Development Corp. in
favor of First Security Bank of Utah, National
Association, as Trustee and Mortgagee for BA Leasing
& Capital Corporation, as Agent
10.11 Master Vessel Trust Agreement dated as of May 10,
1996 between BA Leasing & Capital Corporation,
"Agent" and First Security Bank of Utah, N.A.,
"Vessell Trustee"
10.12 Ground Lease dated as of May 10, 1996 by and between
BL Development Corp. and Hancock Bank
10.13 Letter Agreement dated May 10, 1996 (Landlord Waiver
and Consent)
10.14 Intercreditor Agreement dated as of May 10, 1996
among American Bank National Association, First
Security Bank of Utah, Grand Casinos, Inc., GCA
Acquisition Subsidiary, Inc., and BA Leasing &
Capital Corporation, and acknowledged and accepted by
each of Grand Casinos Resorts, Inc., Grand Casinos of
Mississippi, Inc. - Gulfport, Grand Casinos of
Mississippi, Inc. - Biloxi, Grand Casinos Biloxi
Theater, Inc., GCI Biloxi Hotel Acquisition
Corporation, GCI Gulfport Hotel Acquisition
Corporation, Mille Lacs Gaming Corporation, Grand
Casinos of Louisiana, Inc. - Tunica-Biloxi, Grand
Casinos of Louisiana, Inc. - Coushatta, GCA, and BL
Development Corp.
27 Financial Data Schedule
(b) A Form 8-K was filed during the fiscal quarter ended June 30,
1996 on June 6, 1996 reporting under Item 5.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 13, 1996 GRAND CASINOS, INC.
-------------------
Registrant
By: / S /PATRICK R. CRUZEN
Patrick R. Cruzen, President
/ S / TIMOTHY J. COPE
Timothy J. Cope, Chief Financial Officer
EXHIBIT INDEX
GRAND CASINOS, INC.
EXHIBIT
NO. PAGE
- --------- ----
10.1 Participation Agreement dated as of May 10, 1996 among BL
Development Corp., Grand Casinos, Inc., Hancock Bank, The
Persons Listed on Schedule II, Bank of Scotland, First
Interstate Bank of Nevada and Societe Generale, Credit
Lyonnais, Los Angeles Branch, and BA Leasing & Capital
Corporation ..............................
10.2 Lease Agreement and Deed of Trust dated as of May 10, 1996
between Hancock Bank and BL Development
Corp.......................................
10.3 Loan Agreement dated as of May 10, 1996 among Hancock Bank;
BA Leasing & Capital Corporation; Bank of Scotland, First
Interstate Bank of Nevada and Societe Generale; and Credit
Lyonnais, Los Angeles Branch
10.4 Trust Agreement dated as of May 10, 1996 between BL
Development Corp., as Guarantor, and Hancock Bank, as Trustee
.....................................................................
10.5 Security Agreement and Assignment of Rents and Leases dated
as of May 10, 1996 between Hancock Bank and BA Leasing &
Capital Corporation
.......................................................................
10.6 Construction Agency Agreement dated as of May 10, 1996
between Hancock Bank and BL Development Corp.
.............................................
10.7 Guaranty dated as of May 10, 1996 of Grand Casinos, Inc. and
its Subsidiaries in favor of The Beneficiaries Named
..................................
10.8 Deed of Trust, Assignment of Rents and Leases and Security
Agreement dated as of May 10, 1996 by and among BL
Development Corp., Hancock Bank, James R. McIlwain and BA
Leasing & Capital Corporation (Resort Hotel)
......................................
10.9 Deed of Trust, Assignment of Rents and Leases and Security
Agreement dated as of May 10, 1996 by and among BL
Development Corp., Hancock Bank, James R. McIlwain and BA
Leasing & Capital Corporation (Barge Equipment)
..................................
10.10 Third Preferred Mortgage by BL Development Corp. in favor of
First Security Bank of Utah, National Association, as Trustee
and Mortgagee for BA Leasing & Capital Corporation, as Agent
..........................
10.11 Master Vessel Trust Agreement dated as of May 10, 1996
between BA Leasing & Capital Corporation, "Agent" and First
Security Bank of Utah, N.A., "Vessel Trustee"
..............................................
10.12 Ground Lease dated as of May 10,1 996 by and between BL
Development Corp. and Hancock Bank
................................................
10.13 Letter Agreement dated May 10, 1996 (Landlord Waiver and
Consent) ........................................
10.14 Intercreditor Agreement dated as of May 10, 1996 among
American Bank National Association First Security Bank of
Utah, Grand Casinos, Inc., GCA Acquisition Subsidiary, Inc.,
and BA Leasing & Capital Corporation, and acknowledged and
accepted by each of Grand Casinos Resorts, Inc., Grand
Casinos of Mississippi, Inc. - Gulfport, Grand Casinos of
Mississippi, Inc. - Biloxi, Grand Casinos Biloxi Theater,
Inc., GCI Biloxi Hotel Acquisition Corporation, GCI Gulfport
Hotel Acquisition Corporation, Mille Lacs Gaming Corporation,
Grand Casinos of Louisiana, Inc. - Tunica - Biloxi, Grand
Casinos of Louisiana, Inc. - Coushatta, GCA, and BL
Development Corp. ...................................