1
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 September 28, 1997
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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
130 Cheshire Lane
Minnetonka, Minnesota 55305
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(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 November 7, 1997, there were 41,956,587 shares of Common Stock, $0.01 par
value per share, outstanding.
Page 1 of 35
2
GRAND CASINOS, INC. AND SUBSIDIARIES
INDEX
Page of
Form 10-Q
---------
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of 3
September 28, 1997 and December 29, 1996
Consolidated Statements of Earnings 4
for the three months ended September 28, 1997
and September 29, 1996
Consolidated Statements of Earnings for the 5
nine months ended September 28, 1997 and
September 29, 1996
Consolidated Statements of Cash Flows 6
for the nine months ended September 28, 1997
and September 29, 1996
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 13
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
----------------
ITEM 1. Legal Proceedings 22
ITEM 6. Exhibits and Reports On Form 8-K 31
- 2 -
3
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 28, DECEMBER 29,
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $140,333 $147,254
Current installments of notes receivable 7,171 7,792
Accounts receivable 17,407 13,463
Deferred income taxes 12,835 9,910
Other current assets 14,823 15,335
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Total Current Assets 192,569 193,754
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Property and Equipment-Net 934,205 821,827
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Other Assets:
Cash and cash equivalents-restricted 6,078 10,276
Securities available for sale 18,180 23,603
Notes receivable-less current installments 27,945 30,772
Investments in and notes from unconsolidated affiliates 8,467 8,823
Debt issuance and deferred licensing costs-net 20,596 22,851
Other long-term assets 19,620 10,910
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Total Other Assets 100,886 107,235
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TOTAL ASSETS $1,227,660 $1,122,816
===================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $13,249 $20,002
Current installments of long-term debt 1,355 4,101
Current installments of capital lease obligations 16,871 15,358
Accrued interest 15,664 5,486
Accrued payroll and related expenses 22,914 23,418
Other accrued expenses 46,935 31,542
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Total Current Liabilities 116,988 99,907
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Long-term Liabilities:
Long-term debt-less current installments 454,498 455,002
Capital lease obligations-less current installments 87,447 56,740
Deferred income taxes 74,208 71,494
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Total Long-Term Liabilities 616,153 583,236
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TOTAL LIABILITIES 733,141 683,143
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COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares;
common stock issued and outstanding 41,930 and 41,796
at September 28, 1997 and December 29, 1996, respectively 420 418
Additional paid-in-capital 413,530 412,576
Net unrealized gains (losses) on securities available for sale 187 1,358
Retained earnings 80,382 25,321
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Total Shareholders' Equity 494,519 439,673
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,227,660 $1,122,816
===================================================================================================================================
* FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-3-
4
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------------------
SEPT. 28, 1997 SEPT. 29. 1996
-------------- ---------------
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Casino $125,764 $109,391
Hotel 10,074 6,516
Food and beverage 17,546 14,941
Management fee income 23,133 22,447
Retail and other income 3,715 3,071
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Revenues 180,232 156,366
Less: Promotional allowances (12,651) (9,641)
- ---------------------------------------------------------------------------------------------------------------------------------
NET REVENUES 167,581 146,725
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COSTS AND EXPENSES:
Casino 42,972 39,509
Hotel 2,462 1,512
Food and beverage 8,753 8,980
Other operating expenses 3,205 3,111
Depreciation and amortization 12,206 14,930
Lease expense 4,993 4,992
Selling, general and administrative 48,371 40,638
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Total Costs and Expenses 122,962 113,672
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EARNINGS FROM OPERATIONS 44,619 33,053
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OTHER INCOME (EXPENSE):
Interest income 2,846 4,063
Interest expense (10,954) (11,167)
Other (64) (245)
Equity in loss of unconsolidated affiliates (465) (10,910)
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Total other expense, net (8,637) (18,259)
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Earnings before income taxes 35,982 14,794
Provision for income taxes 13,817 11,291
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NET EARNINGS $22,165 $3,503
=================================================================================================================================
EARNINGS PER COMMON SHARE $0.51 $0.08
=================================================================================================================================
WEIGHTED AVERAGE COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 43,606 42,827
=================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-4-
5
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
NINE MONTHS ENDED
-------------------------------------------------
SEPT. 28, 1997 SEPT. 29, 1996
-------------- --------------
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Casino $348,072 $263,991
Hotel 26,650 18,555
Food and beverage 48,498 34,009
Management fee income 62,001 61,539
Retail and other income 10,139 8,406
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Revenues 495,360 386,500
Less: Promotional allowances (34,774) (22,961)
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NET REVENUES 460,586 363,539
- ----------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 121,040 90,195
Hotel 6,572 4,561
Food and beverage 25,272 18,500
Other operating expenses 9,655 8,686
Depreciation and amortization 36,167 28,269
Lease expense 14,173 13,164
Selling, general and administrative 133,271 102,487
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Total Costs and Expenses 346,150 265,862
- ----------------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 114,436 97,677
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 9,540 13,501
Interest expense (33,572) (21,733)
Other (176) (245)
Equity in loss of unconsolidated affiliates (665) (14,749)
- ----------------------------------------------------------------------------------------------------------------------------------
Total expense, net (24,873) (23,226)
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Earnings before income taxes 89,563 74,451
Provision for income taxes 34,503 33,892
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Net Earnings $55,060 $40,559
==================================================================================================================================
EARNINGS PER COMMON SHARE $1.27 $0.94
==================================================================================================================================
WEIGHTED AVERAGE COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 43,320 42,985
==================================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-5-
6
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 28, 1997 SEPTEMBER 29, 1996
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $55,060 $40,559
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 36,167 28,269
Equity in loss of unconsolidated affiliates 665 14,749
Deferred income taxes - 616
Write-off of project note receivables - (340)
Changes in operating assets and liabilities:
Other current assets (4,815) (15,460)
Accounts payable (6,753) 7,314
Accrued expenses 25,067 34,849
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 105,391 110,556
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable (1,328) (453)
Proceeds from repayment of notes receivable 5,868 10,349
Investment in and notes receivable from unconsolidated affiliates (338) (53,664)
Payments for property and equipment (144,100) (261,508)
Sales (Purchases) of securities available for sale 4,045 (19,750)
Decrease in cash and cash equivalents-restricted and other 4,198 649
Increase in other long-term assets (10,309) (13,455)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (141,964) (337,832)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net 956 15,047
Debt issuance costs and deferred financing costs (276) (5,018)
Proceeds from issuance of long-term debt 45,088 18,429
Payments on long-term debt and capital lease obligations (16,116) (9,664)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 29,652 18,794
- -------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (6,921) (208,482)
Cash and cash equivalents - beginning of period 147,254 334,772
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $140,333 $126,290
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of capitalized interest $29,731 $9,883
Income taxes $19,642 $15,719
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-6-
7
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1997
(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. The Company owns and
operates two dockside casinos on the Mississippi Gulf Coast and one
dockside casino in Tunica County, Mississippi, and manages two
Indian-owned casinos in Minnesota and two Indian-owned casinos in
Louisiana. Related hotel facilities at Company-owned Grand Casino
Biloxi, located in Biloxi, Mississippi, are currently under
construction. In addition, related hotel facilities at Indian-owned
Grand Casino Hinckley, located in Hinckley, Minnesota, are currently
under construction and are scheduled to open during the fourth quarter.
The Company also owns approximately 42% of Stratosphere Corporation
(Stratosphere), which owns and operates Stratosphere Tower, Casino &
Hotel in Las Vegas, Nevada. Stratosphere filed for reorganization
under Chapter 11 of the Bankruptcy Code on January 27, 1997. See Note
7 for further discussion regarding Stratosphere's bankruptcy
proceeding.
The consolidated financial statements include the accounts of Grand
Casinos, Inc. and its wholly-owned and majority-owned subsidiaries.
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 nine months ended September 28, 1997, are not
necessarily indicative of the results that may be expected for the
fiscal year ending December 28, 1997.
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8
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
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 29, 1996.
NOTE 2 NEW ACCOUNTING PRONOUNCEMENT
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128), which requires the disclosure of basic earnings per share
and diluted earnings per share. The Company will adopt Statement 128
in fiscal 1997.
NOTE 3 PREOPENING EXPENSES
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 direct payroll and other operating costs incurred
prior to commencement of operations. Depreciation and amortization for
the nine months ended September 28, 1997 and September 29, 1996
includes approximately $1.3 million and $5.6 million of preopening
amortization expense, respectively. For the three months ended
September 28, 1997 and September 29, 1996, approximately $.4 million
and $5.2 million, respectively, of preopening amortization was
expensed.
NOTE 4 INTEREST COSTS
The Company's policy is to capitalize interest incurred on debt during
the course of qualifying construction projects at Company-owned
facilities. Such costs are amortized over the related assets'
estimated useful lives. For the nine months ended September 28, 1997
and September 29, 1996, approximately $6.3 million and $14.1 million,
respectively, of interest cost was capitalized. For the three months
ended September 28, 1997 and September 29, 1996, approximately $2.6
million and $1.0 million, respectively, of interest cost was
capitalized.
-8-
9
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 NOTES RECEIVABLE
Notes receivable consist of the following (in thousands):
Sept. 28, 1997 Dec. 29, 1996
-------------- -------------
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 23,182 23,800
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 10,963 12,558
Other, less allowance for doubtful accounts
of $3,050 and $3,050, respectively 971 2,206
------- -------
$35,116 $38,564
Less current installments of notes
receivable (7,171) (7,792)
------- -------
Notes receivable-less current installments $27,945 $30,772
======= =======
NOTE 6 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. The 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 which commenced
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.
-9-
10
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 LONG-TERM DEBT (CONTINUED)
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, is being 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 was used for furniture, fixtures
and equipment for the 340,000 square foot casino complex. The balance
of approximately $30 million was used to construct a 600-room hotel at
Grand Casino Tunica. As of September 28, 1997, $104.3 million was the
balance owing under the Senior Secured Term Loan Facility (see Note 8).
NOTE 7 COMMITMENTS AND CONTINGENCIES
STRATOSPHERE CORPORATION
The Company owns approximately 42% of the equity in Stratosphere
Corporation. Stratosphere did not make its scheduled First Mortgage
Notes interest payment due on November 15, 1996. On January 6, 1997,
Stratosphere, the Company and an ad hoc committee representing the
holders of more than 57% of Stratosphere's First Mortgage Notes reached
an agreement-in-principle for restructuring the debt and equity of
Stratosphere.
On January 27, 1997, Stratosphere filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Pursuant to the
agreement-in-principle, Stratosphere and the Company filed a joint
proposed plan of reorganization for Stratosphere and a related
investment agreement, which stated the terms and conditions pursuant to
which the Company agreed to participate in the reorganization of
Stratosphere.
The proposed plan of reorganization and the related investment
agreement provided that the Company's obligations to participate in the
proposed reorganization were conditioned on Stratosphere obtaining
average monthly consolidated cash flow (as defined in the investment
agreement) of at least $2,267,000 for the months between October 1,
1996 and June 30, 1997. In June 1997, Stratosphere announced that its
average monthly-consolidated cash flow for the eight-month period ended
May 25, 1997 was $1,470,996. As a result of Stratosphere's inability to
satisfy the consolidated cash flow condition, the Company terminated
the original investment agreement.
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11
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STRATOSPHERE CORPORATION (CONTINUED)
On June 20, 1997, Stratosphere and the Company entered into an
amended investment agreement and filed an amended plan of
reorganization, establishing modified terms and conditions of the
Company's proposed participation in the reorganization of
Stratosphere.
On July 25, 1997, Stratosphere advised the Company that an
independent committee of Stratosphere's Board of Directors had
reached a preliminary determination that a restructuring proposal
presented to Stratosphere by High River Limited Partnership and
American Real Estate Partners, L.P. (collectively "High River") was
more favorable than the restructuring proposal contained in the
amended investment agreement and plan of reorganization. The
restructuring proposal presented by High River did not provide the
Company with any opportunity to invest in or otherwise participate
in the ownership of reorganized Stratosphere.
On July 31, 1997, the Company announced that the members of the
Company's Board of Directors who had also been members of
Stratosphere's Board of Directors had resigned from their positions
as Stratosphere board members. Accordingly, no director or officer
of the Company is a director or officer of Stratosphere.
On October 9, 1997, the Company announced that it had been unable to
reach an agreement with the holders of a significant portion of
Stratosphere's first mortgage for a consensual reorganization of
Stratosphere involving the Company's participation. The Company also
announced that it had informed Stratosphere that the Company had no
intention of participating in any Stratosphere plan of
reorganization. The Company has terminated the amended investment
agreement with Stratosphere entered into on June 20, 1997.
In connection with the issuance of Stratosphere's First Mortgage
Notes, the Company delivered a Standby Equity Commitment pursuant to
which the Company agreed, under the terms and conditions described
in the Standby Equity Commitment, to purchase up to $20 million of
additional equity in Stratosphere during each of the first three
years Stratosphere is operating (as defined in the Standby Equity
Commitment) to the extent Stratosphere's consolidated cash flow (as
defined in the Standby Equity Commitment) during each of such years
does not reach $50 million. As a result of Stratosphere's bankruptcy
filing and the application of federal bankruptcy laws, the Company
has contended that the enforceability of the Standby Equity
Commitment is in question.
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12
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STRATOSPHERE CORPORATION (CONTINUED)
This issue is currently the subject of litigation in Stratosphere's
Chapter 11 bankruptcy proceedings and in U.S. District Court in
Nevada. See Part II - Item 1. Legal Proceedings of this Form 10-Q.
LOAN GUARANTY AGREEMENTS
The Company has guaranteed two loan and security agreements entered
into by the Tunica-Biloxi Tribe of Louisiana for $14.1 million for
the purpose of financing casino equipment and for $16.5 million for
the purpose of purchasing a hotel and additional casino equipment.
The agreements extend through 1998 and 2000, respectively, and as of
September 28, 1997, the amounts outstanding were $4.0 million and
$14.0 million, respectively.
The Company has also 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
September 28, 1997, the amounts outstanding were $5.8 million. In
addition, on May 1, 1997, the Company entered into a guaranty
agreement related to a loan agreement entered into by the Coushatta
Tribe of Louisiana in the amount of $25.0 million, for the purpose
of constructing a hotel and acquiring additional casino equipment.
The guaranty will remain in effect until the loan is paid. The loan
term is approximately five years.
The Company has entered into a master hotel development agreement
with Casino Resource Corporation for the Grand Casino Hinckley Inn
adjacent to Grand Casino Hinckley. The Company has guaranteed the
mortgage for the hotel which had an unpaid principal balance of $2.5
million as of September 28, 1997.
The Company has provided a limited guaranty for the purpose of
financing Stratosphere Corporation hotel and casino equipment
subject to a maximum limitation amount of $8.7 million.
OTHER
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. See Part II - Item 1. Legal
Proceedings of this Form 10-Q.
- 12 -
13
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
NOTE 8 SUBSEQUENT EVENTS
On September 30, 1997 the Company closed on $100 million in bank
financing. The 5-year Revolving Senior Secured Capital Lease Term
Loan Facility will be used for the continued development of Grand
Casino Tunica, located in northern Mississippi, and Grand Casino
Gulfport, located in Gulfport, Mississippi, as well as other general
corporate purposes. As of November 7, 1997, no advances relating to
this financing had been made.
On October 14, 1997, the Company closed on a $115.0 million, 9.0%,
seven year, Senior Unsecured Note offering. The proceeds from the
offering will be used to refinance an existing bank capital lease in
approximately the same amount (see Note 6). The Senior Notes will
rank pari passu in right of payment with all senior indebtedness and
senior in right of payment to all subordinated indebtedness.
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. 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 based on the net
distributable profits (as defined in the contracts) generated by Grand
Casino Mille Lacs, Grand Casino Hinckley, Grand Casino Avoyelles, and
Grand Casino Coushatta. The management agreement for Grand Casino
Mille Lacs will expire in April 1998, and will not be renewed. No
decision has been made with respect to renewal of the management
agreement for Grand Casino Hinckley, which expires in June 1999.
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.
- 13 -
14
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
OVERVIEW (CONTINUED)
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 Company expects that Grand Casino Biloxi and Grand
Casino Gulfport may be affected by the addition of new competition
on the Mississippi Gulf Coast. 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 29, 1996.
Revenues from owned and operated casinos are calculated in
accordance with generally accepted accounting principles and are
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
NINE MONTHS ENDED SEPTEMBER 28, 1997 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 29, 1996
Earnings Per Common Share and Net Earnings
Earnings per common share for the nine months ended September 28,
1997 were $1.27 versus $.94 for the prior year's comparable period
based upon weighted average common shares outstanding of 43.3
million and 43.0 million for the nine month periods ended September
28, 1997 and September 29, 1996, respectively.
- 14 -
15
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Earnings Per Common Share and Net Earnings (Continued)
Net earnings for the nine months ended September 28, 1997 increased
$14.5 million to $55.1 million. Net earnings for the comparable
period in the prior fiscal year included a $14.7 million loss
related to unconsolidated affiliates, whereas net earnings for the
nine months ended September 28, 1997 includes only a $.7 million
loss related to unconsolidated affiliates. An increase of $11.8
million in interest expense is offset by less preopening expense and
improved operating results at Grand Casino Tunica.
Gross Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $348.1 million in gross casino revenue and $85.3 million
in gross hotel, food, beverage, retail and entertainment revenue
during the nine months ended September 28, 1997. During the nine
months ended September 29, 1996, Grand Casino Tunica, Grand Casino
Biloxi and Grand Casino Gulfport generated $264.0 million in gross
casino revenue and $61.0 million in gross food, beverage, and retail
revenue. The increase in gross revenues is primarily related to
Grand Casino Tunica which contributed $141.3 million of gross
revenues for the nine months ended September 28, 1997 compared to
$38.0 million for the same period in 1996. Grand Casino Tunica was
open all of 1997 compared to being open approximately one quarter in
1996. Combined gross revenues for Grand Casino Biloxi and Grand
Casino Gulfport increased $5.1 million for the nine months ended
September 28, 1997 compared to the same period in the prior year.
For the nine months ended September 28, 1997, management fees were
approximately even with management fees for the same period in the
prior year.
Net Revenues
Net revenues for the Company increased $97.0 million for the nine
months ended September 28, 1997 compared to the same period in the
prior year. The increase in net revenues is primarily due to Grand
Casino Tunica, which contributed net revenues of $128.3 million
during the nine months ended September 28, 1997 compared to $35.1
million during the nine months ended September 29, 1996. Grand
Casino Tunica was open all of 1997 compared to being open
approximately one quarter in 1996. In addition, combined net
revenues of Grand Casino Biloxi and Grand Casino Gulfport increased
$3.5 million for the nine months ended September 28, 1997 compared
to the same period in the prior year.
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16
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Net Revenues (Continued)
The Company implemented a new marketing campaign in 1997 for Grand
Casino Biloxi and Grand Casino Gulfport. This campaign has
increased the level of play, however, it has made only a slight
impact on win due to lower win percentages in table games and slots.
The increase in net revenues for Grand Casino Biloxi and Grand
Casino Gulfport has principally been due to non-gaming revenues.
Costs and Expenses
Total costs and expenses increased $80.3 million from $265.9 million
for the nine months ended September 29, 1996 to $346.2 million for
the nine months ended September 28, 1997.
Casino expenses were $121.0 million for the nine months ended
September 28, 1997 compared to $90.2 million for the comparable
period last year. The increase of $30.8 million was comprised of
additional casino expenses for Grand Casino Tunica in the amount of
$26.4 million. Grand Casino Tunica was open all of 1997, compared
to being open approximately one quarter in 1996. The casino expenses
for Grand Casino Biloxi and Grand Casino Gulfport increased $4.4
million for the nine months ended September 28, 1997 compared to the
same period in the prior year. The increase was principally a
result of additional complimentaries and labor to service and
attract guests. Food and beverage expenses increased $6.8 million
to $25.3 million during the nine-month period ended September 28,
1997, $4.7 million of which related to Grand Casino Tunica being
open all of 1997 compared to approximately one quarter in 1996.
Selling, general, and administrative expenses increased $30.8
million from $102.5 million for the nine months ended September 29,
1996 to $133.3 million for the nine months ended September 28, 1997.
Grand Casino Tunica's selling, general, and administrative expenses
increased $32.6 million from the nine months ended September 29,
1996 to the nine months ended September 28, 1997. In addition,
combined selling, general, and administrative expenses for Grand
Casino Biloxi and Grand Casino Gulfport increased slightly from 1996
to 1997 ($.5 million). Corporate expense decreased $2.8 million
from the nine months ended September 29, 1996 to the nine months
ended September 28, 1997 as a result of corporate reorganization
plans implemented in late 1996.
- 16 -
17
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Other
Interest income decreased by $4.0 million to $9.5 million for the
nine months ended September 28, 1997 from the comparable period last
year. This decrease is primarily attributable to lower cash
balances due to construction at Grand Casino Biloxi and Grand Casino
Tunica. Interest expense increased by $11.8 million to $33.6
million for the nine months ended September 28, 1997 compared to
$21.7 million for the nine months ended September 29, 1996. The
increase is the result of a reduction in capitalized interest
relating to the construction at Grand Casino Tunica and interest
expense incurred under the $120 million Senior Secured Term Loan.
Capitalized interest was $6.3 million and $14.1 million for the nine
months ended September 28, 1997 and September 29, 1996,
respectively.
THREE MONTHS ENDED SEPTEMBER 28, 1997 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 29, 1996
Earnings Per Common Share and Net Earnings
Earnings per common share for the three months ended September 28,
1997 were $.51 versus $.08 for the prior year's comparable period
based upon weighted average common shares outstanding of 43.6
million and 42.8 million for the three month periods ended September
28, 1997 and September 29, 1996, respectively. Net earnings
increased $18.7 million to $22.2 million for the three months ended
September 28, 1997 compared to the same period in the prior year.
The increase in net earnings is attributable to no loss from
Stratosphere for the three months ended September 29, 1997, and
preopening expenses at Grand Casino Tunica in 1997. During the
three months ended September 29, 1996, equity in loss of
unconsolidated affiliates was $10.9 million, whereas, for the three
months ended September 29, 1997 it was $.5 million. Grand Casino
Tunica expensed $5.2 million in preopening costs for the three
months ended September 29, 1996 compared to $.3 million for the same
period in 1997.
- 17 -
18
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Gross Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $125.8 million in gross casino revenue and $31.3 million in
gross hotel, food, beverage, retail, and entertainment revenue during
the three months ended September 28, 1997. During the three months
ended September 29, 1996, Grand Casino Tunica, Grand Casino Biloxi and
Grand Casino Gulfport generated $109.4 million in gross casino revenue
and $24.5 million in gross hotel, food, beverage and retail revenue.
The increase in gross revenues is primarily attributable to the opening
of Grand Casino Tunica which contributed $54.7 million of gross revenues
for the three months ended September 28, 1997 compared to $33.0 million
for the same period in 1996. Combined gross revenues for Grand Casino
Biloxi and Grand Casino Gulfport increased $1.5 million for the three
months ended September 28, 1997 compared to the same period in the prior
year. Management fees were approximately even for the three months
ended September 28, 1997 compared to the same period in the prior year.
Net Revenues
Net revenues for the Company increased $20.9 million for the three
months ended September 28, 1997 compared to the same period in the
prior year. The increase in net revenues is primarily due to Grand
Casino Tunica, which contributed net revenues of $49.7 million during
the three months ended September 28, 1997, compared to $30.3 million
during the three months ended September 29, 1996. In addition, combined
net revenues of Grand Casino Biloxi and Grand Casino Gulfport increased
$.8 million for the three months ended September 28, 1997 compared to
the same period in the prior year.
Costs and Expenses
Total costs and expenses increased $9.3 million from $113.7 million
for the three months ended September 29, 1996 to $123.0 million for the
three month period ended September 28, 1997. Casino expenses were $43.0
million for the three month period ended September 28, 1997 compared to
$39.5 million for the comparable period in 1996.
- 18 -
19
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
Costs and Expenses (Continued)
The increase of $3.5 million was comprised of additional casino
expenses for Grand Casino Tunica in the amount of $2.6 million and a
combined increase for Grand Casino Biloxi and Grand Casino Gulfport
of $.9 million for the three months ended September 28, 1997
compared to the same period in the prior year. Food and beverage
expenses decreased $.2 million to $8.8 million for the three month
period ended September 28, 1997. Selling, general, and
administrative expenses increased $7.7 million from $40.6 million
for the three months ended September 29, 1996 to $48.4 million for
the three months ended September 28, 1997.
Grand Casino Tunica's selling, general, and administrative expenses
increased $5.3 million from the three months ended September 29,
1996 to the three months ended September 28, 1997. In addition,
combined selling, general, and administrative expenses for Grand
Casino Biloxi and Grand Casino Gulfport increased $2.5 million from
the three months ended September 29, 1996 to the three months ended
September 28, 1997. Corporate expenses for the three months ended
September 28, 1997 decreased slightly from the same period in 1996.
Other
Interest income decreased by $1.2 million to $2.8 million for the
three months ended September 28, 1997. This decrease is primarily
attributable to lower cash balances due to construction at Grand
Casino Biloxi and Grand Casino Tunica. Interest expense decreased
by $.2 million to $11.0 million for the three months ended September
28, 1997 compared to $11.2 million for the three months ended
September 29, 1996. The decrease is the result of an increase in
capitalized interest relating to the construction at Grand Casino
Tunica and Grand Casino Biloxi, which is offset by interest expense
on additional advances under the $120 million Senior Secured Term
Loan. Capitalized interest was $2.6 million and $1.0 million for
the three months ended September 28, 1997 and September 29, 1996,
respectively.
- 19 -
20
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
CAPITAL RESOURCES AND LIQUIDITY
As of September 28, 1997, the Company had cash and cash equivalents
of $140.3 million. For the nine months ended September 28, 1997,
capital expenditures were $144.1 million compared to $261.5 million
for the comparable period in the prior year. The majority of
expenditures for the nine months ended September 28, 1997, related
to additional construction at Grand Casino Biloxi and Grand Casino
Tunica. Based on the projected cash generated from operations,
current cash and cash equivalents, and available credit facilities,
the Company believes it will have sufficient resources to fund
operations and proposed capital expenditures during the next twelve
months.
Pursuant to the Company's covenants related to the $450.0 million
First Mortgage Notes and the $115.0 million Senior Notes, the
Company is restricted from paying cash dividends and must maintain
certain financial ratios. 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.
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" under the Federal Private
Securities Litigation Reform Act of 1995.
Forward-looking statements are those which include statements
regarding projections, plans and objectives, and future economic
performance, together with statements regarding any assumptions
pertaining to such projections, plans and objectives, and future
economic performance. While these forward-looking statements
reflect the best judgment of the Company, based on information
available on the date of this Form 10-Q, such statements are all
subject to risks and uncertainties that could cause actual results
to vary from the forward-looking statements made in this Form 10-Q.
Those variances could be significant.
- 20 -
21
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(UNAUDITED)
FORWARD-LOOKING STATEMENTS (CONTINUED)
Such forward-looking statements involve risks and uncertainties that
could significantly affect future results, 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),
changes in competitive conditions, 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). In addition to any
specific risks and uncertainties mentioned or discussed in this Form
10-Q, the risks and uncertainties discussed in detail in the Company's
1996 Form 10-K, provide information which should be considered in
evaluating any of the Company's forward-looking statements. In
addition, you should be aware that the facts and circumstances which
exist when any forward-looking statements are made and on which those
forward-looking statements are based, may significantly change in the
future, thereby rendering obsolete the forward-looking statements on
which such facts and circumstances were based.
- 21 -
22
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following descriptions are summaries of the status of each of the
following legal proceedings as of November 1, 1997. More complete
information may be obtained by reviewing the court files pertaining to
such actions.
COHEN - FEDERAL ACTION
In April 1994, Harvey Cohen brought an action in the United States
District Court for the District of Nevada -- Harvey Cohen, et. al. v.
Stratosphere Corporation, et. al. - Case No. CV-S-94-00334 DWH (LRL)
-- against various defendants, including Grand Casinos Resorts, Inc.
("Resorts"), a wholly owned subsidiary of the Company. Cohen alleges
federal securities law violations and various state law claims in
connection with the initial public offering (the "IPO") for
Stratosphere Corporation ("Stratosphere"). Cohen brought the action as
a class action, and alleges that the defendants deprived the
plaintiffs of the opportunity to purchase Stratosphere common stock
in the IPO.
In April 1995, the federal district court dismissed the action. In
May 1995, the plaintiffs filed a notice of appeal of the dismissal
with the United States Court of Appeals for the Ninth Circuit. The
appeal -- Case No. CA 95-16098 -- was subsequently briefed and argued,
and in June 1997, the Appeals Court issued its decision affirming the
district court's dismissal of the action. Because the plaintiffs did
not request reconsideration or review of the Appeals Court's decision
by the applicable deadline, the district court's dismissal of the
action is final.
COHEN - STATE ACTION
In August 1995, Harvey Cohen brought an action in the District Court
for Clark County, Nevada -- Harvey J. Cohen, et. al. v. Stratosphere
Corporation, et. al. - Case No. A349985 -- against various defendants,
including Grand Casinos Resorts, Inc., a wholly owned subsidiary of
the Company. Cohen brought the action as a class action, and makes
substantially the same claims as made in the federal action brought by
Cohen and described above.
The state action has, by agreement of the parties, been stayed pending
a decision in the federal court action. The Company intends to
request that the state action be dismissed.
- 22 -
23
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
CALIFORNIA VIDEO POKER LITIGATION
In April 1996, three plaintiffs brought an action in the Superior
Court of California, County of San Diego -- Tom Payne, et. al. v.
Aztar Corporation, et. al. - Case No. 698592 -- against several
defendants, including the Company. The plaintiffs alleged that the
defendants participated in fraudulent and misleading conduct
intended to induce plaintiffs to play video poker machines based on
false beliefs regarding how such machines operate, and that the
defendants' alleged conduct violates various provisions of
California law. The plaintiffs sought to have the action certified
a class action, compensatory and punitive damages and other relief.
The defendants submitted various motions to dismiss the action,
including a motion by the Company based on the claim that the
California court does not have jurisdiction over the Company.
In March 1997, the court required the plaintiffs to file a
complaint stating more clearly the basis on which the plaintiffs
claim the defendants violated California law. In April 1997, the
plaintiffs filed an amended complaint. The amended complaint
included allegations that the defendants directed advertisements to
California residents that included false statements regarding video
poker machines.
The Company continued to assert that the California courts do not
have jurisdiction over the Company, and, therefore submitted a
motion to dismiss the action with respect to the Company.
Certain of the defendants in the action - - not including the
Company - - submitted a motion to dismiss based on a claim that the
U.S. Constitution precludes California courts from considering the
plaintiffs' claims against those defendants. Before the court ruled
on the Company's jurisdictional motion, the court granted the other
defendants' constitutional motion. The Company has been advised that
the plaintiffs intend to appeal the dismissal order.
- 23 -
24
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
CALIFORNIA VIDEO POKER LITIGATION (CONTINUED)
In October 1997, the plaintiffs and the defendants who submitted
jurisdictional motions to dismiss (including the Company) entered
into an agreement pursuant to which the plaintiffs' claims against
those defendants will be dismissed. If the plaintiffs' appeal is
unsuccessful, the constitutional dismissal will apply to all
defendants in the action - - including the Company. If the
plaintiff's appeal is successful, the plaintiffs will have the
right to reinstate their claims against all of the defendants. If
the plaintiffs reinstate their claims against the Company, the
Company will be free to reinstate its jurisdictional motion to
dismiss.
SLOT MACHINE LITIGATION - NEVADA
In April 1994, William H. Poulos brought an action in the United
States District Court for the Middle District of Florida, Orlando
Division -- William H. Poulos, et. al. vs. Caesars World, Inc. et.
al. - Case No. 39-478-CIV-ORL-22 -- in which various parties
(including the Company) alleged to operate casinos or be slot
machine manufacturers were named as defendants. The plaintiff
sought to have the action certified as a class action.
A subsequently filed action -- William Ahearn, et. al. vs. Caesars
World, Inc., et. al. - Case No. 94-532-CIV-ORL-22 -- made similar
allegations and was consolidated with the Poulos action.
Both actions included claims under the federal
Racketeering-Influenced and Corrupt Organizations Act and under
state law, and sought compensatory and punitive damages. The
plaintiffs claimed that the defendants are involved in a scheme to
induce people to play electronic video poker and slot machines
based on false beliefs regarding how such machines operate and the
extent to which a player is likely to win on any given play.
In December 1994, the consolidated actions were transferred to the
United States District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the United
States District Court for the District of Nevada -- Larry Schreier,
et. al. vs. Caesars World, Inc., et. al. - Case No.
CV-S-95-00923-DWH (RJJ).
- 24 -
25
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
SLOT MACHINE LITIGATION - NEVADA (CONTINUED)
The plaintiffs' allegations in the Schreier action were similar to
those made by the plaintiffs in the Poulos and Ahearn actions,
except that Schreier claimed to represent a more precisely defined
class of plaintiffs than Poulos or Ahearn.
In December 1996, the court ordered the Poulos, Ahearn and Schreier
actions consolidated under the title William H. Poulos, et. al. vs.
Caesars World, Inc., et. al. - Case No. CV-S-94-1126 - DAE (RJJ) -
(Base File), and required the plaintiffs to file a consolidated and
amended complaint. In February 1997, the plaintiffs filed a
consolidated and amended complaint.
In March 1997, various defendants (including the Company) filed (i)
motions to dismiss the amended complaint, and (ii) motions to stay
the consolidated action pending consideration of the plaintiff's
allegations by various gaming regulatory authorities. As of
November 1, 1997, the Company has not received notice of a decision
regarding any of such motions.
STRATOSPHERE SECURITIES LITIGATION - FEDERAL
In August 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 Stratosphere
Corporation and others, including the Company. The complaint was
filed as a class action, and sought relief on behalf of
Stratosphere shareholders who purchased their stock between
December 19, 1995 and July 22, 1996. The complaint included
allegations of misrepresentations, federal securities law
violations and various state law claims.
In August through October 1996, several other nearly identical
complaints were filed by various plaintiffs in the United States
District Court for the District of Nevada. Those complaints
include the following:
- 25 -
26
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
STRATOSPHERE SECURITIES LITIGATION - FEDERAL (CONTINUED)
o Regina Peltz, et. al. v. Stratosphere Corporation, et. al.
o Robert Stengel, et. al. v. Stratosphere Corporation, et. al.
o Robert Johnson, et. al. v. Stratosphere Corporation, et. al.
o David Vallee, et. al. v. Stratosphere Corporation, et. al.
o Anthony L. Poli, et. al. v. Stratosphere Corporation, et. al.
o Darrell Russell and Gail Russell, et. al. v. Stratosphere Corporation,
et. al.
o Mitchell Gordon, et. al. v. Stratosphere Corporation, et. al.
o James J. Enright, Jr. v. Stratosphere Corporation, et. al.
The defendants in the above actions submitted motions requesting that all of
the actions be consolidated. Those motions were granted on January 15, 1997,
and the consolidated action is entitled In Re: Stratosphere Corporation
Securities Litigation - Master File No. CV-S-96-00708 PMP (RLH).
In February 1997, the plaintiffs filed a consolidated and amended complaint
naming various defendants, including the Company and certain officers and
directors of the Company. The amended complaint includes claims under federal
securities laws and Nevada laws based on acts alleged to have occurred between
December 19, 1995 and July 26, 1996.
In February 1997, various defendants, including the Company and the
Company's officers and directors named as defendants, submitted motions to
dismiss the amended complaint on various grounds, including the Company's claim
that the amended complaint failed to state a valid cause of action against the
Company and the Company's officers and directors.
- 26 -
27
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
STRATOSPHERE SECURITIES LITIGATION - FEDERAL (CONTINUED)
In May 1997, the court issued an order dismissing the action. The
original dismissal order did not allow the plaintiffs to amend
their complaint in an attempt to state a valid cause of action.
In June 1997, the plaintiffs asked the court to reconsider its
dismissal order. In July 1997, the court amended its dismissal
order to provide that the amended complaint was dismissed, but that
the plaintiffs could submit a second amended complaint by August
22, 1997.
In August 1997, the plaintiffs filed a second amended complaint.
In September 1997, certain of the defendants, including the Company
and the Company's officers and directors named as defendants,
submitted motions to dismiss the second amended complaint on
various grounds, including the Company's claim that the second
amended complaint fails to state a valid cause of action against
the Company and those officers and directors.
STRATOSPHERE SECURITIES LITIGATION - STATE
In August 1996, a complaint was filed in the District Court for
Clark County, Nevada -- Victor M. Opitz, et. al. v. Robert E.
Stupak, et. al. - Case No. A363019 -- against various defendants,
including the Company. The complaint seeks relief on behalf of
Stratosphere Corporation shareholders who purchased stock between
December 19, 1995 and July 22, 1996. The complaint alleges
misrepresentations, state securities law violations and other state
claims.
The Company and certain defendants submitted motions to (i)
dismiss, or (ii) stay the state court proceedings pending
resolution of the federal court actions described above. The court
has stayed further proceedings pending the proceedings in federal
district court In Re: Stratosphere Securities Litigation.
GRAND SECURITIES LITIGATION - FEDERAL
In September and October 1996, two actions (Joel Blake, et. al. v.
Grand Casinos, Inc., et. al. and Robert D. Marcus, et. al. v. Grand
Casinos, Inc., et. al.) were filed by Company Shareholders in the
United States District Court for the District of Minnesota against
the Company and certain of the Company's directors and officers.
- 27 -
28
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
GRAND SECURITIES LITIGATION - FEDERAL (CONTINUED)
The complaints allege misrepresentations, federal securities law
violations and other claims in connection with the Stratosphere
project.
The actions have been consolidated In Re: Grand Casinos, Inc.
Securities Litigation - Master File No. 4-96-890 -- and the
plaintiffs filed a consolidated complaint. The defendants have
submitted a motion to dismiss the consolidated complaint. The
court heard arguments regarding the motion in May 1997, but as of
November 1, 1997, the Company has not received notice of a decision
regarding the motion to dismiss.
MICHAELS COMPANY OF NEVADA
In December 1996, a complaint was filed in the United States
District Court for the District of Nevada -- Michaels Company of
Nevada v. Grand Casinos, Inc., et. al. - Case No. CV-S-96-01006-PMP
(RLH) -- against the Company and others, including certain
directors and officers of the Company. The complaint alleges that
the Company improperly withdrew from an agreement to finance and
develop a potential Indian-owned gaming project in California.
The complaint seeks lost profits that which the plaintiff claims it
would have received had the Company not withdrawn. The Company
believes that it had legitimate business reasons to withdraw from
the proposed project.
The Company and the other defendants have submitted answers denying
the allegations of the complaint. The parties to the action then
began discovery.
In October 1997, plaintiff and the defendants signed a settlement
agreement pursuant to which the complaint will be dismissed.
DERIVATIVE ACTION
In February 1997, certain shareholders of the Company brought an
action in the Hennepin County, Minnesota District Court -- Lloyd
Drilling, et. al. v. Lyle Berman, et. al. - Court File No.
MC97-002807 -- against certain officers and directors of the
Company. The plaintiffs allege that those officers and directors
breached certain fiduciary duties to the shareholders of the
Company as a result of certain transactions involving the
Stratosphere project.
- 28 -
29
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
DERIVATIVE ACTION (CONTINUED)
The Company's Board of Directors appointed an independent special
litigation committee to evaluate whether the Company should pursue
the claims against the officers and directors.
The Company's officers and directors named as defendants in the
action have filed an answer to the complaint. The special
litigation committee asked the court stay discovery in the action
pending completion of the special litigation committee's evaluation.
Discovery has been stayed pending the special litigation committee's
evaluation. As of November 1, 1997, the special litigation
committee is conducting its evaluation.
STRATOSPHERE VACATION CLUB LITIGATION
In late April, 1997, the Company and Grand Casinos Resorts, Inc.
("Resorts"), a wholly-owned subsidiary of the Company, were served
with a summons and a second amended complaint in an action in
District Court in Clark County, Nevada -- Richard Duncan, et. al.
vs. Bob and Jane Doe Stupak, et. al. - Case No. A370127. The
plaintiffs allege that the defendants, including the Company and
Resorts, engaged in acts that which constitute "consumer fraud"
under Nevada law in connection with vacation packages which the
defendants claim to have purchased from Bob Stupak. The plaintiffs
also allege "unjust enrichment", breach of contract and other
claims under Nevada law. The plaintiffs seek to pursue their claims
as a class action, and ask for various remedies including
compensatory damages and punitive damages.
The Company has submitted a motion to dismiss the complaint as it
pertains to Company and Resorts. The court denied the motion to
dismiss. Discovery has been commenced.
STRATOSPHERE NOTEHOLDER COMMITTEE BANKRUPTCY COURT ACTION
In June 1997, the Official Committee of Noteholders (the
"Committee") in the Chapter 11 bankruptcy proceeding for
Stratosphere Corporation ("Stratosphere") pending in the United
States Bankruptcy Court for the District of Nevada (the "Bankruptcy
Court") filed a motion by which the Committee sought Bankruptcy
Court approval for assumption (on behalf of Stratosphere's
bankruptcy estate) of the March 1995 Standby Equity Commitment (the
"Standby Equity Commitment") between Stratosphere and the Company.
- 29 -
30
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
STRATOSPHERE NOTEHOLDER COMMITTEE BANKRUPTCY COURT ACTION
(CONTINUED)
In the motion, the Committee seeks Bankruptcy Court authorization to
compel the Company to fund up to $60 million in "capital
contributions" to Stratosphere over three years, based on the
Committee's claim that such "contributions" are required by the
Standby Equity Commitment.
Both the Company and Stratosphere opposed the Committee's motion.
The Bankruptcy Court held a preliminary hearing on the Committee's
motion in June 1997, and set evidentiary hearings in December 1997
on the issues raised by the Committee's motion and the Company's
opposition to that motion.
The Company has asserted, in its opposition to the Committee's
motion, that the Standby Equity Commitment is not enforceable in the
Stratosphere bankruptcy proceeding as a matter of law.
Discovery is ongoing with respect to some of the factual issues
raised by the Committee's motion and the Company's opposition to
that motion. Accordingly, the Bankruptcy Court has not issued a
definitive ruling regarding the Committee's motion.
STANDBY EQUITY COMMITMENT LITIGATION
In September 1997, the successor trustee (the "Stratosphere
Trustee") under the indenture pursuant to which Stratosphere
Corporation issued Stratosphere Corporation's first mortgage notes
filed a complaint in the United States District Court for the
District of Nevada - - IBJ Schroeder Bank & Trust Company, Inc. vs.
Grand Casinos, Inc. - File No. CV-S- 97-01252-DWH (RJJ) - - naming
the Company as defendant.
The complaint alleges that the Company failed to perform under a
Standby Equity Commitment entered into between Stratosphere
Corporation and the Company in connection with Stratosphere
Corporation's issuance of such first mortgage notes in March 1995.
The complaint seeks an order compelling specific performance of what
the Committee claims are Grand's obligations under the Standby
Equity Commitment. The Stratosphere Trustee filed the complaint in
its alleged capacity as a third party beneficiary under the Standby
Equity Commitment.
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31
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
STANDBY EQUITY COMMITMENT LITIGATION (CONTINUED)
The complaint was served on the Company on October 6, 1997. The
Company has yet not responded to the complaint.
The Company has, however, asserted in previous filings with the United
States Securities and Exchange Commission (and continues to assert)
that as a result of Stratosphere's bankruptcy filing and the
application of bankruptcy laws, the enforceability of the Standby
Equity Commitment is in question.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No.
4.1 Second Amendment to Indenture, dated as of September 16,
1997, by and among Grand Casinos, Inc., Grand Casinos
Resorts, Inc., Grand Casinos of Mississippi, Inc. -
Gulfport, Grand Casinos of Mississippi, Inc. - Biloxi,
Grand Casinos Biloxi Theater, Inc., Mille Lacs Gaming
Corporation, Grand Casinos of Louisiana, Inc. -
Tunica-Biloxi, Grand Casinos of Louisiana, Inc. -
Coushatta, GCA Acquisition Subsidiary, Inc., BL
Development Corp., BL Resorts I, Inc., GCG Resorts I,
Inc., Grand Casinos Nevada I, Inc., and Firstar Bank of
Minnesota, N.A.
4.2 Third Amendment to Indenture, dated as of September 25,
1997, by and among Grand Casinos, Inc., Grand Casinos
Resorts, Inc., Grand Casinos of Mississippi, Inc. -
Gulfport, Grand Casinos of Mississippi, Inc. - Biloxi,
Grand Casinos Biloxi Theater, Inc., Mille Lacs Gaming
Corporation, Grand Casinos of Louisiana, Inc. -
Tunica-Biloxi, Grand Casinos of Louisiana, Inc. -
Coushatta, GCA Acquisition Subsidiary, Inc., BL
Development Corp., BL Resorts I, Inc., GCG Resorts I,
Inc., Grand Casinos Nevada I, Inc., BL Resorts I, LLC,
GCG Resorts I, LLC and Firstar Bank of Minnesota, N.A.
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32
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
(a) Exhibit No. (Continued)
4.3 Indenture, dated as of October 16, 1997, between Grand
Casinos, Inc., the Guarantors and Firstar Bank of
Minnesota, N.A. (Incorporated herein by reference to
Exhibit 4.1 to the Company's Registration Statement on
Form S-4, as amended, File No. 333-39009.)
4.4 Registration Rights Agreement, dated as of October 16,
1997, between Grand Casinos, Inc., the Guarantors and
Donaldson, Lufkin & Jenrette Securities Corporation.
(Incorporated herein by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-4, as amended,
File No. 333-39009.)
10.1 Participation Agreement, dated as of September 29, 1997,
by and among BL Resorts I, LLC, GCG Resorts I, LLC,
Grand Casinos, Inc. and its Subsidiaries Listed on
Schedule I, as Guarantors, Hancock Bank, the Persons
Listed on Schedule II, as Lenders, Societe Generale, The
Sumitomo Bank, Limited, and Wells Fargo Bank, National
Association, as Co-Agents, the Mitsubishi Trust and
Banking Corporation, as Lead Manager, and BA Leasing &
Capital Corporation, as Arranger and Administrative
Agent, including Appendix.
10.2 Master Lease Agreement and Deed of Trust, dated as of
September 29, 1997, between Hancock Bank and BL Resorts
I, LLC and GCG Resorts I, LLC.
10.3 Reducing Revolving Loan Agreement, dated as of September
29, 1997, among Hancock Bank, BA Leasing & Capital
Corporation, Societe Generale, The Sumitomo Bank,
Limited, and Wells Fargo Bank, National Association, The
Mitsubishi Trust and Banking Corporation, and the Persons
named on Schedule I, as Lenders.
10.4 Trust Agreement, dated as of September 29, 1997, between
BL Resorts I, LLC and GCG Resorts I, LLC, and Hancock
Bank.
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33
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
(CONTINUED)
(a) Exhibit No. (Continued)
10.5 Guaranty, dated as of September 29, 1997 of Grand
Casinos, Inc., and its Subsidiaries named therein in
favor of the Beneficiaries named therein.
10.6 Purchase Agreement, dated as of October 9, 1997, by and
among Grand Casinos, Inc., the Guarantors and Donaldson,
Lufkin & Jenrette Securities Corporation. (Incorporated
herein by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-4, as amended, File No.
333-39009.)
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarterly period
ended September 28, 1997.
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34
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: November 12, 1997 GRAND CASINOS, INC.
----------------------------
Registrant
By/ S /THOMAS J. BROSIG
----------------------------
Thomas J. Brosig, President
/ S / TIMOTHY J. COPE
----------------------------
Timothy J. Cope
Executive Vice President and
Chief Financial Officer
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