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 June 28, 1998
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.)
130 Cheshire Lane
Minnetonka, Minnesota 55305
- ---------------------------------------- -------------------
(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 3, 1998, there were 42,293,145 shares of Common Stock, $0.01 par
value per share, outstanding.
Page 1 of 32
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
June 28, 1998 and December 28, 1997
Consolidated Statements of Earnings 4
for the three months ended June 28, 1998
and June 29, 1997
Consolidated Statements of Earnings 5
for the six months ended June 28, 1998
and June 29, 1997
Consolidated Statements of Cash Flows 6
for the six months ended June 28, 1998
and June 29, 1997
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 14
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
------------------
ITEM 1. Legal Proceedings 22
ITEM 4. Submission of Matters to
a Vote of Security Holders 31
ITEM 5. Other Information 32
ITEM 6. Exhibits and Reports On Form 8-K 33
-2-
3
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED) *
JUNE 28, 1998 DECEMBER 28, 1997
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $92,847 $238,635
Current installments of notes receivable 7,367 6,856
Accounts receivable 21,239 15,644
Deferred income taxes 12,602 13,399
Other current assets 15,751 15,087
- ----------------------------------------------------------------------------------------------------------------
Total Current Assets 149,806 289,621
- ----------------------------------------------------------------------------------------------------------------
Property and Equipment-Net 1,034,020 941,022
- ----------------------------------------------------------------------------------------------------------------
Other Assets:
Cash and cash equivalents-restricted 8,120 4,967
Securities available for sale 15,372 13,110
Notes receivable-less current installments 25,955 26,979
Investments in and notes from unconsolidated affiliates 8,142 8,180
Debt issuance and deferred licensing costs-net 21,625 26,000
Other long-term assets 29,615 23,858
- ----------------------------------------------------------------------------------------------------------------
Total Other Assets 108,829 103,094
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,292,655 $1,333,737
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $9,745 $12,947
Current installments of long-term debt 60 3,509
Current installments of capital lease obligations - 97,376
Accrued interest 5,291 5,817
Accrued payroll and related expenses 25,551 25,555
Income taxes payable 10,180 -
Other accrued expenses 36,582 22,398
- ----------------------------------------------------------------------------------------------------------------
Total Current Liabilities 87,409 167,602
- ----------------------------------------------------------------------------------------------------------------
Long-term Liabilities:
Long-term debt-less current installments 566,481 566,434
Deferred income taxes 97,192 97,085
- ----------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 663,673 663,519
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 751,082 831,121
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares;
common stock issued and outstanding 42,291 and 41,966
at June 28, 1998 and December 28, 1997, respectively 423 420
Additional paid-in-capital 416,566 413,631
Net unrealized losses on securities available for sale (1,548) (2,947)
Retained earnings 126,132 91,512
- ----------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 541,573 502,616
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,292,655 $1,333,737
================================================================================================================
* FROM AUDITED CONSOLIDATED FINANCIAL STATEMENTS
- 3 -
4
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED
--------------------------------
JUNE 28, 1998 JUNE 29, 1997
------------- -------------
- ----------------------------------------------------------------------------------------------------------
REVENUES:
Casino $121,090 $113,628
Hotel 12,602 9,514
Food and beverage 18,072 16,347
Management fee income 19,717 19,814
Retail and other income 3,606 3,488
- ----------------------------------------------------------------------------------------------------------
Gross Revenues 175,087 162,791
Less: Promotional allowances (12,801) (11,954)
- ----------------------------------------------------------------------------------------------------------
NET REVENUES 162,286 150,837
- ----------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 40,609 39,587
Hotel 4,096 2,291
Food and beverage 9,647 8,534
Other operating expenses 3,258 3,390
Depreciation and amortization 13,948 12,410
Lease expense 5,356 4,676
Selling, general and administrative 48,149 40,993
- ----------------------------------------------------------------------------------------------------------
Total Costs and Expenses 125,063 111,881
- ----------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 37,223 38,956
- ----------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 2,785 2,981
Interest expense (10,118) (11,971)
Other (583) (125)
- ----------------------------------------------------------------------------------------------------------
Total other expense, net (7,916) (9,115)
- ----------------------------------------------------------------------------------------------------------
Earnings before income taxes 29,307 29,841
Provision for income taxes 10,567 11,525
- ----------------------------------------------------------------------------------------------------------
Earnings before Extraordinary Charge 18,740 18,316
Extraordinary Charge-Net of Taxes (1,560) -
- ----------------------------------------------------------------------------------------------------------
NET EARNINGS $17,180 $18,316
==========================================================================================================
Basic Earnings per Share before Extraordinary Charge $0.44 $0.44
Basic Loss per Share - Extraordinary Charge ($0.04) $0.00
- ----------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.40 $0.44
==========================================================================================================
Diluted Earnings per Share before Extraordinary Charge $0.43 $0.43
Diluted Loss per Share - Extraordinary Charge ($0.04) $0.00
- ----------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $0.39 $0.43
==========================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,136 41,890
==========================================================================================================
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 43,378 42,782
==========================================================================================================
- 4 -
5
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
SIX MONTHS ENDED
-----------------------------------
JUNE 28, 1998 JUNE 29, 1997
------------- -------------
- --------------------------------------------------------------------------------------------------------------
REVENUES:
Casino $247,272 $222,308
Hotel 22,472 16,576
Food and beverage 35,943 30,952
Management fee income 42,748 38,868
Retail and other income 6,572 6,425
- --------------------------------------------------------------------------------------------------------------
Gross Revenues 355,007 315,129
Less: Promotional allowances (26,256) (22,122)
- --------------------------------------------------------------------------------------------------------------
NET REVENUES 328,751 293,007
- --------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 81,932 78,067
Hotel 7,192 4,110
Food and beverage 18,517 16,519
Other operating expenses 6,159 6,451
Depreciation and amortization 28,011 23,961
Lease expense 10,750 9,181
Selling, general and administrative 102,846 84,899
- --------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 255,407 223,188
- --------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 73,344 69,819
- --------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 6,852 6,694
Interest expense (21,815) (22,617)
Other (888) (313)
- --------------------------------------------------------------------------------------------------------------
Total expense, net (15,851) (16,236)
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes 57,493 53,583
Provision for income taxes 21,313 20,686
- --------------------------------------------------------------------------------------------------------------
Earnings before extraordinary charge 36,180 32,897
Extraordinary charge-net of taxes (1,560) -
- --------------------------------------------------------------------------------------------------------------
Net Earnings $34,620 $32,897
==============================================================================================================
Basic Earnings per Share before Extraordinary Charge $0.86 $0.79
Basic Loss per Share - Extraordinary Charge ($0.04) -
- --------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $0.82 $0.79
==============================================================================================================
Diluted Earnings per Share before Extraordinary Charge $0.84 $0.77
Diluted Loss per Share - Extraordinary Charge ($0.04) -
- --------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $0.80 $0.77
==============================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,101 41,859
==============================================================================================================
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 43,229 42,609
==============================================================================================================
- 5 -
6
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 28, 1998 JUNE 29, 1997
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $34,620 $32,897
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 28,011 23,961
Equity in loss of unconsolidated affiliates 225 200
Deferred income taxes - 1,250
Changes in operating assets and liabilities:
Current assets (6,828) (3,927)
Accounts payable (3,202) (5,641)
Accrued expenses 23,887 (1,106)
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 76,713 47,634
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (117,837) (101,590)
Increase in notes receivable (2,728) -
Proceeds from repayment of notes receivable 3,241 3,905
Decrease (increase) in cash and cash equivalents-restricted and other (3,153) 3,626
Increase in other long-term assets (6,510) (3,878)
- -------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (126,987) (97,937)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net 2,938 641
Debt issuance costs and deferred financing costs 2,379 (79)
Proceeds from issuance of long-term debt - 45,088
Payments on long-term debt and capital lease obligations (100,831) (10,000)
- -------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (95,514) 35,650
- -------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (145,788) (14,653)
Cash and cash equivalents - beginning of year 238,635 147,254
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $92,847 $132,601
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of capitalized interest $30,519 $27,325
Income taxes - 17,301
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 6 -
7
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 1998
(UNAUDITED)
NOTE 1 UNAUDITED FINANCIAL STATEMENTS
Grand Casinos, Inc. and its subsidiaries (collectively "the Company")
develops, constructs, and manages 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 (the management contract with Grand
Casino Mille Lacs in Onamia, Minnesota, expired on April 2, 1998) and
two Indian-owned casinos in Louisiana. Related hotel, health spa/salon,
and convention center facilities at Company-owned Grand Casino Gulfport,
located in Gulfport, Mississippi, and hotel and health spa/salon
facilities at Grand Casino Tunica, located in Tunica County,
Mississippi, are currently under construction. In addition, a casino
expansion and a new hotel at Indian-owned Grand Casino Coushatta,
located in Kinder, Louisiana, are currently under construction.
The accompanying unaudited consolidated financial statements include the
accounts of Grand Casinos, Inc. and its wholly-owned and majority-owned
subsidiaries. Investments in unconsolidated affiliates 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 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 28, 1998, are not
necessarily indicative of the results that may be expected for the
fiscal year ending January 3, 1999. Operating results for such six
months include management fees from the Company's management of Grand
Casino Mille Lacs. The contract pursuant to which the Company managed
Grand Casinos Mille Lacs expired on April 2, 1998.
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 year ended December 28,
1997.
- 7 -
8
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 ACCOUNTING PRONOUNCEMENTS
The Company adopted FASB Statement No. 130, "Reporting Comprehensive
Income", effective December 29, 1997. Statement No. 130 establishes
standards for reporting and display of comprehensive earnings and its
components in financial statements; however, the adoption of this
Statement had no impact on the Company's net earnings or shareholders'
equity. Statement No. 130 requires minimum pension liability
adjustments, unrealized gains or losses on the company's
available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive earnings.
Total comprehensive earnings (loss) for the six months ended June 28,
1998 and June 29, 1997 were $1.4 million and ($1.9) million,
respectively. Differences between comprehensive earnings (loss) for
these periods were due to unrealized holding gains and losses on
securities available for sale.
During April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). SOP 98-5 requires companies to expense as
incurred all start-up and preopening costs that are not otherwise
capitalizable as long-lived assets. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. The
Company expects to adopt the Statement effective January 3, 1999. The
effect of the adoption is not expected to be significant. Start-up and
preopening amounts capitalized as of June 28, 1998 totaled $1.2 million.
The Company expects that all such costs will be fully amortized prior to
the end of 1998.
In March, 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The
statement is effective for fiscal years beginning after December 15,
1998. The statement defines which costs of computer software developed
or obtained for internal use are capital and which costs are expenses.
The effect of adoption is not expected to materially effect the
Company's financial position or results of operation.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive
hedge accounting. Statement 133 is effective for fiscal years
beginning after June 15, 1999. The Company has not yet quantified the
impacts of adopting Statement 133 on its financial statements and has
not determined the timing of adoption of Statement 133. However, the
statement could increase volatility in earnings and other comprehensive
income.
- 8 -
9
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 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 interest costs are amortized over the related assets'
estimated useful lives. For the six months ended June 28, 1998 and June
29, 1997, approximately $8.2 million and $3.7 million, respectively, of
interest cost was capitalized.
NOTE 4 NOTES RECEIVABLE
Notes receivable consist of the following (in thousands):
June 28, 1998 Dec. 28, 1997
------------- -------------
Notes from the Coushatta Tribe with
interest at a defined reference rate plus
1% (not to exceed 16%), receivable in
monthly installments through
January 2002 22,235 22,722
Notes from the Tunica-Biloxi Tribe with
interest at a defined reference rate plus
1% (not to exceed 16%), receivable in
monthly installments through June
2001 10,497 10,409
Other, less allowance for doubtful accounts
of $3,050 and $3,050, respectively 590 704
------------- -------------
$33,322 $33,835
Less current installments of notes receivable (7,367) (6,856)
------------- -------------
Notes receivable-less current installments $25,955 $26,979
============= =============
NOTE 5 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 as of November
30, 1995, Grand Casino Tunica assets included in Phase 1 development as
described in the indenture pursuant to which the first mortgage notes
were issued, capital stock of Stratosphere Corporation owned by the
Company, and certain notes receivable due the Company from Tribes.
- 9 -
10
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 LONG-TERM DEBT (CONTINUED)
The first mortgage notes require semi-annual payments of interest only
on June 1 and December 1 of each year commencing June 1, 1996, and
continuing until December 1, 2003, at which time the entire principal
plus accrued interest is due and payable. The first mortgage 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.
On May 10, 1996, the Company completed a $120 million capital lease
facility through BA Leasing & Capital Corporation. The five-year
capital lease facility, with varying interest rates ranging from 1.75%
to 2.50% over the LIBO Rate, was used to fund 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.
On March 31, 1998, the Company used cash proceeds received from the
$115.0 million, senior unsecured note offering which closed on October
14, 1997, (described below) to pay off the $94.6 million balance of
principal and interest, remaining under the $120.0 million capital
lease facility. Unamortized debt issuance costs of $1.6 million, net of
tax, were classified as extraordinary charge relating to early
extinguishment of debt.
On September 30, 1997, the Company completed a $100.0 million revolving
loan facility through BA Leasing & Capital Corporation. The five-year
revolving capital lease facility, with interest rates ranging from 1.75%
to 2.50% over the LIBO Rate, will be used for the continued development
of Grand Casino Tunica and Grand Casino Gulfport, as well as other
general corporate purposes. As of June 28, 1998, no advances relating
to this financing had been made.
On October 14, 1997, the Company completed a $115.0 million, 9.0%,
seven-year, senior unsecured note offering due 2004. The majority of the
proceeds from the offering were used to refinance the $120.0 million
capital lease facility (described above) on March 31, 1998. The notes
require semi-annual payments of interest only on April 15 and October 15
of each year commencing April 15, 1998 and continuing until October 15,
2004, at which time the entire principal plus accrued interest is due
and payable.
- 10 -
11
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 LONG-TERM DEBT (CONTINUED)
The notes may be redeemed in whole or in part, anytime after October 15,
2001, at a premium, declining ratably thereafter to par value on October
15, 2003.
NOTE 6 COMMITMENTS AND CONTINGENCIES
STRATOSPHERE CORPORATION
As of July 31, 1998, the Company owns approximately 37% of the common
stock issued by Stratosphere Corporation ("Stratosphere"). Stratosphere
and its wholly-owned operating subsidiary developed and operate the
Stratosphere Tower, Hotel and Casino in Las Vegas, Nevada. In January
1997, Stratosphere and its wholly-owned operating subsidiary filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
In October 1997, the Company announced that it had not been able to
reach an agreement with holders of a significant portion of
Stratosphere's first mortgage notes for a consensual reorganization of
Stratosphere that would involve the Company's participation. The
Company also announced that it had no intention of participating in any
plan of reorganization for Stratosphere.
A reorganization plan for Stratosphere has been confirmed by the
Bankruptcy Court, but as of June 30, 1998 is not yet effective. The
confirmed reorganization plan provides for cancellation of the
Stratosphere common stock owned by the Company when the reorganization
plan becomes effective.
In March 1995, in connection with Stratosphere's issuance of its first
mortgage notes, the Company entered into a Standby Equity Commitment
Agreement (the "Standby Equity Commitment") between Stratosphere and the
Company.
The Company agreed in the Standby Equity Commitment, subject to the
terms and conditions stated in the Standby Equity Commitment, to
purchase up to $20.0 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 exceed $50.0 million.
- 11 -
12
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STRATOSPHERE CORPORATION (CONTINUED)
Based on provisions of the U.S. Bankruptcy Code that the Company
contends apply to the Standby Equity Commitment, the Company has
asserted that the enforceability of the Standby Equity Commitment is in
question. Both the Official Committee of Noteholders in the
Stratosphere Bankruptcy case (the "Official Committee") and the current
trustee under the indenture pursuant to which Stratosphere issued its
first mortgage notes (the "Trustee") have asserted that the Standby
Equity Commitment is enforceable.
The enforceability of the Standby Equity Commitment is the subject of
litigation to which the Company is a party in (i) the Stratosphere
bankruptcy case (as a result of a motion brought by the Official
Committee), and (ii) the U.S. District Court for the district of Nevada
(as a result of an action brought by the Trustee). In February 1998,
the Bankruptcy Court ruled that the Standby Equity Commitment is not
enforceable in the Stratosphere bankruptcy proceeding as a matter of
law.
The Stratosphere reorganization plan contemplates formation of a new
limited liability company that will own certain alleged claims that
Stratosphere and other parties may have against various other parties,
including the Company and/or officers and/or directors of the Company.
As of July 31, 1998, the Company has not been served with any documents
evidencing the commencement of any legal action based on such claims.
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 June
28, 1998, the amounts outstanding were $1.0 million and $10.1 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 June 28,
1998, the amounts outstanding were $0.5 million.
- 12 -
13
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
LOAN GUARANTY AGREEMENTS (CONTINUED)
In addition, on May 1, 1997, the Company guaranteed a loan agreement
entered into by the Coushatta Tribe 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. As of June 28, 1998, $11.3
million has been advanced, and is outstanding.
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 $2.3 million as of
June 28, 1998. On June 29, 1998, the mortgage was paid in full and the
Company was released from its guaranty.
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.
NOTE 7 SUBSEQUENT EVENTS
On June 30, 1998, the Company announced that it will separate its
non-Mississippi business (principally its Indian casino management
business) from its Mississippi gaming operations in a tax-free
distribution to shareholders, and simultaneously merge its Mississippi
gaming operations with the gaming operations of Hilton Hotels
Corporation (NYSE:HLT). The transactions are subject to shareholder
and regulatory approvals and are expected to be completed by
year-end 1998.
- 13 -
14
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 and related hotel and entertainment facilities in emerging and
established 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 Hinckley, Grand Casino Avoyelles, and Grand Casino
Coushatta and, prior to April 2, 1998, Grand Casino Mille Lacs.
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 expired on April 2, 1998. The Company believes that the management
agreement for Grand Casino Hinckley, which expires in May 1999, will
not be renewed.
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.
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 each year.
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.
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15
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
OVERVIEW (CONTINUED)
On June 30, 1998, the Company announced that it will separate its Indian
casino management business from its Mississippi gaming operations in a
tax-free distribution to shareholders, and simultaneously merge its
Mississippi gaming operations with the gaming operations of Hilton
Hotels Corporation (NYSE:HLT). The transactions are subject to
shareholder and regulatory approvals and are expected to be completed by
year-end 1998.
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 28,
1997.
Revenues from owned 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.
Earlier this year, the Louisiana legislature considered various
proposals for state constitutional amendments and/or legislation that
would impose certain taxes, including excise taxes, on certain
activities conducted on Indian reservations. Certain of the proposals
were to become effective after the expiration dates of the existing
compacts between the State of Louisiana and the Indian tribes that own
and operate casinos in the State of Louisiana. None of the proposals
was adopted.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 28, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 29
1997
Earnings Per Common Share and Net Earnings
Basic and diluted earnings per common share were $.86 and $.84,
respectively, for the six months ended June 28, 1998 before a $.04
extraordinary charge per share related to early extinguishment of debt.
This compares to basic and diluted earnings of $.79 and $.77 per common
share for the prior year's comparable period.
-15 -
16
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Earnings Per Common Share and Net Earnings (Continued)
Earnings increased $1.7 million to $34.6 million for the six months
ended June 28, 1998 compared to the same period in the prior year. Net
earnings for the six months ended June 28, 1998 includes a $1.6 million,
net of tax, extraordinary charge relating to early extinguishment of
debt.
Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $ 247.3 million in gross casino revenue and $65.0 million in
gross hotel, food, beverage, retail and entertainment revenue during the
six months ended June 28, 1998 as compared to $222.3 million in gross
casino revenue and $54.0 million in gross food, beverage, and retail
revenue for the prior year's comparable period. At Grand Casino Tunica,
gross revenues increased $19.1 million for the six months ended June 28,
1998 compared to the same period in the prior year. The increase is
attributable to increased hotel occupancy and average daily rate along
with increased guest counts from a full six months use of the Convention
Center, which opened in July of 1997. Combined gross revenues for Grand
Casino Biloxi and Grand Casino Gulfport increased $16.9 million for the
six months ended June 28, 1998 compared to the same period in the prior
year. The increase in gross revenues is primarily related to the
500-room Biloxi Bayview Hotel, which opened during the first quarter of
1998. Management fees increased $3.8 million to $42.7 million for the
six months ended June 28, 1998 compared to the same period in the prior
year, despite the fact that the Mille Lacs contract expired April 2,
1998.
Costs and Expenses
Total costs and expenses increased $32.2 million from $223.2 million for
the six months ended June 29 1997 to $255.4 million for the six-month
period ended June 28, 1998. Casino expenses were $81.9 million for the
six-month period ended June 28, 1998 compared to $78.1 million for the
comparable period last year. The increase of $3.9 million relates
primarily to additional casino expenses for Grand Casino Tunica, which
had a $13.7 million increase in casino revenues for the six month period
ended June 28, 1998. Food and beverage expenses increased $2.0 million
to $18.5 million for the six-month period ended June 28, 1998.
Selling, general, and administrative expenses increased in the amount of
$17.9 million from $84.9 million for the six months ended June 29, 1997
to $102.8 million for the six months ended June 28, 1998.
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17
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses (Continued)
Contributing to this increase were increased selling, general, and
administrative expenses at Grand Casino Tunica of $6.0 million from the
six months ended June 29, 1997 to the six months ended June 28, 1998,
relating to the opening of the 600-room hotel and the convention center,
and an increase in employee benefit costs. In addition, corporate
expense increased $10.4 million from the six months ended June 29, 1997
to the six months ended June 28, 1998. This increase is primarily
attributable to reserves relating to the corporate office relocation and
litigation reserves.
Other
Interest income increased slightly from $6.7 million to $6.9 million for
the six months ended June 28, 1998 over the comparable period last year.
In addition, interest expense decreased by $.8 million to $21.8 million
for the six months ended June 28, 1998. The decrease is the result of
additional interest expense relating to the $115.0 million senior
unsecured notes and the capital lease facility which were outstanding
during the first quarter of 1998, offset by an increase in capitalized
interest for the six month period ended June 28, 1998. Capitalized
interest was $8.2 million and $3.7 million for the six months ended June
28, 1998 and June 29 1997, respectively.
THREE MONTHS ENDED JUNE 28, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE
29, 1997
Earnings Per Common Share and Net Earnings
Basic and diluted earnings per common share were $.44 and $.43,
respectively, for the three months ended June 28, 1998 and June 29,
1997. Net earnings decreased $1.1 million from the three months ended
June 29, 1997 to $17.2 million for the three months ended June 28, 1998.
Net earnings for the three months ended June 28, 1998 includes an
extraordinary charge of $1.6 million, net of tax, related to early
extinguishment of debt.
Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $121.1 million in gross casino revenue and $34.3 million in
gross hotel, food, beverage, retail, and entertainment revenue during
the three months ended June 28, 1998.
-17 -
18
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Revenues (Continued)
During the same period in the prior year, Grand Casino Biloxi, Grand
Casino Gulfport and Grand Casino Tunica generated $113.6 million in
gross casino revenue and $29.3 million in gross hotel, food, beverage
and retail revenue.
The increase in gross revenues is attributable to increased revenue at
all properties. Grand Casino Tunica's gross revenues increased $4.6
million to $52.0 million, an increase of 9.6%, for the three months
ended June 28, 1998. Contributing to this increase at Grand Casino
Tunica was the Convention Center, which was not open during the second
quarter of 1997, but was open the entire second quarter of 1998. In
addition, other new amenities added in the Tunica market appear to have
increased the overall Tunica market capacity.
Combined gross revenues for Grand Casino Biloxi and Grand Casino
Gulfport increased $7.8 million for the three months ended June 28,
1998, compared to the same period in the prior year. Contributing to
this increase was the opening of a 500-room hotel at Grand Casino Biloxi
in mid-February 1998. Finally, the Company's management fees from
Indian-owned casinos were flat at $19.7 million for the three months
ended June 28, 1998, compared to the same period in the prior year,
despite the expiration of the Grand Casino Mille Lacs contract on April
2, 1998.
Costs and Expenses
Total costs and expenses increased $13.2 million, from $111.9 million
for the three months ended June 29, 1997, to $125.1 million for the
three months ended June 28, 1998. Casino expenses were $40.6 million
for the three-month period ended June 28, 1998, compared to $39.6
million for the comparable period in 1997. This increase of $1.0
million relates to additional operating expenses to produce a $7.5
million increase in casino revenue for such three-month period, compared
to the same period in the prior year. Food and beverage expenses
increased $1.1 million to $9.6 million for the three-month period ended
June 28, 1998.
Selling, general, and administrative expenses increased $7.1 million
from $41.0 million for the three months ended June 29, 1997, to $48.1
million for the three months ended June 28, 1998. Grand Casino Tunica's
selling, general, and administrative expenses increased $3.0 million, as
a result of the opening of the 600-room hotel and the convention center,
and an increase in employee benefit costs.
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19
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses (Continued)
In addition, combined selling, general, and administrative expenses for
Grand Casino Biloxi and Grand Casino Gulfport were constant as compared
to the prior year. Corporate expenses for the three months ended June
28, 1998 increased $4.1 million from the same period in 1997. The
increase in corporate expenses is primarily related to the relocation of
the corporate headquarters and litigation reserves.
Other
Interest income of $2.8 million for the three months ended June 28, 1998
was flat when compared to the same period for the prior year. Interest
expense decreased by $1.9 million to $10.1 million for the three months
ended June 28, 1998. The decrease is the result of the $115.0 million
senior unsecured notes being outstanding during the three month period
ended June 28, 1998, offset by an increase in capitalized interest for
the same period. Capitalized interest was $4.2 million and $1.3 million
for the three months ended June 28, 1998 and June 29, 1997,
respectively.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At June 28, 1998, the Company had $92.8 million in cash and cash
equivalents. On March 31, 1998, $94.6 million was used to pay off an
existing capital lease facility and related interest resulting in an
extraordinary charge of $.04 per share.
Net cash provided by operating activities totaled $76.7 million for the
three month period ended June 28, 1998, compared with $47.6 million for
the three-month period ended June 29, 1997. During the six-month
periods ended June 28, 1998 and June 29, 1997, the Company's capital
expenditures totaled $117.8 and $101.6 million, respectively. Capital
expenditures related primarily to constructing new 600-room hotels at
Grand Casino Tunica and Grand Casino Gulfport and completion of a new
500-room hotel at Grand Casino Biloxi.
At June 28, 1998, the Company's long-term debt included 10.125% first
mortgage notes due 2003 in the amount of $450.0 million and 9% senior
unsecured notes in the amount of $115.0 million due 2004 (which the
Company incurred in connection with the refinancing of an existing
capital lease facility). The first mortgage notes are redeemable on
December 1, 1999, or thereafter based on a stated premium that
declines ratably to par value.
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20
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY (CONTINUED)
The senior unsecured notes are redeemable on October 15, 2001, or
thereafter based on a stated premium that declines ratably to par value.
At March 29, 1998, $93.9 million remained outstanding on the capital
lease facility and was classified as a current liability on the March
29, 1998 balance sheet. The balance was paid in full on March 31, 1998
using proceeds from the $115.0 million senior unsecured notes. The
Company also has available a $100.0 million revolving capital lease
facility for continued development of Grand Casino Gulfport and Grand
Casino Tunica. As of June 28, 1998, no advances relating to this
financing had been made.
Pursuant to the Company's covenants related to the 10.125% first
mortgage notes and the 9% senior unsecured notes 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" as defined 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 when such statements
are made, such statements are all subject to risks and uncertainties
that could cause actual results to vary from the forward-looking
statements made. Those variances could be significant.
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.
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21
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
FORWARD-LOOKING STATEMENTS (CONTINUED)
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 1997 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 July 31, 1998. More complete and/or
updated information may be obtained by reviewing the court files
pertaining to such proceedings.
COHEN - STATE ACTION
In August 1995, Harvey Cohen brought a legal 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 alleges 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.
The action was, by agreement of the parties, stayed pending a decision
in a similar action brought by Cohen in 1994 in U.S. District Court for
the District of Nevada. Cohen alleged securities law violations and
various state law claims in the federal action. The federal action was
dismissed by the U.S. District Court, and that dismissal was affirmed by
the U.S. Court of Appeals.
The Clark County action was dismissed in June 1998.
SLOT MACHINE LITIGATION - NEVADA
In April 1994, William H. Poulos brought a legal action in the U.S.
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.
- 22 -
23
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
SLOT MACHINE LITIGATION - NEVADA (CONTINUED)
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 U.S.
District Court for the District of Nevada.
In September 1995, Larry Schreier brought an action in the U.S. 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). 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 motions
to dismiss or stay the consolidated action until the plaintiffs
submitted their claims to gaming authorities and those authorities
considered the claims submitted by the plaintiffs.
In December 1997, the court denied all of the motions submitted by the
defendants, and ordered the plaintiffs to file a new consolidated and
amended complaint. That complaint has been filed. The Company has filed
its answer to the new complaint.
STRATOSPHERE SECURITIES LITIGATION - FEDERAL
In August 1996, a complaint was filed in the U.S. 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.
- 23 -
24
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
STRATOSPHERE SECURITIES LITIGATION - FEDERAL (CONTINUED)
In August through October 1996, several other nearly identical
complaints were filed by various plaintiffs in the U.S. District Court
for the District of Nevada. The defendants in the actions submitted
motions requesting that all of the actions be consolidated. Those
motions were granted in January 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
current and former officers and directors of the Company. The amended
complaint included 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. Those motions were made 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.
In May 1997, the court dismissed the amended complaint. The dismissal
order did not allow the plaintiffs to further 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, and to allow the plaintiffs to submit a second amended complaint
in an attempt to state a valid cause of action. In July 1997, the court
allowed the plaintiffs to submit a second amended complaint.
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 a motion
to dismiss the second amended complaint. The motion was based on
various grounds, including the Company's claim that the second amended
complaint failed to state a valid cause of action against the Company
and those officers and directors.
In April 1998, the court granted the Company's motion to dismiss in
part, and denied the motion in part. Thus, the plaintiffs are pursuing
the claims in the second amended complaint that survived the Company's
motion to dismiss.
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25
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
STRATOSPHERE SECURITIES LITIGATION - FEDERAL (CONTINUED)
In June 1998, the Company submitted a motion for summary judgment
seeking an order that the Company and the Company's officers and
directors are entitled to judgment as a matter of law.
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 dismiss or stay
the state court action pending resolution of the federal court action
described above. The court has stayed further proceedings pending the
resolution of In Re: Stratosphere Securities Litigation.
GRAND SECURITIES LITIGATION - FEDERAL
In September and October 1996, two actions were filed by Company
shareholders in the U.S. District Court for the District of Minnesota
against the Company and certain of the Company's current and former
directors and officers.
The complaints allege misrepresentations, federal securities law
violations and other claims in connection with the Stratosphere project.
The actions have been consolidated as In Re: Grand Casinos, Inc.
Securities Litigation - Master File No. 4-96-890 -- and the plaintiffs
filed a consolidated complaint. The defendants submitted a motion to
dismiss the consolidated complaint, based in part on the Company's claim
that the consolidated complaint failed to properly state a cause of
action.
In December 1997, the court granted the Company's motion to dismiss in
part, and denied the motion in part. Thus, the plaintiffs are pursuing
the claims in the consolidated complaint that survived the Company's
motion to dismiss. Discovery has commenced.
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26
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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 current and former officers and directors of the Company. The
plaintiffs alleged 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.
Pursuant to Minnesota law, the Company's Board of Directors appointed an
independent special litigation committee to evaluate whether the Company
should pursue the claims made in the action against the officers and
directors. The special litigation committee completed its evaluation in
December 1997, and filed a report with the court recommending that such
claims not be pursued.
The Company provided the defense for the Company's current and former
officers and directors who were defendants in the action pursuant to the
Company's indemnification obligations to such defendants.
In January 1998, the Company submitted a motion for summary judgment
based on the special litigation committee's report. In May 1998, the
court granted that motion, thereby dismissing the plaintiffs' claims.
STRATOSPHERE VACATION CLUB LITIGATION
In late April 1997, the Company and Grand Casinos Resorts, Inc.
("Resorts"), a wholly-owned subsidiary of the Company, were made
defendants 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 alleged that the defendants, including the
Company and Resorts, engaged in acts that constitute "consumer fraud"
under Nevada law in connection with vacation packages which the
defendants claim to have purchased from Bob Stupak. The plaintiffs also
alleged "unjust enrichment", breach of contract and other claims under
Nevada law. The plaintiffs sought to pursue their claims as a class
action, and asked for various remedies including compensatory damages
and punitive damages.
In April 1998, the court preliminarily approved a proposed settlement of
the action. The terms and conditions of the settlement are described in
a settlement agreement filed with the court. In June 1998, the court
dismissed the action pursuant to the settlement.
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27
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
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 U.S. 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.
In the motion, the Committee sought 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.
The Company opposed the Committee's motion. The Company 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.
The Bankruptcy Court held a preliminary hearing on the Committee's
motion in June 1997, and an evidentiary hearing in February 1998 on the
issues raised by the Committee's motion and the Company's opposition to
that motion.
In February 1998, the Bankruptcy Court denied the Committee's motion,
and determined that the Standby Equity Commitment cannot be assumed (or
enforced) by Stratosphere under applicable bankruptcy law.
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
U.S. 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 the
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.
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28
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
STANDBY EQUITY COMMITMENT LITIGATION (CONTINUED)
The complaint seeks an order compelling specific performance of what the
Committee claims are the Company'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.
In November 1997, the Company submitted a motion requesting, among other
things, that the court dismiss the complaint. As of June 30, 1998, that
motion is pending.
STRATOSPHERE PREFERENCE CLAIM
In April 1998, Stratosphere served on the Company and Grand Media &
Electronics Distributing, Inc., a wholly-owned subsidiary of the Company
("Grand Media"), a complaint in the Stratosphere bankruptcy case seeking
recovery of certain amounts paid by Stratosphere to (i) the Company as
management fees and for costs and expenses under a management agreement
between Stratosphere and the Company, and (ii) Grand Media for
electronic equipment purchased by Stratosphere from Grand Media.
Stratosphere claims in its complaint that such amounts are recoverable
by Stratosphere as preferential payments under bankruptcy law.
In May 1998, the Company responded to Stratosphere's complaint. That
response denies that Stratosphere is entitled to recover the amounts
described in the complaint. Discovery has begun.
STRATOSPHERE REORGANIZATION PLAN
The Stratosphere reorganization plan contemplates formation of a new
limited liability company that will own certain alleged claims that
Stratosphere and other parties may have against various other parties,
including the Company and/or officers and/or directors of the Company.
As of June 30, 1998, the Company has not been served with any documents
evidencing the commencement of any legal action based on such claims.
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29
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
TULALIP TRIBES LITIGATION
In 1995, the Company entered into discussions with Seven Arrows, L.L.C.
("Seven Arrows"), a Delaware limited liability company, regarding
possible participation by the Company in a proposed casino resort
development on land in the State of Washington held in trust by the
United States for the Tulalip Tribes. The Company and Seven Arrows
entered into a letter of intent providing for the negotiation of a
revision to the Seven Arrows limited liability company agreement by
which the Company (or a subsidiary of the Company) would become a member
of Seven Arrows. Those negotiations were not completed, and such a
revision to the limited liability agreement was not signed.
During the negotiations, the Company entered into an agreement (the
"Advance Agreement") with Seven Arrows and the Tulalip Tribes. The
Advance Agreement provided for the loan by the Company and Seven Arrows
of certain amounts to the Tulalip Tribes upon the satisfaction of
certain conditions. The Company contends that those conditions were
never satisfied. Neither the Company nor Seven Arrows advanced any
amount under the Advance Agreement.
In April 1996, the Tulalip Tribes brought a legal action in Tulalip
Tribal Court - - Tulalip Tribes of Washington v. Seven Arrows, et al -
Case No. TUL-Ci-4/96-499 - - against Seven Arrows and the Company. The
action seeks various remedies, including (i) a declaration that a lease
and a sublease between the Tulalip Tribes and Seven Arrows for the land
on which the casino resort was proposed has been terminated, (ii)
damages for breach of the lease, the sublease and the Advance Agreement,
and (iii) a declaration that the lease, sublease and Advance Agreement
are void.
Because the Company is not a party to the lease or the sublease, the
Company contends that the only claim against the Company in the tribal
court action is for a breach of the Advance Agreement, that the Company
did not breach the Advance Agreement, and that any damages sustained by
the Tulalip Tribes as a result of any such breach are not material to
the Company.
In May 1996, Seven Arrows and the Company brought a legal action in the
U.S. District Court in the Western District of Washington - - Seven
Arrows, L.L.C., et al v. Tulalip Tribes of Washington - File No.
C96-0709Z - - against the Tulalip Tribes. Seven Arrows seeks in that
action certain remedies against the Tulalip Tribes, including damages,
and the Company seeks an order rescinding the Advance Agreement.
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30
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
TULALIP TRIBES LITIGATION (CONTINUED)
Seven Arrows, the Company and the Tulalip Tribes have, since June 1996,
been engaged in disputes in both the tribal court and the federal court
regarding which court has jurisdiction over the various claims made in
the two legal actions.
As of July 31, 1998, Seven Arrows, the Company and the Tulalip Tribes
are discussing a partial settlement that, if implemented, will resolve
the jurisdiction disputes. During the discussions regarding that
partial settlement, both Seven Arrows and the Tulalip Tribes have stated
that they may pursue claims against the Company that have not yet been
pleaded in either the tribal court action or the federal court action.
The Company does not know the nature or the extent of any such
additional claims and, as of July 31, 1998, has not received any amended
pleading in either action stating any such additional claims. Such
claims, if made, could be in amounts material to the Company.
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31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on May 15, 1998.
(b) Matters voted upon:
(1) Directors elected at meeting:
Affirmative Negative
Votes Votes Abstentions
----- ----- -----------
Lyle Berman 35,867,228 271,154 5,896,119
Thomas J. Brosig 35,868,884 269,498 5,896,119
Morris Goldfarb 35,860,686 277,696 5,896,119
Ronald Kramer 35,870,495 267,885 5,896,119
David L. Rogers 35,872,400 265,982 5,896,119
Neil I. Sell 35,872,803 265,579 5,896,119
Timothy J. Cope 35,875,860 262,522 5,896,119
Joel N. Waller 35,862,696 275,686 5,896,119
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32
ITEM 5. OTHER INFORMATION
Discretionary Proxy Voting Authority/Shareholder Proposals
On May 21, 1998 the Securities and Exchange Commission adopted
an amendment to Rule 14a-4, as promulgated under the Securities and
Exchange Act of 1934. The amendment to Rule 14a-4(c)(1) governs
the Company's use of its discretionary proxy voting authority with
respect to a shareholder proposal which the shareholder has not sought
to include in the Company's proxy statement. The new amendment provides
that if a proponent of a proposal fails to notify the company at least
45 days prior to the month and day of mailing of the prior year's proxy
statement, then the management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the
meeting, without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of
Shareholders, if the Company is not provided notice of a shareholder
proposal, which the shareholder has not previously sought to
include in the Company's proxy statement, by February 10, 1999, the
management proxies will be allowed to use their discretionary authority
as outlined above.
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33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger by and among Hilton Hotels
Corporation, Gaming Co., Inc., Gaming Acquisition Corporation,
GCI Lakes, Inc. and Grand Casinos, Inc. Dated as of June 30,
1998.
(Pursuant to Item 601(b)(2) of Regulation S-K, certain
Schedules and Exhibits to this Agreement have been omitted.
The Registrant will furnish a copy of any omitted Schedule or
Exhibit to the Commission upon request.)
10.1 Form of Distribution Agreement by and between Grand Casinos,
Inc. and GCI Lakes, Inc.
(Pursuant to Item 601(b)(2) of Regulation S-K, certain
Schedules and Exhibits to this Agreement have been omitted.
The Registrant will furnish a copy of any omitted Schedule or
Exhibit to the Commission upon request.)
10.2 Form of Employee Benefits and Other Employment Matters
Allocation Agreement By and Between Grand Casinos, Inc.
and GCI Lakes, Inc.
10.3 Form of Intellectual Property License Agreement.
10.4 Form of Tax Allocation and Indemnity Agreement.
10.5 Form of Trust Agreement.
10.6 Form of Pledge and Security Agreement.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarterly period ended
June 28, 1998.
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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: August 5, 1998 GRAND CASINOS, INC.
----------------------------
Registrant
By/ S /THOMAS J. BROSIG
----------------------------
Thomas J. Brosig
President and
Chief Executive Officer
/ S / TIMOTHY J. COPE
----------------------------
Timothy J. Cope
Executive Vice President and
Chief Financial Officer
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35
Exhibit Index
Exhibit No. Document
2.1 Agreement and Plan of Merger by and among Hilton Hotels
Corporation, Gaming Co., Inc., Gaming Acquisition Corporation,
GCI Lakes, Inc. and Grand Casinos, Inc. Dated as of June 30,
1998.
(Pursuant to Item 601(b)(2) of Regulation S-K, certain
Schedules and Exhibits to this Agreement have been omitted.
The Registrant will furnish a copy of any omitted Schedule or
Exhibit to the Commission upon request.)
10.1 Form of Distribution Agreement by and between Grand Casinos,
Inc. and GCI Lakes, Inc.
(Pursuant to Item 601(b)(2) of Regulation S-K, certain
Schedules and Exhibits to this Agreement have been omitted.
The Registrant will furnish a copy of any omitted Schedule or
Exhibit to the Commission upon request.)
10.2 Form of Employee Benefits and Other Employment Matters
Allocation Agreement By and Between Grand Casinos, Inc.
and GCI Lakes, Inc.
10.3 Form of Intellectual Property License Agreement.
10.4 Form of Tax Allocation and Indemnity Agreement.
10.5 Form of Trust Agreement.
10.6 Form of Pledge and Security Agreement.
27 Financial Data Schedule