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 27, 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 October 30, 1998, there were 42,295,539 shares of Common Stock, $0.01 par
value per share, outstanding.
Page 1 of 31
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 27, 1998 and December 28, 1997
Consolidated Statements of Earnings 4
for the three months ended September 27, 1998
and September 28, 1997
Consolidated Statements of Earnings 5
for the nine months ended September 27, 1998
and September 28, 1997
Consolidated Statements of Cash Flows 6
for the nine months ended September 27, 1998
and September 28, 1997
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 22
ITEM 6. Exhibits and Reports On Form 8-K 29
-2-
3
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED) *
SEPTEMBER 27, 1998 DECEMBER 28, 1997
- -----------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 112,126 $ 238,635
Current installments of notes receivable 7,659 6,856
Accounts receivable 20,276 15,644
Deferred income taxes 12,644 13,399
Other current assets 16,074 15,087
- -----------------------------------------------------------------------------------------------------
Total Current Assets 168,779 289,621
- -----------------------------------------------------------------------------------------------------
Property and Equipment-Net 1,065,430 941,022
- -----------------------------------------------------------------------------------------------------
Other Assets:
Cash and cash equivalents-restricted 7,571 4,967
Securities available for sale 13,619 13,110
Notes receivable-less current installments 24,680 26,979
Investments in and notes from unconsolidated affiliates 8,351 8,180
Debt issuance and deferred licensing costs-net 20,867 26,000
Other long-term assets 31,448 23,858
- -----------------------------------------------------------------------------------------------------
Total Other Assets 106,536 103,094
- -----------------------------------------------------------------------------------------------------
Total Assets $1,340,745 $1,333,737
=====================================================================================================
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $11,118 $12,947
Current installments of long-term debt 422 3,509
Current installments of capital lease obligations - 97,376
Accrued interest 19,192 5,817
Accrued payroll and related expenses 24,312 25,555
Other accrued expenses 47,868 22,398
- -----------------------------------------------------------------------------------------------------
Total Current Liabilities 102,912 167,602
- -----------------------------------------------------------------------------------------------------
Long-term Liabilities:
Long-term debt-less current installments 566,430 566,434
Deferred income taxes 97,093 97,085
- ----------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 663,523 663,519
- -----------------------------------------------------------------------------------------------------
Total Liabilities 766,435 831,121
- -----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Capital stock, $.01 par value; authorized 100,000 shares;
common stock issued and outstanding 42,294 and 41,966
at September 27, 1998 and December 28, 1997, respectively 423 420
Additional paid-in-capital 416,590 413,631
Net unrealized losses on securities available for sale (1,750) (2,947)
Retained earnings 159,047 91,512
- -----------------------------------------------------------------------------------------------------
Total Shareholders' Equity 574,310 502,616
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $1,340,745 $1,333,737
=====================================================================================================
* From audited consolidated financial statements
See accompanying notes to financial statements
- 3 -
4
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
THREE MONTHS ENDED
------------------
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------ ------------------
- --------------------------------------------------------------------------------------------------
REVENUES:
Casino $137,953 $125,764
Hotel 12,879 10,074
Food and beverage 19,184 17,546
Management fee income 21,582 23,133
Retail and other income 4,119 3,715
- --------------------------------------------------------------------------------------------------
Gross Revenues 195,717 180,232
Less: Promotional allowances (13,533) (12,651)
- --------------------------------------------------------------------------------------------------
NET REVENUES 182,184 167,581
- --------------------------------------------------------------------------------------------------
Costs and Expenses:
Casino 44,626 42,972
Hotel 4,361 2,462
Food and beverage 9,771 8,753
Other operating expenses 3,967 3,205
Depreciation and amortization 20,460 12,206
Lease expense 6,061 4,993
Selling, general and administrative 51,967 48,371
- --------------------------------------------------------------------------------------------------
Total Costs and Expenses 141,213 122,962
- --------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 40,971 44,619
- --------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 1,883 2,846
Interest expense (8,245) (10,954)
Other (1,901) (529)
- --------------------------------------------------------------------------------------------------
Total other expense, net (8,263) (8,637)
- --------------------------------------------------------------------------------------------------
Earnings before income taxes 32,708 35,982
Provision (benefit) for income taxes (206) 13,817
- --------------------------------------------------------------------------------------------------
NET EARNINGS $32,914 $22,165
==================================================================================================
BASIC EARNINGS PER SHARE $0.78 $0.53
==================================================================================================
DILUTED EARNINGS PER SHARE $0.77 $0.51
==================================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,293 41,910
==================================================================================================
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 42,645 43,606
==================================================================================================
See accompanying notes to financial statements
- 4 -
5
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------ ------------------
- ------------------------------------------------------------------------------------------
REVENUES:
Casino $385,225 $348,072
Hotel 35,351 26,650
Food and beverage 55,127 48,498
Management fee income 64,330 62,001
Retail and other income 10,692 10,139
- ------------------------------------------------------------------------------------------
Gross Revenues 550,725 495,360
Less: Promotional allowances (39,790) (34,774)
- ------------------------------------------------------------------------------------------
NET REVENUES 510,935 460,586
- ------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Casino 126,559 121,040
Hotel 11,553 6,572
Food and beverage 28,288 25,272
Other operating expenses 10,126 9,655
Depreciation and amortization 48,471 36,167
Lease expense 16,811 14,173
Selling, general and administrative 154,812 133,271
- ------------------------------------------------------------------------------------------
Total Costs and Expenses 396,620 346,150
- ------------------------------------------------------------------------------------------
Earnings From Operations 114,315 114,436
- ------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 8,734 9,540
Interest expense (30,060) (33,572)
Other (2,788) (841)
- ------------------------------------------------------------------------------------------
Total other expense, net (24,114) (24,873)
- ------------------------------------------------------------------------------------------
Earnings before income taxes 90,201 89,563
Provision for income taxes 21,106 34,503
- ------------------------------------------------------------------------------------------
Earnings before extraordinary charge 69,095 55,060
Extraordinary charge-net of taxes (1,560) -
- ------------------------------------------------------------------------------------------
NET EARNINGS $67,535 $55,060
==========================================================================================
Basic Earnings per Share before Extraordinary Charge $1.64 $1.31
Basic Loss per Share - Extraordinary Charge ($0.04) -
- ------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $1.60 $1.31
==========================================================================================
Diluted Earnings per Share before Extraordinary Charge $1.60 $1.28
Diluted Loss per Share - Extraordinary Charge ($0.04) -
- ------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $1.56 $1.28
==========================================================================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 42,165 41,876
==========================================================================================
WEIGHTED AVERAGE COMMON AND DILUTED
SHARES OUTSTANDING 43,066 42,941
==========================================================================================
See accompanying notes to financial statements
- 5 -
6
GRAND CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
Sept. 27, 1998 Sept. 28, 1997
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings before extraordinary charge $ 69,095 $ 55,060
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 48,471 36,167
Equity in loss of unconsolidated affiliates and other 266 665
Changes in operating assets and liabilities:
Current assets (7,064) (4,815)
Accounts payable (1,829) (6,753)
Accrued expenses 37,655 25,067
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 146,594 105,391
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (167,755) (144,100)
Increase in notes receivable (3,363) (1,328)
Proceeds from repayment of notes receivable 4,859 5,868
Decrease (increase) in cash and cash equivalents-restricted and other (2,604) 4,198
Increase in other long-term assets (7,403) (6,602)
- ----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (176,266) (141,964)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock-net 2,962 956
Debt issuance costs and deferred financing costs 721 (276)
Proceeds from issuance of long-term debt 365 45,088
Payments on long-term debt and capital lease obligations (100,885) (16,116)
- ----------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (96,837) 29,652
- ----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (126,509) (6,921)
Cash and cash equivalents - beginning of year 238,635 147,254
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year $112,126 $140,333
================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - net of capitalized interest $30,601 $29,731
Income taxes 460 19,642
See accompanying notes to consolidated financial statements.
- 6 -
7
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 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 currently manages one Indian-owned casino
in Hinckley, 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, a championship golf course situated between Grand Casinos
Gulfport and Biloxi on the Gulf Coast of 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.
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), which
are being separately spun off to Hilton Shareholders as shares of stock in
Park Place Entertainment Corporation. The transactions are subject to
shareholder and regulatory approvals and are expected to be completed by
year-end 1998.
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 nine months ended September 27, 1998, are not
necessarily indicative of the results that may be expected for the fiscal
year ending January 3, 1999. Operating results for such nine months include
management fees from the Company's management of Grand Casino Mille Lacs.
The contract pursuant to which the Company managed Grand Casino 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 nine months ended
September 27, 1998 and September 28, 1997 were $1.2 million and ($1.2)
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 September 27,
1998 totaled $.6 million. The Company expects that all such costs will be
fully amortized prior to the end of 1998.
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.
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 nine months ended September 27, 1998 and September 28, 1997,
approximately $13.9 million and $6.3 million, respectively, of interest cost
was capitalized.
- 8 -
9
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 INTEREST COSTS (CONTINUED)
For the three months ended September 27, 1998 and September 28, 1997,
approximately $5.7 million and $2.6 million, respectively, of interest cost
was capitalized.
NOTE 4 NOTES RECEIVABLE
Notes receivable consist of the following (in thousands):
Sept. 27, 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 21,846 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 9,903 10,409
Other, less allowance for doubtful accounts
of $3,050 and $3,050, respectively 590 704
------- -------
$32,339 $33,835
Less current installments of notes receivable (7,659) (6,856)
------- -------
Notes receivable-less current installments $24,680 $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, then owned by the Company, and certain
notes receivable due the Company from Tribes.
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.
- 9 -
10
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 LONG-TERM DEBT (CONTINUED)
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 an 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 September 27, 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.
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 INCOME TAXES
During the quarter ended September 27, 1998, the Company recognized an
income tax benefit related to the write-off of a note receivable from
Stratosphere Corporation. A deferred tax asset was recorded in 1996 when the
Company set up a reserve allowance due to uncertainty related to the
collectibility of the receivable. However, a full valuation allowance was
created for the deferred tax asset and no income tax benefit was recognized
at that time. Upon writing off the receivable and realizing the tax
deduction in the current year, the Company reversed a portion of the
deferred tax asset valuation allowance resulting in the recognition of a
$13.1 million income tax benefit.
- 10 -
11
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7 COMMITMENTS AND CONTINGENCIES
STRATOSPHERE CORPORATION
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.
On November 7, 1997, Stratosphere filed its Second Amended Plan, which has
been approved by the Bankruptcy Court and was declared effective on October
14, 1998. Pursuant to the Second Amended Plan, Stratosphere Common Stock
that was outstanding prior to the effective date of the Second Amended Plan
was canceled. Prior to the effectiveness of the Second Amended Plan,
Grand owned approximately 37% of the issued and outstanding common stock of
Stratosphere.
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.
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.
- 11 -
12
GRAND CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
STRATOSPHERE CORPORATION (CONTINUED)
The Second Amended Plan contemplates the formation of a new limited
liability company which will own and pursue certain alleged claims and
causes of action that Stratosphere and other persons may have against
numerous third-parties, including Grand and/or officers and/or directors of
Grand. The Second Amended Plan contemplates capitalizing this new limited
liability company with an investment of $5 million. As of October 30, 1998,
Grand has not been served with any such litigation.
LOAN GUARANTY AGREEMENTS
The Company has guaranteed a loan and security agreement entered into by
the Tunica-Biloxi Tribe of Louisiana for $16.5 million for the purpose of
purchasing a hotel and casino equipment. The agreement extends through 2000,
and as of September 27, 1998, the amount outstanding was $8.7 million.
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 casino equipment. The guaranty will
remain in effect until the loan is paid. The loan term is approximately five
years. As of September 27, 1998, $16.4 million has been advanced, and is
outstanding.
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.
NOTE 8 SUBSEQUENT EVENTS
As of September 27, 1998, the Company owned 2,126,000 shares of Casino Magic
common stock. On October 15, 1998, Hollywood Park and Casino Magic completed
a merger agreement under which Hollywood Park acquired Casino Magic.
Hollywood Park purchased, in cash, each outstanding share of Casino Magic
common stock for $2.27 per share. As a result of this transaction, the
Company will realize a loss of approximately $2.9 million, net of tax,
during the fourth quarter ending January 3, 1999.
On October 23, 1998, a notice and Joint Proxy Statement/Prospectus was
mailed containing details concerning the tax-free distribution to holders of
common stock of Grand of all outstanding shares of Lakes Gaming, Inc.
("Lakes"), a wholly owned subsidiary of Grand, which will consist of Grand's
non-Mississippi gaming operations and certain other assets. In addition, the
Joint Proxy Statement/Prospectus describes the proposed merger of the
Company's Mississippi gaming operations with a wholly owned subsidiary of
Park Place Entertainment Corporation ("Park Place"), a new publicly held
company consisting of the gaming operation of Hilton Hotels Corporation
("Hilton"), which is being separately spun off to Hilton stockholders.
- 12 -
13
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
NOTE 8 SUBSEQUENT EVENTS (CONTINUED)
A special meeting of shareholders of Grand Casinos, Inc. will be held on
November 24, 1998, at 2:00 p.m. local time to consider and vote upon, among
other things, the tax-free distribution and merger transaction described
above. The transactions are also subject to regulatory approvals and are
expected to be completed by year-end 1998.
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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14
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
OVERVIEW (CONTINUED)
On October 23, 1998, a notice and Joint Proxy Statement/Prospectus was
mailed containing details concerning the tax-free distribution to holders of
common stock of Grand of all outstanding shares of Lakes Gaming, Inc.
("Lakes"), a wholly owned subsidiary of Grand, which will consist of Grand's
non-Mississippi gaming operations and certain other assets. In addition, the
Joint Proxy Statement/Prospectus describes the proposed merger of the
Company's Mississippi gaming operations with a wholly owned subsidiary of
Park Place Entertainment Corporation ("Park Place"), a new publicly held
company consisting of the gaming operation of Hilton Hotels Corporation
("Hilton"), which is being separately spun off to Hilton stockholders.
A special meeting of shareholders of Grand Casinos, Inc. will be held on
November 24, 1998, at 2:00 p.m. local time to consider and vote upon, among
other things, the tax-free distribution and merger transaction described
above. The transactions are also subject to regulatory approvals and are
expected to be completed by year-end 1998.
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.
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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 28, 1997
Earnings Per Common Share and Net Earnings
Basic and diluted earnings per common share were $1.64 and $1.60,
respectively, for the nine months ended September 27, 1998 before a $.04
extraordinary charge per share related to early extinguishment of debt. This
compares to basic and diluted earnings of $1.31 and $1.28 per common share
for the prior year's comparable period.
Earnings increased $12.5 million to $67.5 million for the nine months ended
September 27, 1998 compared to the same period in the prior year. Net
earnings for the nine months ended September 27, 1998 includes a $1.6
million, net of tax, extraordinary charge relating to early extinguishment
of debt.
-14 -
15
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $385.2 million in gross casino revenue and $102.2 million in gross
hotel, food, beverage, retail and entertainment revenue during the nine
months ended September 27, 1998 as compared to $348.1 million in gross
casino revenue and $85.3 million in gross food, beverage, and retail revenue
for the prior year's comparable period. At Grand Casino Tunica, gross
revenues increased $26.9 million for the nine months ended September 27,
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 nine months use of the Convention Center,
which opened in July of 1997. Combined gross revenues for Grand Casino
Biloxi and Grand Casino Gulfport increased $26.2 million for the nine months
ended September 27, 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 $2.3 million to $64.3 million for the nine months ended
September 27, 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 $50.5 million from $346.2 million for the
nine months ended September 28, 1997 to $396.6 million for the nine-month
period ended September 27, 1998. Casino expenses were $126.6 million for the
nine-month period ended September 27, 1998 compared to $121.0 million for
the comparable period last year. The increase of $5.5 million relates
primarily to additional casino expenses for Grand Casino Tunica, which had a
$20.3 million increase in casino revenues for the nine month period ended
September 27, 1998. Food and beverage expenses increased $3.0 million to
$28.3 million for the nine-month period ended September 27, 1998.
Depreciation and amortization expense increased $12.3 million to $48.5
million for the nine-month period ended September 27, 1998. The increase
relates to a 600-room hotel, convention center, and other amenities at Grand
Casino Tunica being open all of 1998 and only part of 1997. Also, during
1998, Grand Casino Tunica opened a championship golf course, a RV resort,
and a sporting clays facility. Grand Casino Biloxi opened a 500-room hotel,
convention center, pool area and spa. Additionally, contributing to the
increase was a $5.4 million adjustment to depreciation related to changes in
estimates for recently completed construction projects.
Selling, general, and administrative expenses increased in the amount of
$21.5 million from $133.3 million for the nine months ended September 28,
1997 to $154.8 million for the nine months ended September 27, 1998.
Contributing to this increase were increased selling, general, and
administrative expenses at Grand Casino Tunica of $7.2 million from the nine
months ended September 28, 1997 to the nine months ended September 27, 1998,
relating to the opening of the 600-room hotel and the convention center, and
an increase in employee benefit costs.
-15 -
16
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, corporate expense increased $12.4 million from the nine months
ended September 28, 1997 to the nine months ended September 27, 1998. This
increase is primarily attributable to reserves relating to the corporate
office relocation, litigation costs, proposed transaction with Hilton, and
an insurance deductible relating to damage due to Hurricane Georges. The
Company is fully insured and doesn't expect any additional effects on
results of operations due to Hurricane Georges.
Other
Interest income decreased slightly from $9.5 million to $8.7 million for the
nine months ended September 27, 1998 over the comparable period last year.
In addition, interest expense decreased by $3.5 million to $30.1 million for
the nine months ended September 27, 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
nine-month period ended September 27, 1998. Capitalized interest was $13.9
million and $6.3 million for the nine months ended September 27, 1998 and
September 28, 1997, respectively.
The provision for income taxes for the nine months ended September 27, 1998
was $21.1 million or an effective tax rate of 23.4%. This compares to a
provision for income taxes of $34.5 million or an effective tax rate of
38.5% for the nine months ended September 28, 1997. The decrease relates to
the tax benefit recognized from the previous write-off of a note receivable
from Stratosphere. The result of the recognition of the tax benefit was a
reduction in the provision for income taxes in the amount of $13.1 million.
THREE MONTHS ENDED SEPTEMBER 27, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 28, 1997
Earnings Per Common Share and Net Earnings
Basic and diluted earnings per common share were $.78 and $.77,
respectively, for the three months ended September 27, 1998. This compares
to basic and diluted earnings of $.53 and $.81 per common share for the
period ended September 28, 1997. Net earnings increased $10.7 million from
the three months ended September 28, 1997 to $32.9 million for the three
months ended September 27, 1998.
Revenues
Grand Casino Biloxi, Grand Casino Gulfport, and Grand Casino Tunica
generated $138.0 million in gross casino revenue and $36.2 million in gross
hotel, food, beverage, retail, and entertainment revenue during the three
months ended September 27, 1998. During the same period in the prior year,
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 and retail revenue.
-16 -
17
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Revenues (Continued)
The increase in gross revenues is attributable to increased revenue at Grand
Casino Biloxi and Grand Casino Tunica. Grand Casino Tunica's gross revenues
increased $7.8 million to $62.4 million, an increase of 14.2%, for the three
months ended September 27, 1998. Contributing to this increase at Grand
Casino Tunica was the Convention Center, which opened during the third
quarter of 1997, but was open the entire third quarter of 1998, and the golf
course being open during the third quarter of 1998 and not in the third
quarter of 1997. 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 $9.3
million for the three months ended September 27, 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. The Company's
management fees from Indian-owned casinos decreased only $1.6 million to
$21.6 million for the three months ended September 27, 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 $18.2 million, from $123.0 million for
the three months ended September 28, 1997, to $141.2 million for the three
months ended September 27, 1998. Casino expenses were $44.6 million for the
three-month period ended September 27, 1998, compared to $43.0 million for
the comparable period in 1997. This increase of $1.6 million relates to
additional operating expenses to produce a $12.2 million increase in casino
revenue for such three-month period, compared to the same period in the
prior year. Food and beverage expenses increased $1.0 million to $9.8
million for the three-month period ended September 27, 1998.
Depreciation and amortization expense increased $8.3 million to $20.5
million for the three-month period ended September 27, 1998. The increase
relates to a convention center, a championship golf course, a RV resort, and
a sporting clays facility at Grand Casino Tunica being opened since the
third quarter of 1997, or open during part of the third quarter in 1998.
Grand Casino Biloxi also opened a 500-room hotel, a convention center, a
pool area and spa in the spring of 1998. Additionally, contributing to the
increase was a $5.4 million adjustment to depreciation related to changes in
estimates for recently completed construction projects.
Selling, general, and administrative expenses increased $3.6 million from
$48.4 million for the three months ended September 28, 1997, to $52.0
million for the three months ended September 27, 1998. Grand Casino Tunica's
selling, general, and administrative expenses increased $1.2 million, as a
result of the opening of the golf course and the convention center being
open the entire quarter.
-17 -
18
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
Costs and Expenses (Continued)
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 September 27, 1998
increased $3.0 million from the same period in 1997. The increase in
corporate expenses is primarily related to costs associated with the merger
transaction with Hilton Hotels, the write-off of expenses associated with
development projects, and an insurance deductible related to damage from
Hurricane Georges. The Company is fully insured and doesn't expect any
additional effects on results of operations due to Hurricane Georges.
Other
Interest income decreased $1.0 million to $1.9 million for the three months
ended September 27, 1998 compared to the same period for the prior year.
Interest expense decreased by $2.7 million to $8.2 million for the three
months ended September 27, 1998. The decrease in expense is the result of an
increase in capitalized interest. Capitalized interest was $5.7 million and
$2.6 million for the three months ended September 27, 1998 and September 28,
1997, respectively.
The provision for incomes taxes for the three months ended September 27,
1998 was ($0.2) million. This compares to a provision for income taxes of
$13.8 million or an effective tax rate of 38.4% for the three months ended
September 28, 1997. The decrease relates to the tax benefit recognized from
the previous write-off of a note receivable from Stratosphere. The result of
the recognition of the tax benefit was a reduction in the provision for
income taxes in the amount of $13.1 million.
CAPITAL RESOURCES, CAPITAL SPENDING, AND LIQUIDITY
At September 27, 1998, the Company had $119.7 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 $145.0 million for the
nine-month period ended September 27, 1998, compared with $105.4 million for
the nine-month period ended September 28, 1997. During the nine-month
periods ended September 27, 1998 and September 28, 1997, the Company's
capital expenditures totaled $167.8 and $144.1 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 and championship golf course at Grand Casino Biloxi and Grand
Casino Tunica, respectively.
At September 27, 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.
- 18 -
19
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
September 27, 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.
YEAR 2000
The Company is currently working to fully determine and resolve the
potential impact of the Year 2000 on the processing of date-sensitive
information by its computerized information systems and components. The Year
2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the Year 2000, which could result in
miscalculations or system failures.
The Company has a Year 2000 program, the objective of which is to determine
and assess the risks of the Year 2000 issue, and plan and institute
mitigating actions to minimize those risks. Pursuant to the Company's Year
2000 program, the Company hired a Year 2000 consultant and has established
an internal review team to monitor and facilitate efficient Year 2000
compliance. The Company is currently in the process of upgrading its
financial reporting systems, IT based and otherwise, to ensure that they are
Year 2000 compliant. The Company's vendors and consultants have represented
to management that the new financial systems meet Year 2000 requirements.
The Company's standard for compliance requires that for a computer system or
business process to be Year 2000 compliant, it must be designed to operate
without error in dates and date-related data prior to, on and after January
1, 2000. Between now and the Year 2000, the Company will proceed through its
various phases of assessment, detailed planning, implementation, testing and
management. The Company expects to be fully Year 2000 compliant by mid-1999.
Generally, the Company is confident that the implementation of its Year 2000
program in conjunction with the engagement of a consultant and the
replacement of all of the Company's financial reporting systems will resolve
any IT system compliance issues. The Company has not currently identified
any material non-IT system Year 2000 issues.
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20
GRAND CASINOS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
YEAR 2000 (CONTINUED)
During the remainder of 1998 and in 1999, the Company will continually
review its progress against its Year 2000 plans and determine what
contingency plans are feasible and appropriate to reduce its exposure to
Year 2000 related issues.
Based on the Company's current assessment, the costs of addressing potential
problems are not currently expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows in future
periods. However, the historical and estimated costs relating to the
resolution of the Company's Year 2000 compliance issues cannot be fully and
finally determined at this time. If significant customers or vendors
identify Year 2000 issues in the future and are unable to resolve such
issues in a timely manner, it could result in a material financial risk. The
Company plans to initiate formal communications with all of its material
suppliers to determine the extent to which the Company's interface systems
are vulnerable to those third parties' failures to resolve their own Year
2000 issues. The Company plans to devote the necessary resources to resolve
all significant Year 2000 issues in a timely manner.
While the Company fully anticipates achieving Year 2000 compliance well in
advance of January 1, 2000, there are certain risks which exist with respect
to the Company's business and the Year 2000. Those risks range from slight
delays and inefficiencies in processing data and carrying out accounting and
financial functions to, in a most reasonably likely worst case scenario,
extensive and costly inability to process data, provide vital accounting
functions and communicate with customers and suppliers. Until the Company
substantially completes its Year 2000 program, it is uncertain if there will
be any material effect on the Company's results of operations, liquidity or
financial condition. As of the date of this filing, the Company has not
finalized a contingency plan to address the failure to be Year 2000
compliant.
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.
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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)
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
annual report on Form 10-K for the year ended December 28, 1997, 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 October 26, 1998. More complete and/or
updated information may be obtained by reviewing the court files pertaining
to such proceedings.
STRATOSPHERE SECURITIES LITIGATION - FEDERAL COURT
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 Grand. 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 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 Grand and certain current and former
officers and directors of Grand. 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 Grand and Grand's officers
and directors named as defendants, submitted motions to dismiss the amended
complaint. Those motions were made on various grounds, including Grand's
claim that the amended complaint failed to state a valid cause of action
against Grand and Grand'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.
- 22 -
23
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
STRATOSPHERE SECURITIES LITIGATION - FEDERAL COURT (CONTINUED)
In August 1997, the plaintiffs filed a second amended complaint. In
September 1997, certain of the defendants, including Grand and Grand's
officers and directors named as defendants, submitted a motion to dismiss
the second amended complaint. The motion was based on various grounds,
including Grand's claim that the second amended complaint failed to state a
valid cause of action against Grand 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 motion to dismiss.
In June 1998, certain of the defendants, including Grand and Grand's
officers and directors named as defendants, submitted a motion for summary
judgment seeking an order that such defendants are entitled to judgment as a
matter of law. As of September 1998, the plaintiffs are engaged in discovery
related to the issues raised by the summary judgment motion. The Court will
not decide the motion until after such discovery is completed and the
parties have submitted their respective arguments regarding the motion.
STRATOSPHERE SHAREHOLDERS LITIGATION - NEVADA STATE COURT
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 Grand. 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.
Grand 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 CASINOS, INC. SHAREHOLDERS LITIGATION
In September and October 1996, two actions were filed by Grand shareholders
in the U.S. District Court for the District of Minnesota against Grand and
certain of Grand's current and former directors and officers.
The complaints allege misrepresentations, federal securities law violations
and other claims in connection with the Stratosphere project.
- 23 -
24
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
GRAND CASINOS, INC. SHAREHOLDERS LITIGATION (CONTINUED)
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 Grand's claim that the
consolidated complaint failed to properly state a cause of action.
In December 1997, the court granted Grand'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 Grand's motion to dismiss.
Discovery in the action has begun.
The defendants have submitted a motion for summary judgment seeking an order
that the defendants are entitled to judgment as a matter of law. The
plaintiffs are currently engaged in discovery related to the issues raised
by the summary judgment motion. The court will not decide the motion until
after such discovery is complete and the parties have submitted their
respective arguments regarding the motion.
DERIVATIVE LITIGATION
In February 1997, certain shareholders of Grand 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 Grand. The plaintiffs alleged that those
officers and directors breached certain fiduciary duties to the shareholders
of Grand 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.
Grand provided the defense for Grand's current and former officers and
directors who are defendants in the action pursuant to the Company's
indemnification obligations to such defendants.
In January 1998, Grand 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. In August 1998, the
plaintiffs appealed the Court's ruling. As of the date hereof, that appeal
is pending.
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25
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
SLOT MACHINE LITIGATION
In April 1994, William H. Poulos brought an action in the U.S. District
Court for the Middle District of Florida, Orlando Division -- William H.
Poulos, et al. v. Caesars World, Inc. et al. -- Case No. 39-478-CIV-ORL-22
-- in which various parties (including Grand) 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. v. 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 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. v. Caesars
World, Inc. et al. -- Case No. CV-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. v. Caesars World,
Inc., et al. -- Case No. CV-S-94-11236-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 Grand) 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. Grand has filed its answer
to the new complaint.
The plaintiffs have filed a motion seeking an order certifying the action as
a class action. Grand and certain of the defendants have opposed the motion.
The Court has not ruled on the motion.
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26
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 Grand.
In the motion, the Committee sought Bankruptcy Court authorization to compel
Grand 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.
Grand opposed the Committee's motion. Grand 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 Grand'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 Grand as
defendant.
The complaint alleges that the Company failed to perform under the Standby
Equity Commitment entered into between Stratosphere Corporation and Grand 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.
In November 1997, Grand submitted a motion requesting, among other things,
that the court dismiss the complaint. Grand's request that the court dismiss
the complaint has been denied. Discovery is pending.
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27
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
STRATOSPHERE PLAN OF REORGANIZATION
Stratosphere has filed its Second Amended Plan with the Bankruptcy Court.
The Second Amended Plan contemplates the formation of a new limited
liability company which will own and pursue certain alleged claims and
causes of action that Stratosphere and other persons may have against
numerous third-parties, including Grand and/or officers and/or directors of
Grand. The Second Amended Plan contemplates capitalizing this new limited
liability company with an investment of $5 million. As of October 26, 1998,
Grand has not been served with any such litigation.
STRATOSPHERE PREFERENCE ACTION
In April 1998, Stratosphere served on Grand and Grand Media & Electronics
Distributing, Inc., a wholly-owned subsidiary of Grand ("Grand Media"), a
complaint in the Stratosphere bankruptcy case seeking recovery of certain
amounts paid by Stratosphere to: (i) Grand as management fees and for costs
and expenses under a management agreement between Stratosphere and Grand;
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, Grand responded to Stratosphere's complaint. That response
denies that Stratosphere is entitled to recover the amounts described in the
complaint. Discovery is proceeding.
TULALIP TRIBES LITIGATION
In 1995, Grand entered into discussions with Seven Arrows, LLC ("Seven
Arrows"), a Delaware limited liability company, regarding possible
participation by Grand in a proposed casino resort development on land in
the State of Washington held in trust by the United States for the Tulalip
Tribes. Grand 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 Grand (or a subsidiary of Grand) would become a member of
Seven Arrows. Those negotiations were not completed, and no revision to the
limited liability company agreement was signed.
During the negotiations, Grand entered into an agreement (the "Advance
Agreement") with Seven Arrows and the Tulalip Tribes. The Advance Agreement
provided for the loan by Grand and Seven Arrows of certain amounts to the
Tulalip Tribes upon the satisfaction of certain conditions. Grand contends
that those conditions were never satisfied. Neither Grand nor Seven Arrows
advanced any amount under the Advance Agreement.
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28
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
TULALIP TRIBES LITIGATION (CONTINUED)
In April 1996, the Tulalip Tribes brought a legal action in Tulalip Tribal
Court -- Tulalip Tribes of Washington v. Seven Arrows, LLC et al. -- Case
No. TUL-Ci4/96-499 -- against Seven Arrows and Grand. The action sought
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 were rightfully 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 Grand was not a party to the lease or the sublease, Grand contended
in the tribal court action that the only claim against Grand was for breach
of the Advance Agreement; that Grand 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.
In May 1996, Seven Arrows and Grand brought a legal action in the U.S.
District Court for the Western District of Washington -- Seven Arrows, LLC,
et al. v. Tulalip Tribes of Washington -- Case No. C96-0709Z -- against the
Tulalip Tribes. Seven Arrows sought in that action certain remedies against
the Tulalip Tribes, including damages, and Grand sought rescission of the
Advance Agreement.
Since June 1996, Seven Arrows, Grand, and the Tulalip Tribes have 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. Seven Arrows, Grand, and the Tulalip Tribes recently entered into a
partial settlement that resolved the jurisdictional dispute. However, all
claims between the parties must now be submitted to and decided by the
federal court.
Pursuant to the partial settlement agreement, Seven Arrows filed a second
amended complaint in the federal action. Among other things, Seven Arrows
seeks damages from the Tulalip Tribes for lost profits of up to $15 million
and for recovery of sums paid to the Tribes between $2 million and $3
million. Grand is not a party to the second amended complaint.
On September 30, 1998, the Tulalip Tribes answered, counterclaimed against
Seven Arrows, and filed and served a complaint in the pending federal action
against Grand. The complaint against Grand contains several counts,
including (i) a request for judgment declaring that the tribe's termination
of the agreements was effective and quieting title in the land; (ii) a claim
for breach of contract and breach of the implied covenant of good faith that
alleges that Grand is liable on the lease, sublease, and Advance Agreement
based upon: (a) Grand's alleged status as a partner of Seven Arrows; (b)
Grand's alleged status as managing and operating agent of Seven Arrows; and
(c) Grand's execution of the Advance Agreement; (iii) a claim for negligent
misrepresentation claiming, in essence, that representations of Grand
personnel induced the Tribes to continue to honor the lease, sublease, and
Advance Agreement and thereby to incur expenses they would not have incurred
otherwise; (iv) a claim that Grand, by purporting to act for and with the
authority of Seven Arrows, stands as warrantor and surety of Seven Arrows'
obligations; and (v) a claim for estoppel.
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29
GRAND CASINOS, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION (CONTINUED)
TULALIP TRIBES LITIGATION (CONTINUED)
Each claim for damages seeks the sum of $856,000 for out-of-pocket expenses
and for "lost profits damages" in an amount to be proved at trial.
Grand's answer, due November 6, 1998, has not yet been filed. Grand does not
oppose the tribe's effort to quiet title to its land (the first claim).
Grand denies that it is factually or legally liable for the obligations or
liabilities of Seven Arrows under the lease and sublease. Grand continues to
contend that, as to the tribe, its obligations, if any, are limited to those
stated in the Advance Agreement; that it did not breach the Advance
Agreement; and that the tribe's damages for such breach, if any, are
minimal. Grand denies that it is liable for negligent misrepresentation.
Seven Arrows has, on previous occasions, threatened unpleaded claims against
Grand. Grand does not know the nature or extent of any such additional
claims and, as of the date hereof, has not received any pleading in any
action stating such a claim.
Grand's liability for damages to all parties in the aggregate cannot exceed
$15 million under the partial settlement agreement. Discovery has commenced
and a three-week bench trial has been set for November 1, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarterly
period ended September 27, 1998.
(1) July 2, 1998, reporting the Hilton transaction
(2) July 23, 1998, reporting second quarter earnings
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30
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 4, 1998 GRAND CASINOS, INC.
-------------------
Registrant
/ 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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