1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------- FORM 10-Q/A (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 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. -13 - 3 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 - 4 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 - 5 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 $.51 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 - 6 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 - 7 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 - 8 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. - 19 - 9 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. - 20 - 10 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 - 11 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 6, 1998 GRAND CASINOS, INC. ------------------- Registrant / S / TIMOTHY J. COPE --------------------- Timothy J. Cope Executive Vice President and Chief Financial Officer - 30 -